26 September 2022

Sancus Lending Group Limited

("Sancus", the "Company" or "Group")

Interim Results for the six-month period ended 30 June 2022

HIGHLIGHTS

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited, commented:

"We started 2022 with a clear strategy to return the business to profitability, and a management team focussed on execution.  In the first half of the year we have made good progress towards this as well as a number of significant positive achievements. The number of new facilities written is significantly up on last year in the UK and Ireland and I am pleased to report no further IFRS9 provisions have been made during the period, following a thorough review of the loan book last year.

Our focus on returning the Group to profitability remains our top priority. We are also looking to broaden our funder base and improve funding terms, expand the Group's presence in the UK and Ireland and grow its loan book in the Offshore markets of the Channel Islands and Gibraltar.

The next step of our plan is to address and secure our long-term financing strategy, and our ZDPs remain an integral part of this. The current maturity date of the ZDPs is 5 December 2022 and we will shortly be engaging with the holders to agree a long-term plan meeting the needs of all stakeholders whilst enabling the Group to reinvest for growth."

Financial Highlights

Operational Highlights

The information contained within this Announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No.596/2014 as amended by The Market Abuse (Amendment) (EU Exit) Regulations 2019. By the publication of this Announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.  

Enquires:

CHAIRMAN'S STATEMENT

Introduction

Our structured change programme which will reposition the Group for growth is well underway. Our chosen markets continue to present compelling opportunities and with reduced appetite amongst traditional balance sheet lenders, we are confident we can write high quality new business. 

The expansion of the sales teams has started to pay dividends with a significant improvement in new loan facilities written in the first half of the year of £86m, versus £53m written in the same period last year.

As part of a wider review of the business and the expansion of the credit and recoveries teams, we carried out a detailed review of the Group's loan book last year resulting in impairments of £6.4m in FY 2021 which at the time we believed drew a line under recent losses. I am therefore pleased to report no further IFRS9 provisions in the period.

Our People

Following last year's personnel changes, the team has settled in well and are working collaboratively to deliver our key goals of profitability and growth.  The Group has invested in rebuilding and reinforcing the team and our headcount has increased from 32 at the end of 2021 to 42 at 30 June 2022. We do not envisage further material hires. The new resource is focussed on expansion in our growth markets of the UK and Ireland and our credit and management focus as we deliver new business in the coming years.

Zero Dividend Preference Shares ("ZDPs")

The key milestones at the end of 2020 were the new equity raise, the restructuring of our debt (Bonds and ZDPs) and the increase and extension of our facility with HIT. Somerston Group, our largest shareholder, participated in both the equity raise and new bond issue and I thank them for their continued support.

On 15 July 2022 the Group entered into a ZDP share buyback programme to purchase up to £0.5m of the ZDPs pursuant to the authority granted to the Directors by shareholders at the Group's AGM in May 2022. We fully deployed the funds we were looking to return by 19 August 2022.

The ZDPs are an integral part of the Group's finance strategy and given the maturity date of 5 December 2022, we will engage with the ZDP shareholders shortly and seek their support to restructure enabling the Group to implement its plan to return to profitability.

Dividend and Shareholders

It is the Board's intention to reinvest surplus resources for growth. As such, the Group does not intend to declare a dividend for the period. The Board intends to revisit this policy at the appropriate time, should the profitability and cash flow profile of the business support the reinstatement of a dividend.

On behalf of the Board, I would like to thank shareholders for their continuing support and patience and for the efforts of the management and employees.

While the Group has made good progress in the first half of the year, we do not underestimate the scale and continuing challenge ahead. I am firmly of the view that we have the right strategy, systems and personnel to put the business onto a firmer footing and return to profitability and I look forward to reporting more positive developments in the coming period. 

Steve Smith

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

The first half of the year saw a number of significant achievements and I am pleased with the progress made.

We saw a significant increase in loans written in H1 2022 with £86m written in the six months to June 2022 versus £53m written in the same period in 2021. This will lead to corresponding growth of loans under management as these loans are drawn.

This loan book growth has been prevalent in the UK (144% growth versus June 2021) and Irish markets (150% growth versus June 2021) where the Sancus name and reputation continue to develop. In the UK we are particularly proud to have been shortlisted for the award of Development Finance provider of the year at the Bridging & Commercial awards, a clear demonstration of our growing reputation as a straightforward and trusted business partner.

It will take time for the loan writing process to deliver revenue uplift as there is a time lag between execution and drawdown, though fees are paid upfront on new deals and we generally receive exit fees when the loan is repaid. At the end of H1 2022 the loan book stood at £147m, a modest increase of £5 million versus FY 2021, but we expect growth in the loan book to increase in the second half of the year as the newly written loans continue to be drawn.

Strategic KPIs

The Board agreed the following KPI's and we have started to see improvements:

·      Revenue growth

o  4% down on last year due to modest progress on loan deployment. Positive upticks in our growth areas of the UK and Ireland, with the UK revenue up 36% on last year and Ireland up 227%.

·      Growing loans under management

o  Loan book increase from £142m at the end of 2021 to £147m at the end of June 2022.

·      Reducing cost of funding

o  This remains a focus for the Group, and we continue to seek cheaper cost of funding. We are cognisant of recent rises in base rates. To address this, we have started to implement a variable rate to borrowers based on Bank of England base rates.

·      Become a capital efficient business

o  We continue to reduce the amount of own capital within loans, which at 30 June 2022 represented 4.2% of the total loan book, in comparison to 5.9% at the end of June 2021.

·      Increasing operating profits - by increasing gross margin and reducing costs

o  Operating loss for H1 2022 was £2.1m against an operating loss of £4.1m last June. We have reported no further IFRS9 losses in the period.  

o  Our cost base has increased on prior year as we focus on growth but in the future we expect the cost ratio to revenue to reduce.

·      Return on Equity ("ROE")

o  Going forward we plan to become profitable and increase our ROE.

·      Ensuring a risk based approach is taken on all decision making

o  Embedding institutional credit processes and becoming increasingly technology enabled has been a focus of the Group over the last year.

Origination

We have seen growth in new loan facilities written during the year with £86m written during the first half of 2022 against £53m for the first half of 2021 and a total of £83m in FY 2021, as the benefits of our investment in the sales and origination teams begin to come through.

Maintaining a high-quality credit process whilst scaling the quantity of new loans is a priority. We expect to see continued growth in the UK and Ireland as these remain key areas of investment for the Group. We further anticipate that the Offshore business (including the Channel Islands and Gibraltar) will continue to see attractive lending opportunities and we are confident that our businesses in these jurisdictions are well placed to execute against those opportunities as they arise.

Standardisation of the loan execution process has been implemented across the Group, including documentation, conditions precedent, conditions subsequent and closing checklists. We have also implemented a new workflow process to expediate the time between the loan credit approval and loan drawdown and are exploring how we can better utilise technology to manage certain elements more efficiently. We expect the onboarding of Salesforce (our chosen CRM software) and its integration with our Loan Management System to be completed in the second half of the year which will create further standardisation and efficiencies. 

Loan Management

The Sancus asset backed lending loan book increased since the end of 2021 from £142m to £147m. With the number of new facilities written and as we see funds deployed, we expect to be reporting a further increase in our loan book at year-end. Further investment has been made in recruiting experienced loan management team members during the period.

Continued emphasis has been placed on actively managing loans once the initial drawdown has been made. This has been particularly important during a time when various market related pressures such as cost inflation are impacting our borrowers. Active management is helping us to deal with issues before they become problems and we are pleased to report that the percentage of loan book in recovery continues to reduce.

Funding

We continue to focus on growing the funding capacity of the business on improved terms. This is particularly important in the context of the wider economic climate where we are in a significant inflationary environment. As is widely reported, the Bank of England Bank Rate has increased from 0.1% this time last year to 2.25% at the time of writing this report (with further increases likely). Additionally, we are seeking to work with a diversified mix of funders, both private and institutional, to match funders with loans meeting their varied risk and reward criteria. Currently, the Group is reliant on four funding sources:

Co-Funders remain our largest funding channel, with the majority of the loan book in the Offshore markets being Co-Funded. As a proportion of total funding it has reduced from 51% at the end of December 2021 to 44% at 30 June 2022. We continue to nurture relationships with the Co-Funder base, typically being Offshore private individuals and family offices.  In addition to the large pool of Co-Funders that have been working with Sancus for a number of years, the business is actively seeking to widen its net.

Loan Notes, managed by Amberton Limited, remain an important funding instrument for the business. Loan Note 8 was launched in January 2022 and currently stands at £3.05 million. Loan Note 8 matures on 1 December 2026 and has a coupon of 5% p.a. (payable quarterly), with Sancus providing a 20% first loss guarantee. Loan Note 7 was launched in May 2021 and currently stands at £17.3 million. Loan Note 7 matures in May 2024 and has a coupon of 7% p.a. (payable quarterly), with Sancus providing a 10% first loss guarantee. As the business matures it is planned to increase the regularity and widen the variety of Loan Note products.

Sancus has an institutional funding line from the Honeycomb Investment Trust ("HIT"), which is managed by Pollen Street Capital and is designed to complement our Co-Funder base and Loan Notes. On 3 December 2020 the HIT credit facility was increased to £75m from £45m and the term was extended to 28 January 2024. At 30 June 2022 the total drawn was £55m and at the date of this report stood at £65m (31 December 2021: £49.9m). The HIT facility continues to be strategic for the business.

Sancus has additionally secured a forward flow bridge funding arrangement with a global private equity backed debt acquisition business and continues to explore additional long term financing lines that could sit alongside our syndicated lending strategy.

The availability, cost and flexibility of funding is key to achieving our growth ambitions and we are reviewing the capital position of the business with a view to ensuring it is best placed to grow funding capacity on market adjusted improved terms. During the first half of 2022 the loan book funded by institutional funding increased by 5% with the majority of the UK and Irish loan book funded by this channel. We will seek to increase this along with the loan notes over time.

Finance & Operations

A focus on operational efficiencies within Finance & Operations to be driven by technology wherever possible is underway. We continue to drive focus and improvement in relation to corporate governance, Compliance & Risk with the implementation of a developed risk management structure to ensure the business is well set for future growth plans.

Sancus has developed, and continues to evolve, its own proprietary loan managements system ("LMS") for the administration of loans. A comprehensive review of the LMS system and our wider Technology strategy has been carried out over the course of the last year and further steps have been undertaken in 2022.

We made several hires across the business over the last year, in particular to bolster our Funding and Origination capabilities in the markets in which we are active. At the end of June 2022, the Group headcount was 42 (31 December 2021: 32) with the largest increases in the Origination and Loan Management teams. We believe the business is now well resourced to meet its objectives and are focussing on continuous improvement and development of our people.

Realising value from the legacy FinTech Ventures Investments remains a target for the management team. Monitoring and governance of FinTech Ventures continues as we assist our investee platforms with their strategy. Unfortunately, the profitability of many of these companies has failed to meet expectations within an acceptable timeframe and their ability to raise additional capital without proving concept is severely constrained. It remains a challenging market for many of the FinTech platforms.

Summary of Financial Performance

While Group revenue for the first half of 2022 was relatively flat on the comparative period last year at £4.8m (H1 2021: £5.0m) we have seen an increase in the UK and Irish revenues which is showing positive signs of further growth over time.

We have reported an operating loss of £2.1m (H1 2021: loss of £4.1m) and no further expected credit losses (IFRS 9) in the period (H1 2021: £3.0m loss). An increase in operating expenses in the period has been driven by the building out of our team. We expect costs to stabilise and we do not envisage growing the team in the foreseeable future.

The Group's net assets have reduced in the period from £19.1m at 31 December 2021 to £17.1m as a result of the operating loss in the period.

The Board has carried out a full impairment review of the carrying amount of goodwill and the resultant value-in-use calculation which indicated that no impairment of goodwill was required in either Sancus Lending (Jersey) or Sancus Lending (Gibraltar). The goodwill value therefore remains at £22.9m.

Group cash and cash equivalents was £8.6m at 30 June 2022. £5.4m of this related to Group operational cash and £3.2m was within Sancus Loans Limited.

We continue to reduce our on balance sheet loans (excluding those loans in Sancus Loans Limited). These amounted to £8.0m before IFRS9 provisions at 30 June 2022 compared to £9.7m at 31 December 2021 (£2.8m net of IFRS9 provisions at 30 June 2022 compared to £4.7m at 31 December 2021). Sancus Loans Limited had loans of £58.4m at 30 June 2022 (31 December 2021: £49.9m).

The Group's liabilities consist of the Bond of £12.6m which has a quarterly paid coupon of 7% p.a. and matures on 31 December 2025; and ZDPs of £10.9m with a coupon of 8% which matures on 5 December 2022. We will shortly be engaging with stakeholders to discuss restructuring the ZDPs to enable the Group to have time for its plans to be implemented and return to profitability. The HIT credit facility was increased to £75m from £45m on 4 December 2020 and stood at £55m at 30 June 2022.

ESG

At Sancus, we are committed to taking environmental, social and governance ("ESG") factors seriously. We recognise our responsibility to incorporate sustainability throughout the operations of our business, be custodians of the environment and practice good stewardship of our stakeholders' interests. We are now taking steps to improve our approach to managing these factors.

H1 2022 has been focused on starting to define our ESG strategy. Having now established an internal ESG focus group we will also draw on external industry experts as required.

It is essential that we understand what ESG factors are most important to our stakeholders, such that we can focus our strategy around improving our approach to these issues. We are well on our way to completing a materiality assessment and intend to engage with stakeholders in the coming period.

We will report more fully on this in our 2022 Annual Report.

Outlook

Despite the uncertain outlook for the economy, the perennial imbalance between supply and demand for housing continues to offer a favourable landscape for the Group's anticipated growth in its target markets. The economic uncertainty is likely to lead to the continued retrenchment of Banks from both SME and development financing which further provides attractive opportunities for alternative lenders. We continue to track the geopolitical situation closely and note the potential for further supply chain disruption and inflationary risks in the construction sector.

We continue to be enthusiastic about the opportunities that lie ahead of us and look forward to delivering profitability. 

Rory Mepham

Chief Executive Officer

RISKS, UNCERTAINTIES AND RESPONSIBILITY STATEMENT

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remainder of the financial year. These include, but are not limited to, Capital and liquidity risk, Regulatory and compliance risk, Market risk, Credit risk with respect to the loan book (primarily bridging loans and, increasingly, development loans), Operational risk and the execution of Sancus strategy. These risks remain unchanged from December 2021 and are not expected to change in the 6 months to the end of the financial year. Further details on these risks and uncertainties can be found in the December 2021 Annual Report.

Responsibility statement

The Directors confirm that to the best of their knowledge:

·      The Interim Report has been prepared in accordance with the AIM rules of the London Stock Exchange;

·      This financial information has been prepared in accordance with IAS 34 as adopted by the UK;

·      The interim results include a fair review of the important events during the first half of the financial year and their impact on the financial information as required by DTR 4.2.7R; and

·      The interim results include a fair review of the disclosure of related party transactions as required by DTR 4.2.8R.

Approved and signed on behalf of the Board of Directors

INDEPENDENT REVIEW REPORT ON INTERIM FINANCIAL INFORMATION

Conclusion

We have been engaged by Sancus Lending Group Limited (the 'Company') to review the condensed set of consolidated financial statements in the Interim Report for the six months ended 30 June 2022 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in shareholders' equity, the condensed consolidated statement of cash flows and related Notes 1 to 19.

We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Consolidated Financial Statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the UK and the AIM Rules of the London Stock Exchange.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2 of the interim condensed consolidated financial statements, the financial statements of the Company are prepared in accordance with IFRSs as adopted by the UK. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with the International Accounting Standard 34, "Interim Financial Reporting", as adopted by the UK.

Conclusions Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of directors

The Interim Report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the Interim Report in accordance with the AIM Rules of the London Stock Exchange.

In preparing the half-yearly financial report, the directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of consolidated financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Moore Stephens Audit and Assurance (Guernsey) Limited

Level 2 Park Place

Park Street

St Peter Port

Guernsey, GY1 3HZ

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

For the period ended 30 June 2022

The accompanying Notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

As at 30 June 2022

The financial statements were approved by the Board of Directors on 23 September 2022 and were signed on its behalf by:

The accompanying Notes form an integral part of these financial statement.