08 September 2022
Funding Circle Holdings plc
Half Year 2022 Results
Embargoed until 7.00am, 8 September 2022
THIS ANNOUNCEMENT INCLUDES INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE MARKET ABUSE REGULATION NO. 596/2014
Funding Circle Holdings plc (“Funding Circle”) announces results for the six months ended 30 June 2022.
Lisa Jacobs, CEO said:
“In the last six months, we have made early progress on all three of our strategic pillars to transform the business into a multi-product platform. We are attracting more businesses, saying yes to more businesses and entering new product categories to enable small businesses to not only borrow with Funding Circle, but pay and spend as well.
We are well prepared to manage the business through the challenging macro environment and are confident in our ability to help small businesses do the same. With our market-leading technology, which continues to deliver a superior customer experience, we remain well placed to deliver on our mission to help more small businesses get the funding they need to win.”
Highlights:
- H1 2022 performance ahead of expectations, driven by investment AEBITDA.
- Prudent approach to the uncertain macro environment in H2 2022, with £15 million reduction to income outlook; now expected to be in the range of £140 million - £155 million.
- Net assets of £299 million, including unrestricted cash of £183 million to support business investment and growth as we execute our medium-term plan.
- Continued investor demand to fund loans; continued borrower demand.
- Investor returns through the platform remain robust and attractive, with upgrades to most loan cohorts.
- Market-leading technology continues to deliver a superior customer experience reflected in a Net Promoter Score of 80 in the UK and 83 in the US.
- Early execution against the three strategic pillars of our medium-term plan:
- Attract more businesses: launched two Lending as a Service partnerships in the US.
- Say yes to more businesses: expanded core product set in UK and US; strong origination growth, particularly in the US.
- #1 in new products: tripled FlexiPay drawdowns from March to August.
- Well prepared to manage the business through the uncertain macro environment.
Performance Highlights
|
|
H1 2022 £m |
H2 2021 £m |
H1 2021 £m |
|
Loans under Management (LuM) |
4,071 |
4,457 |
4,933 |
|
Originations |
803 |
661 |
1,635 |
|
Operating income |
66.4 |
71.0 |
94.5 |
|
Net investment income[1] |
10.9 |
15.3 |
26.1 |
|
Total income |
77.3 |
86.3 |
120.6 |
|
Fair value gains |
1.5 |
20.5 |
8.1 |
|
Net income |
78.8 |
106.8 |
128.7 |
|
AEBITDA[2] |
10.6 |
38.5 |
53.3 |
|
Operating profit |
1.5 |
28.7 |
35.5 |
|
Profit before taxation |
1.6 |
28.7 |
35.4 |
|
Cash |
200.7 |
224.0 |
168.1 |
|
Net Assets |
299.3 |
288.0 |
254.1 |
Financial Summary:
- Loans under management of £4.1 billion (31 December 2021: £4.5 billion) down 9% following expected early repayments of CBILS loans and PPP loan forgiveness.
- Originations of £803 million (H1 2021: £1.6 billion) down 51% year-on-year in line with expectations following the conclusion of the government-guaranteed loan schemes in H1 2021, but up on H2 2021 by 21%.
- Operating income of £66.4 million (H1 2021: £94.5 million) down by 30% against the high levels of income from the government-guaranteed loan schemes in H1 2021. H2 2021 included £14 million of deferred PPP revenue.
- Investment income of £10.9 million (H1 2021: £26.1 million) down by 58% as investments monetised in line with strategy and remaining loans amortise down.
- Fair value gain of £1.5 million (H1 2021: £8.1 million gain) following positive revaluations in both H1 and H2 2021, reflecting underlying credit performance.
- AEBITDA of £10.6 million (H1 2021: £53.3 million) and operating profit of £1.5 million (H1 2021: £35.5 million) in line with reduction in net income.
- Net assets of £299.3 million (31 December 2021: £288.0 million), including cash of £200.7 million (31 December 2021: £224.0 million) of which £183.4 million (31 December 2021: £199.4 million) was unrestricted[3].
Operating and Strategic Summary:
- We have a proven platform model and we will continue to actively manage the business through the challenging macro environment:
- Investor returns through the platform remain resilient with improvements in most cohorts. Recent cohorts expected to deliver 5-7% returns. This reflects the quality of the loans Funding Circle originates.
- We have refined our credit model to maintain a prudent approach to originations and adjusted borrower pricing to reflect the rising base rate environment.
- We continue to see demand from investors to fund loans with an active forward-pipeline and anticipate adding new investors in H2 2022.
- We have made early progress against our medium-term plan:
- In March, we announced our medium-term plan to transform Funding Circle into a multi-product platform, serving a direct and embedded audience.
- We are focused on empowering small businesses to not only borrow but pay and spend as well.
- Six months into this plan, we are delivering against our three strategic pillars:
- Attract more businesses:
- Launched two Lending as a Service (“LaaS”) partnerships with Pitney Bowes and DreamSpring in the US.
- Continued to refine our embedded finance solution in the UK
- Say yes to more businesses:
- Expanded US core loan proposition to serve super-prime businesses
- Expanded UK core loan proposition to serve select younger businesses
- #1 in new products:
- Tripled FlexiPay drawdowns from March to August during its pilot phase and opened up to new customer segments. Generated £17 million of originations in H1 2022
- Beta launch for FlexiPay Card on track for Q4 2022 in the UK
- Leading SME loans platform:
- UK: Funding Circle is the largest SME loan platform with over ten years of experience.
- £3.6 billion of loans under management in H1 2022 down from £3.9 billion in H2 2021, reflecting the early repayment of CBILS loans.
- US: We have built powerful capabilities with increasing scale and customer base over the past eight years.
- High origination growth since PPP closure in May 2021. £145 million originated in H1 2022 compared with £69 million in H2 2021.
- The superior experience we deliver to customers leads to high customer advocacy, reflected in a Net Promoter Score (“NPS”) of 80 in the UK and 83 in the US.
- We also have a huge societal impact. In 2021, lending through Funding Circle’s UK platform helped generate more than £7bn in GDP whilst creating and sustaining 100,000 jobs.
- UK: Funding Circle is the largest SME loan platform with over ten years of experience.
- Our world-class technology continues to deliver a superior customer experience:
- At Funding Circle we are reinventing small business lending through technology, data and machine learning.
- Our world-class tech platform delivers significant customer benefits and creates a deep moat around our business:
- Large data lake: Our data lake has over 2 billion data points on 28 million SMEs across the UK and US enabling us to build accurate and predictive models.
- Better machine learning models: In the UK, our 8th generation risk models significantly outperform traditional bureau scores, optimising access whilst delivering strong investor returns.
- Better customer experience: We have built the capability for SMEs in the UK to receive an instant lending decision. Today more than 70% of applications receive an instant decision. A borrower can apply for a loan in six minutes, receive a decision in nine seconds and money in their account in 24 hours.
- Increased operating leverage: Our Decision Engine platform generates personalised customer journeys, pricing and propositions which help to increase conversion.
- New products: The strength of our platform enables us to offer new products and capabilities.
- Customer growth: Our technology is revolutionising SME lending and delivering a superior customer experience for borrowers resulting in strong satisfaction scores and high repeat rates.
Outlook:
- The business is in a good position and we are well prepared to manage through the challenging macro environment.
- We are taking a prudent approach to the macro environment in the UK and the US in H2 2022, with income outlook now expected to be in the range of £140 million - £155 million.
- We reaffirm that the business will be AEBITDA positive for the Full Year. Medium-term guidance is unchanged.
|
|
2022 |
|
Medium-term guidance (2025) unchanged |
|||
|
Revised guidance |
Original guidance |
|
UK |
US |
FlexiPay |
|
|
Group total income[4] |
£140m - £155m |
£155m - £170m |
|
At least £220m |
At least £70m |
Too early to be precise |
|
Group AEBITDA |
Remain AEBITDA positive, although now skewed to H1, following strong performance of investment AEBITDA |
|
Margins at 30-35% |
AEBITDA breakeven during 2024 |
AEBITDA profitable |
|
Analyst presentation:
Management will host an analyst and investor presentation and conference call at 9:30am UK time (BST), on Thursday 8 September 2022, including a Question and Answer session.
To watch and listen to the webcast, with the opportunity to submit written questions, please use this webcast link to register or gain instant access to the event.
For conference call access, with the opportunity to ask live questions, please dial-in:
From the UK dial: 0800 279 6877
From the US dial: +1 646-828-8073
From anywhere else dial: +44 330 165 4012
Access code: 9611633
An on-demand replay and transcript will also be available on the Funding Circle website following the presentation.
Enquiries:
Funding Circle Investor Relations
Morten Singleton (+44 7709 048699)
ir@fundingcircle.com
Funding Circle Media Relations
Abigail Whittaker (+44 7989 876136) / Nicole Gregory (+44 7715 997709)
press@fundingcircle.com
Headland Consultancy
Mike Smith / Stephen Malthouse (+44 20 3805 4822)
About Funding Circle:
Funding Circle (LSE: FCH) is a lending platform for small business borrowers. Established in the UK in 2010, and now the leading lending platform to SMEs, the Group also has a material and growing presence in the US. Globally, Funding Circle has provided £14.5bn in loans to c.130,000 businesses.
For small business borrowers, Funding Circle provides a leading-edge customer experience, delivered through its technology, machine learning, and data science, coupled with a human touch. Its solutions continue to help customers access the funding they need to succeed.
For lending investors, Funding Circle provides access to an alternative asset class in an underserved market, and delivers robust and attractive returns.
Forward looking statements and other important information
This document contains forward looking statements, which are statements that are not historical facts and that reflect Funding Circle’s beliefs and expectations with respect to future events and financial and operational performance. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the control of Funding Circle and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. Nothing contained within this document is or should be relied upon as a warranty, promise or representation, express or implied, as to the future performance of Funding Circle or its business. Any historical information contained in this statistical information is not indicative of future performance.
The information contained in this document is provided as of the dates shown. Nothing in this document should be construed as legal, tax, investment, financial, or accounting advice, or solicitation for or an offer to invest in Funding Circle.
Business Review
At Funding Circle, we deliver an amazing customer experience through technology, machine learning and data science.
Over the past ten years, we have revolutionised SME lending and built the capability for SMEs in the UK to receive an instant lending decision. This is a first in SME term lending.
Today, as the leading global platform for small business loans we have helped 130,000 small businesses to access more than £14.5 billion of funding. Through our investment in technology, we have acquired more than a decade of data on SMEs. This data enables us to conduct granular risk analysis, strengthening our risk models. This world-class system powers the Funding Circle flywheel which drives innovation, improvements, and a significant competitive advantage.
For borrowers, this means we provide a seamless and fast experience, resulting in strong customer satisfaction scores and high-repeat rates. For investors, this means we provide resilient and attractive returns. And it also helps us to grow alongside our customers, all part of a virtuous circle so that we can continue to meet the finance needs of hundreds of thousands of SMEs and grow our market share.
Overview of the six months ended June 2022
Our performance in H1 2022 was ahead of expectations, driven by investment AEBITDA. We continued to focus on our commercial loans, expanding to new customer segments, following either the closure or reducing scale of the various government-guaranteed loan schemes. We continued to invest in and grow our first short-term finance product FlexiPay, opened up to new customer segments and tripled FlexiPay drawdowns from March to August. We also continued to grow our marketplace (referral) offering, connecting borrowers with other lenders in the market, providing further products beyond what Funding Circle currently offers, such as larger loans, asset finance and invoice finance.
In the UK, we continued to offer our commercial loans alongside the Recovery Loan Scheme (“RLS”), the 80% government-guaranteed loan scheme introduced in April 2021, up until May 2022. We then transitioned to operate solely our commercial lending from June 2022 onwards and now also offer our core loans to select younger businesses. A new iteration of RLS launched in August 2022. We have applied for accreditation, but we expect that the majority of our lending will continue to be through a combination of our core, marketplace and new products. In the prior year, we offered CBILS loans until the processing of those loans finished in June 2021.
In the US, we continued to offer our commercial loan product during the six months to June 2022 and we have expanded this offering to serve super-prime businesses. In the prior year, we operated the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) which closed in May 2021. Since the programme’s closure, we continued to process forgiveness claims of PPP loans as they became forgiven by the US Government during H1 2022, as a result of the borrower meeting usage conditions.
Government-guaranteed loan schemes resulted in very high demand for loans from borrowers in H1 2021. As a result of the timings of these schemes operating and concluding, borrower appetite for loans was subdued during H2 2021 and into H1 2022. We have continued to grow originations in H1 2022 despite this subdued market demand.
|
Originations (half year ended) |
|
||
|
|
30 June 2022 £m |
31 December 2021 £m |
30 June 2021 £m |
|
United Kingdom |
641 |
591 |
1,381 |
|
United States |
145 |
69 |
247 |
|
Developing Markets |
- |
1 |
7 |
|
New Products (FlexiPay) |
17 |
- |
- |
|
Total |
803 |
661 |
1,635 |
Originations in H1 2022 totalled £803 million. This compared with £661 million in H2 2021, down from £1,635 million in H1 2021.
|
Loans under Management |
|
|
|
|||
|
|
30 June 2022 £m |
31 December 2021 £m |
Change |
|
||
|
United Kingdom |
3,632 |
3,944 |
(8%) |
|
||
|
United States |
371 |
425 |
(13%) |
|
||
|
Developing Markets |
60 |
88 |
(32%) |
|
||
|
New Products |
8 |
- |
- |
|
||
|
Total |
4,071 |
4,457 |
(9%) |
|
||
Loans under management declined in the period by 9% to £4,071 million. This was principally driven by:
- Higher levels of early repayments from CBILS loans which was expected as there were no principal payments required in the first year and the government was paying the interest. As the first borrower payments became due, some borrowers repaid the loans in full.
- Reduction in PPP loans as they became forgiven by the US Government, provided certain borrower conditions on usage were satisfied. PPP loans totalled £125 million at 31 December 2021 reducing to £48 million by 30 June 2022. No servicing fees are earned on PPP loans.
Geographic highlights
|
Net income/(loss) |
30 June 2022 |
30 June 2021 |
|||||||||
|
United Kingdom |
United States |
Developing Markets |
New Products |
Total |
United Kingdom |
United States |
Developing Markets |
New Products |
Total |
|
|
|
|
|
|
|
|
|||||||
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
|
|
Total income |
61.9 |
14.2 |
0.8 |
0.4 |
77.3 |
98.8 |
20.2 |
1.6 |
- |
120.6 |
|
|
Fair value gains/(losses) |
(4.0) |
5.5 |
- |
- |
1.5 |
0.3 |
7.8 |
- |
- |
8.1 |
|
|
Net income |
57.9 |
19.7 |
0.8 |
0.4 |
78.8 |
99.1 |
28.0 |
1.6 |
- |
128.7 |
|
|
Segment profit |
30 June 2022 |
30 June 2021 |
|||||||||
|
|
United Kingdom |
United States |
Developing Markets |
New Products |
Total
|
United Kingdom |
United States |
Developing Markets |
New Products |
Total |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
|
Adjusted EBITDA |
7.6 |
1.9 |
1.8 |
(0.7) |
10.6 |
41.0 |
11.8 |
0.5 |
- |
53.3 |
|
|
Depreciation and amortisation |
(5.3) |
(1.6) |
- |
- |
(6.9) |
(5.6) |
(2.7) |
- |
- |
(8.3) |
|
|
Share-based payments and social security costs |
(1.9) |
(0.4) |
- |
- |
(2.3) |
(4.2) |
(0.6) |
- |
- |
(4.8) |
|
|
Foreign exchange gains/(losses) |
0.1 |
- |
- |
- |
0.1 |
- |
(0.8) |
- |
- |
(0.8) |
|
|
Exceptional items |
- |
- |
- |
- |
- |
- |
(3.9) |
- |
- |
(3.9) |
|
|
Operating profit/(loss) |
0.5 |
(0.1) |
1.8 |
(0.7) |
1.5 |
31.2 |
3.8 |
0.5 |
- |
35.5 |
|
|
Operating AEBITDA[5] |
4.9 |
(7.8) |
1.8 |
(0.7) |
(1.8) |
27.7 |
(9.1) |
0.5 |
- |
19.1 |
|
|
Investment AEBITDA5 |
2.7 |
9.7 |
- |
- |
12.4 |
13.3 |
20.9 |
- |
- |
34.2 |
|
United Kingdom
There continued to be strong demand from investors during the period to fund both the RLS and commercial loans. We have signed ongoing forward funding flow agreements with a range of institutional investors totalling £1.7 billion.
We originated £641 million of loans in H1 2022 compared with £591 million in H2 2021 and £1,381 million in H1 2021. Originations in 2021 were at a record level due to the significant demand for government-guaranteed loans at the height of the pandemic.
The UK delivered total income of £61.9 million in H1 2022 compared with £98.8 million in H1 2021 and £60.6 million in H2 2021. Operating income in H1 2022 was £55.2 million (H1 2021: £85.8 million, H2 2021: £51.9 million). Net investment income was down to £6.7 million (H1 2021: £13.0 million, H2 2021: £8.7 million) as the investments in SME loans on balance sheet continued to amortise down and we took the opportunity to exit and monetise the UK warehouse in November 2021, crystallising £32 million of cash.
The UK generated operating AEBITDA of £4.9 million, lower than the levels seen in H1 2021 whilst CBILS was operating, but above the £2.0 million in H2 2021. Investment AEBITDA was £2.7 million (H1 2021: £13.3 million, H2 2021: £18.9 million). H1 2022 experienced a net fair value loss in the UK of £4.0 million driven predominantly by negative fair value movements in investments in certain trusts held via vehicles in which the Group holds a minority investment. Increases in base rates increased projected borrowing costs, and a revision to the macroeconomic loss assumptions with a gradual but longer lasting default stress negatively impacted the expected returns. In contrast, 2021 benefited from the improved economic outlook and the positive impact this had on the fair value of the SME loans held on balance sheet resulting in fair value gains.
Total AEBITDA was £7.6 million (H1 2021: £41.0 million, H2 2021: £20.9 million) with an AEBITDA margin of 13%. Operating profit was £0.5 million (H1 2021: £31.2 million, H2 2021: £13.1 million). The reduction in both total AEBITDA and operating profit on H2 2021 was driven by the reduced investment AEBITDA offset by some growth in operating AEBITDA.
United States
During the period, the US closed funding deals with four banks and credit unions. We anticipate adding further new investors during H2 2022.
The US has continued to grow originations since PPP ceased in May 2021. Originations were £145 million during H1 2022 compared with £69 million in H2 2021 and £247 million in H1 2021 when PPP was operating.
Total income for the US was £14.2 million (H1 2021: £20.2 million) comprising operating income of £10.0 million (H1 2021: £7.1 million) and net investment income of £4.2 million (H1 2021: £13.1 million).
In H1 2021, £16 million of transaction fees were earned on PPP originations. However, loans originated under the PPP liquidity facility are held on balance sheet until they have been forgiven by the SBA. Accordingly, under IFRS 9, this was spread over the expected life of those loans with c.£14 million of this being recognised in H2 2021 and c.£2 million in H1 2022. When the PPP deferral is reversed to show the underlying operating performance, operating income was £7.6 million in H1 2022, down from H1 2021 of £23.2 million, but higher than the £4.0 million in H2 2021.
Net investment income was £4.2 million compared to £13.1 million in H1 2021. Similar to the UK, the reduction in investment income reflects the amortising nature of the investment in SME loans held on balance sheet. In June 2021, the US sold c.£63 million of loans held in the warehouse to an asset manager, crystallising £38 million of net cash proceeds.
Operating AEBITDA for the period was negative £7.8 million (H1 2021: negative £9.1 million). When the PPP deferral is reversed to show underlying performance, operating AEBITDA was negative £10.1 million compared to £5.6 million in H1 2021 and negative £13.1 million in H2 2021. Investment AEBITDA was £9.7 million (H1 2021: £20.9 million) principally reflecting the amortising loan book and warehouse sold in June 2021. However, the SME loans held on balance sheet continue to deliver strong returns and cash inflows which drove the fair value gain.
Total AEBITDA was £1.9 million compared with AEBITDA of £11.8 million in H1 2021 and operating profit was negative £0.1 million (H1 2021: £3.8 million).
Finance review
Overview
Group total income was £77.3 million (H1 2021: £120.6 million), down 36%. Net income for the half year was £78.8 million (H1 2021: £128.7 million). Net income is total income plus fair value movements on SME loans held for sale and investments in trusts. The fair value gain in H1 2022 reflected a strong performance from the consolidated SME loans with lower defaults and higher recoveries than expected, although it was partially offset by higher discount rates (affected by higher interest rates) as loans are valued on a discounted cash flow basis.
AEBITDA was £10.6 million (H1 2021: £53.3 million), which comprised negative £1.8 million operating AEBITDA (H1 2021: £19.1 million) and £12.4 million investment AEBITDA (H1 2021: £34.2 million).
The Group’s operating profit was £1.5 million for the period (H1 2021: £35.5 million).
Profit and loss
|
|
30 June 2022
|
30 June 2021
|
||||
|
|
Before exceptional items £m |
Exceptional items £m |
Total £m |
Before exceptional items £m |
Exceptional items £m |
Total £m |
|
Transaction fees |
40.7 |
- |
40.7 |
70.5 |
- |
70.5 |
|
Servicing fees |
24.2 |
- |
24.2 |
21.9 |
- |
21.9 |
|
Other fees |
0.9 |
- |
0.9 |
2.1 |
- |
2.1 |
|
Interest income |
0.6 |
- |
0.6 |
- |
- |
- |
|
Operating income |
66.4 |
- |
66.4 |
94.5 |
- |
94.5 |
|
Investment income |
14.1 |
- |
14.1 |
33.5 |
- |
33.5 |
|
Investment expense |
(3.2) |
- |
(3.2) |
(7.4) |
- |
(7.4) |
|
Total income |
77.3 |
- |
77.3 |
120.6 |
- |
120.6 |
|
Fair value gains |
1.5 |
- |
1.5 |
8.1 |
- |
8.1 |
|
Net income |
78.8 |
- |
78.8 |
128.7 |
- |
128.7 |
|
|
|
|
|
|
|
|
|
People costs |
(41.4) |
- |
(41.4) |
(39.4) |
- |
(39.4) |
|
Marketing costs |
(17.3) |
- |
(17.3) |
(27.4) |
- |
(27.4) |
|
Depreciation, amortisation and impairment |
(6.9) |
- |
(6.9) |
(8.3) |
(3.9) |
(12.2) |
|
Loan repurchase charge |
0.4 |
- |
0.4 |
(0.1) |
- |
(0.1) |
|
Other costs |
(12.1) |
- |
(12.1) |
(14.1) |
- |
(14.1) |
|
Operating expenses |
(77.3) |
- |
(77.3) |
(89.3) |
(3.9) |
(93.2) |
|
|
|
|
|
|
|
|
|
Operating profit/(loss) |
1.5 |
- |
1.5 |
39.4 |
(3.9) |
35.5 |
|
|
|
|
|
|
|
|
Operating income includes transaction fees, servicing fees, interest income and other fees and was £66.4 million (H1 2021: £94.5 million).
- Transaction fees, representing fees earned on originations, decreased 42% from H1 2021 to £40.7 million. The overall decrease in transaction fees over H1 2021 was driven by lower trading volumes as the Group transitioned away from the government-guaranteed loan schemes in the UK and the US. In comparison, H1 2021 experienced strong trading performance as a result of CBILS.
Average yields across the Group were 5.2% in H1 2022 compared with 4.4% in H1 2021. Yields on CBILS loans in the prior year were fixed at 4.75%.
Whilst PPP loans were originated in H1 2021, as the PPP loans were held on balance sheet at amortised cost until forgiven, the transaction fees associated with them are required to be spread over the expected life of the loans. As a result, transaction fees for which cash had been received totalling £16 million were deferred from H1 2021 with £14 million recognised in H2 2021 and £2 million in H1 2022 respectively.
- Servicing fees, representing income for servicing loans under management, increased to £24.2 million from £21.9 million in H1 2021 following the heightened origination activity driven by CBILS.
Overall servicing yield was 1.1% compared with 1.0% in H1 2021, with yields on CBILS, RLS and commercial loans at c.1.25%. There is no servicing fee earned on PPP loans.
- Other fees arose principally from a fee premium we received from certain institutional investors in the year in respect of buying back certain defaulted loans under a historic loan purchase commitment and from collections fees.
- Interest income represents interest earned on loans held at amortised cost predominantly from our FlexiPay lines of credit assets.
Net investment income represents the investment income, less investment expense, on loans within Funding Circle’s investment vehicles and was £10.9 million (H1 2021: £26.1 million). H1 2021 benefitted from the net investment income on the US and UK warehouses which were sold in June 2021 and November 2021 respectively. Net investment income will continue to reduce as the loans continue to amortise down.
Net income, defined as total income after fair value adjustments, was £78.8 million (H1 2021: £128.7 million). This reflects the reduction in operating income from the higher levels in H1 2021 when CBILS was operating together with a reduction in net investment income following amortisation of the portfolios and the sale of the warehouses in 2021 to crystallise c. £70 million in cash.
The net fair value gain in H1 2022 was driven by strong performance on the securitisation vehicles particularly in the US, partly offset by investment in trusts in the UK, where investments held via vehicles were negatively impacted by the increased base rates increasing borrowing costs and revision to the timing and magnitude of forecast default stress. H1 2021 benefitted from an improved economic outlook which had a positive impact on the valuation of the SME loans held on balance sheet.
Operating expenses
Operating expenses reduced by 17% or £16 million from H1 2021. This was principally as a result of reduced marketing costs and in particular broker commissions which were higher in H1 2021 (aligned to the higher originations from government-guaranteed loan schemes).
People costs (including contractors) which represent the Group’s largest ongoing operating cost increased during the period by 9% to £47.2 million, before the capitalisation of development spend. This was driven by increased investment in the technology teams and wage inflation. The share-based payment charge for the period, included in people costs, was £2.3 million (H1 2021: £4.8 million).
|
|
30 June 2022 £m |
30 June 2021 £m |
Change % |
|
People costs |
47.2 |
43.4 |
9 |
|
Less capitalised development spend (“CDS”) |
(5.8) |
(4.0) |
45 |
|
People costs net of CDS |
41.4 |
39.4 |
5 |
|
Average headcount (incl. contractors) |
1,004 |
915 |
10 |
|
Period-end headcount (incl. contractors) |
1,029 |
931 |
11 |
Marketing costs reduced in the period from £27.4 million in H1 2021 to £17.3 million principally driven by broker commissions which were higher in H1 2021 following the higher level of CBILS originations together with strong cost control of marketing to ensure the spend was optimised. Marketing spend overall was 26% of operating income (H1 2021: 29%).
Depreciation, amortisation and impairment costs of £6.9 million (H1 2021: £8.3 million) largely represent the amortisation of the cost of the Group’s capitalised technology development and impairment of assets.
A charge of £3.9 million was recorded in H1 2021 to impair the right of use asset and office fixtures associated with the San Francisco office which was sublet.
Balance sheet and investments
The Group’s net equity has grown from £288 million at 31 December 2021 to £299 million as at 30 June 2022.
The Group’s balance sheet includes £214 million of net equity from the operating business, including £7.1 million of FlexiPay lines of credit. Funding Circle also holds certain SME loans on balance sheet either directly or through investment vehicles. The net equity in these totalled a further £85 million. The table below sets out the Group’s net equity:
|
|
|
|
|
|
|
|
|
30 June 2022 |
31 December 2021 |
|
|
Operating business
|
Investment business |
|
||||||
|
|
Trading business |
New products |
PPP Loans |
Securitisation SPVs |
Investment in trusts and co-investments |
Investment in core loans |
Other investments |
Total |
Total |
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
SME loans |
2.9 |
7.1 |
35.1 |
63.7 |
34.5 |
27.6 |
5.9 |
176.8 |
273.8 |
|
Cash and cash equivalents |
193.1 |
- |
0.7 |
6.9 |
- |
- |
- |
200.7 |
224.0 |
|
Other assets/(liabilities) |
- |
- |
(0.2) |
1.8 |
- |
- |
- |
1.6 |
(0.5) |
|
Borrowings/bonds |
- |
- |
(35.6) |
(55.4) |
- |
- |
- |
(91.0) |
(213.5) |
|
Cash and net investments |
196.0 |
7.1 |
- |
17.0 |
34.5 |
27.6 |
5.9 |
288.1 |
283.8 |
|
Other assets |
66.9 |
- |
- |
- |
- |
- |
- |
66.9 |
67.9 |
|
Other liabilities |
(55.7) |
- |
- |
- |
- |
- |
- |
(55.7) |
(63.7) |
|
Equity |
207.2 |
7.1 |
- |
17.0 |
34.5 |
27.6 |
5.9 |
299.3 |
288.0 |
The table below provides a further breakdown of Funding Circle’s net equity invested in products and vehicles:
|
Investment in product/vehicles |
30 June 2022 £m |
31 December 2021 £m |
|
1. Securitisation SPVs 1 |
|
|
|
Vertical |
3 |
6 |
|
Horizontal |
14 |
16 |
|
2. Trusts and co-investments1 |
34 |
39 |
|
3. Core loans |
28 |
- |
|
4. Other |
6 |
7 |
|
Net investment equity |
85 |
68 |
|
5. New products |
7 |
2 |
|
Total net equity |
92 |
70 |
1 These vehicles are bankruptcy remote
1. Securitisation SPVs
i. Vertical - Funding Circle is required by regulation to retain a 5% equal participation in all classes of bonds issued. This has continued to pay down.
ii. Horizontal - once loans are securitised, we temporarily hold the residual horizontal tranches with the intention to sell once seasoned. These tranches have the potential to earn greatest returns, but they also absorb losses first. The timing of the pandemic meant that it was not feasible to dispose of all these horizontal tranches in 2020 but we still intend to do so if opportunities allow. As the loans are valued at fair value using discounted cash flow forecasts, improved performance has increased the value of the horizontals.
2. Trusts and co-investments
As part of our participation in the CBILS and RLS programmes we were required to co-invest c.1% alongside institutional investors. As the underlying CBILS and RLS SME loans are 70-80% guaranteed our exposure is limited. However, where some of the investment is via warehouses, the increase in base rates increasing borrowing costs in combination with a revision to default stress expectations growing gradually and being longer lasting have impacted projected returns through these structures in the period and resulted in a fair value loss. Excluding movement in fair value these investments have otherwise increased, driven by the strong originations in the period, partially offset by repayments.
3. Core loans
This relates to loans held following the closure of certain consolidated securitisation SPVs. The SBOLT 19-3 call option was exercised to wind up the structure in June 2022. As a result Funding Circle bought out the remaining bond tranches and retained some of the underlying loans. These loans are mature and amortise quickly with over £10 million of cash expected to be received during H2 2022. Legacy loans from the previously closed warehouses are also included within this category, along with other core loans temporarily funded through the Group’s balance sheet with the intention of selling on.
4. Other
There are a small amount of other loans, comprising seed investments in Private Funds held as associates which are in amortisation.
5. New products
This relates to the Group’s FlexiPay lines of credit. The Group is funding the product from its own balance sheet until it reaches a certain level of maturity.
Cash flow
As at 30 June 2022, the Group held cash and cash equivalents of £200.7 million. Of this balance, £17.3 million (H1 2021: £33.9 million) was held and restricted for use. The remaining £183.4 million is unrestricted in its use. Cash has reduced by £23.3m from 31 December 2021, of which c.£16.0 million was utilised in calling the UK securitisation vehicle and repaying bonds, from which c.£10.0m of cash inflows from the retained loans are expected to flow back to the Group in H2 2022., and the remainder to follow in 2023.
Free cash flow, which is an alternative performance measure, represents the net cash flows from operating activities less the cost of purchasing intangible assets, property, plant and equipment, lease payments and interest received. It excludes the investment vehicle financing and funding cash flows together with new product (FlexiPay) lines of credit. The Directors view this as a key liquidity measure and is the net amount of cash used or generated to operate and develop the Group’s platform each year.
Free cash flow has reduced from H1 2021 predominantly due to lower AEBITDA and large working capital movements associated with CBILS where £27 million of fees were received in H1 2021 relating to 2020 originations.
The table below shows how the Group’s cash has been utilised:
|
|
30 June 2022 |
30 June 2021 |
|
£m |
£m |
|
|
Adjusted EBITDA |
10.6 |
53.3 |
|
Fair value adjustments |
(1.5) |
(8.1) |
|
Purchase of tangible and intangible assets |
(6.6) |
(4.6) |
|
Payment of lease liabilities |
(3.0) |
(3.8) |
|
Working capital / other |
(1.4) |
29.0 |
|
Free cash flow |
(1.9) |
65.8 |
|
Net distributions from associates |
2.0 |
1.4 |
|
Net movement in trusts and co-investments |
(1.7) |
(15.7) |
|
Net originations of lines of credit |
(5.6) |
- |
|
Net movement in PPP loans |
0.2 |
3.5 |
|
Net movement in warehouses and securitisation vehicles |
(15.3) |
9.8 |
|
Purchase of own shares |
(4.6) |
- |
|
Other |
(0.7) |
0.3 |
|
Effect of foreign exchange |
4.3 |
(0.3) |
|
Movement in the period |
(23.3) |
64.8 |
|
Cash and cash equivalents at the beginning of the period |
224.0 |
103.3 |
|
Cash and cash equivalents at the end of the period |
200.7 |
168.1 |
Principal risks and uncertainties
The Group’s principal risks and uncertainties were disclosed on pages 55 to 63 of the Funding Circle Holdings plc 2021 Annual Report and Accounts after review and approval by the Board. The Group considers that the overall principal risks and uncertainties, risk appetite, key risks and management of risks remain unchanged for the six months ended 30 June 2022.
The principal risks include:
- Strategic risk, including the economic environment and environmental, social and governance risk;
- Funding and balance sheet risk;
- Credit risk, including borrower acquisition and portfolio management risk;
- Regulatory, reputation and conduct risk; and
- Operational risk, including process risk, information security, data risk, financial crime, technology risk and client money risk.
Statement of Directors’ Responsibilities
The Directors confirm that these condensed interim financial statements have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom’s Financial Conduct Authority, give a true and fair view of the assets, liabilities, financial position and profit and loss as required by DTR 4.2.4 and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
- an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
- material related-party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report and Accounts.
The maintenance and integrity of the Funding Circle Holdings plc website is the responsibility of the directors; the work carried out by the authors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that might have occurred to the interim financial statements since they were initially presented on the website.
The Directors of Funding Circle Holdings plc are listed in the Funding Circle Holdings plc Annual Report and Accounts for 31 December 2021. A list of current directors is maintained on the Funding Circle Holdings plc website: www.corporate.fundingcircle.com.
By order of the Board
Lisa Jacobs, Chief Executive Officer
8 September 2022
Oliver White, Chief Financial Officer
8 September 2022
[1] Net investment income comprises investment income less investment expense.
[2] Adjusted EBITDA (“AEBITDA”) is an alternative performance measure and represents operating profit/(loss) before depreciation and amortisation, share based payment charges, associated social security costs, foreign exchange gains / (losses), and exceptional items. A reconciliation between AEBITDA and operating profit/(loss) is shown in the Business Review.
[3] Unrestricted cash refers to total cash less cash that is restricted in use. The restricted cash is cash that is not available for general use by the company as it is held within investment vehicles.
[4] Revised guidance: Group operating income £130m-£140m and Group investment income £10m-£15m. Original guidance: Group operating income £145m-£155m and Group investment income £10m-£15m.
[5] Investment AEBITDA is defined as investment income, investment expense and fair value adjustments, and operating AEBITDA represents AEBITDA excluding investment AEBITDA.