Sancus Lending : Annual Report 2021

Sancus Lending Group Limited

(formerly GLI Finance Limited)

Annual Report and

Audited Consolidated Financial Statements

For the year ended 31 December 2021

Sancus Lending Group Limited (formerly GLI Finance Limited)

For the year ended 31 December 2021

CONTENTS

CONTENTS

HIGHLIGHTS 2

STRATEGIC REPORT

Chairman's Statement

Chief Executive Officer's Report

Principal Risks and Uncertainties and Related Internal Controls Social Responsibility

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CORPORATE GOVERNANCE

Board of Directors and Executive Management Team 14

Governance Framework 16

Board Committee Structure 18

The Audit and Risk Committee Report 20

Remuneration and Nomination Committee Report 23

Directors' Report 26

CONSOLIDATED FINANCIAL STATEMENTS

Independent auditor's report to the members of Sancus Lending Group Limited 29

Consolidated Statement of Comprehensive Income 36

Consolidated Statement of Financial Position 37

Consolidated Statement of Changes in Shareholders' Equity 38

Consolidated Statement of Cash Flows 39

Notes to the Financial Statements 40-77

Officers and Professional Advisers 78-79

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Sancus Lending Group Limited (formerly GLI Finance Limited)

For the year ended 31 December 2021

HIGHLIGHTS

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

"Since my appointment as CEO in June 2021, I have prioritised the turnaround of the Group's financial performance. 2021 was the start of a transitional period for the Company. We have rebranded, strengthened the management team, invested in technology and expanded our presence in the UK and Ireland. We have also undertaken a thorough review of the loan book and, where required, provisioned accordingly.

Our plan is to return the Group to profitability by growing the Groups loans under management while ensuring that our credit and other processes are best in class. We will also broaden our funder base and improve funding terms. The business will continue to focus on expanding the Group's presence in the UK and Ireland together with rebuilding its loan book in the Offshore markets of Jersey, Guernsey and Gibraltar.

We started 2022 with a clear strategy to return the business to profitability, and a management team committed to achieving that."

Strategic and Operational Highlights

•  Change of name to Sancus Lending Group Limited, announced on 11 May 2021, reflecting the Group's continued focus on property lending in residential development and bridge financing;

•  Appointment of Rory Mepham as CEO and Steve Smith as Chairman;

•  Significant investment in the sales and credit teams at the end of 2021 and into 2022, to support and drive growth over the coming years;

•  Focus on the maintenance of robust institutional grade credit processes, smooth loan execution, active loan management, data integrity and a proactive approach to loans that become stressed or distressed;

•  Geographic focus remains unchanged, with the UK and Ireland the key areas of growth for the business whilst the Offshore markets currently remain the Group's largest market. Core Sancus revenue growth was 6% in FY21, with UK revenue up 131%;

•  Impressive growth of 60% on new facilities written; from £50m to £80m year on year, and a strong pipeline in the Group's key growth markets for FY22 and beyond;

•  Loan book at year end £142m (2020: £171m) as a result of large Offshore loan repayments; and

•  Positive shift in the residential property market presents the Group with a favourable outlook and an opportunity to focus on the right strategic steps to support growth in coming years.

Financial Headlines

•  Group revenue for the year was £9.0m (2020: £10.9m) with the reduction in Sancus Loans Limited representing a decrease of £2m;

•  Group loss for the year was £10.3m (2020: loss £14.5m);

•  £6.4m of operating losses relates to expected credit losses under IFRS9 and represents a realistic view on delinquent or defaulted loans, virtually all of which were written in or prior to 2018; and

•  Increase in operating expenses to £6.2m (FY20: £5.6m) reflects investment in sales and credit teams.

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Sancus Lending Group Limited (formerly GLI Finance Limited)

For the year ended 31 December 2021

CHAIRMAN'S STATEMENT

Introduction

I was delighted to take on the role of Chairman of the Group on 31 August 2021, having joined Sancus in May 2021, and am looking forward to the challenge ahead.

A number of key events took place prior to my appointment. The successful fund raise at the end of 2020 was the first step in what the Board believes will be a structured change programme which will reposition the Group for growth. Our target markets continue to present compelling opportunities and coupled with the reduced appetite amongst traditional balance sheet lenders, we are optimistic this will increase the potential to write high quality new business.

2021 was a busy year. The Group was rebranded as Sancus Lending Group Limited (from GLI Finance Limited) on 11 May 2021, the change reflecting the Group's continued focus on lending for residential property development and bridge financing purposes.

There have also been a number of changes to our senior executive team, with new appointments expected to drive Group development and growth, which are outlined more fully below.

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 in June 2021, resulting in impairments of £3m. Whilst we have seen some improvement in the quality of the loan book as the worst effects of the pandemic reduced, we have made an additional £3.4m provision in the second half of the year which we believe draws a line under recent losses. Virtually all of the provisions relate to loans written in or before 2018.

Finally, after a five-year tenure our auditor, Deloitte LLP stood down and have been replaced by Moore Stephens following a tender process.

Our People

There were a number of personnel changes during 2021. Following the resignation of Andy Whelan, Rory Mepham assumed the role of Interim CEO on 30 June 2021 and was then confirmed as CEO on 23 November 2021. Rory joined the business in January 2021 with initial responsibility for funding and origination and has extensive experience in corporate finance, capital raising, debt finance, fund management and development. During his transition, Rory was supported by Dan Walker who originally joined the Group in 2018, and was appointed as Deputy CEO in June 2021. Dan subsequently left the Group on 31 January 2022, and we thank him for his contribution. On 8 March 2022 James Waghorn was appointed as Chief Investment Officer and together with Rory and Emma Stubbs, our Chief Financial Officer, completes our Executive Management Team. James has over 14 year's experience in the UK and European real estate market and has extensive experience across the corporate real estate, investment and property development sectors.

On 31 August 2021, Patrick Firth stepped down after sixteen years with the Group and I would like to thank Patrick for his invaluable contribution during this time.

As Rory sets out in more detail in his report, the Group has invested in rebuilding and reinforcing the team and our headcount has increased from 25 at the end of 2021 to 36 at the date of this report. The new resource will largely be focussed on expansion in our growth markets UK and Ireland but will also reinforce our credit and management focus as we deliver new business in the coming years.

Dividend and Shareholders

As part of its wider strategic review of the business, the Board has decided to withdraw its previous dividend policy as the business plan requires the reinvestment of surplus resources in order to deliver the planned growth objectives. The Company last declared a dividend in 2016 and thereafter adopted a policy consistent with prudent capital and liquidity management, recognising the need to provide the time and funding necessary for the various platforms in which the Group was invested to reach their potential. This followed the transitioning of the business from an investment company to a trading company, when historically it was earning positive cashflows from CLO investments which enabled the business to pay dividends. The Board's decision to formally withdraw its previous dividend policy is therefore consistent with the approach that has been adopted over recent years, to reinvest surplus resources for growth. As such, the Group does not intend to declare a dividend for the year. 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. We certainly do not underestimate the scale and challenge ahead, but with the continuing support of shareholders and all of our stakeholders and in the belief that we have the strategy, the systems and the personnel to put the business onto a firmer footing, I look forward to reporting more positive developments in the coming period.

Steve Smith

Chairman

Date: 30 March 2022

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Sancus Lending Group Limited (formerly GLI Finance Limited)

For the year ended 31 December 2021

CHIEF EXECUTIVE OFFICER'S REVIEW

Outlook

Since my appointment as CEO in June 2021, I have prioritised planning the turnaround of the Group's financial performance. A return to Group profitability relies on successfully growing loans under management whilst widening its range of funders, improving funding terms and adopting institutional grade processes in all areas. The business is focused on expanding the Group's presence in the UK and Ireland, together with rebuilding its loans under management in the Offshore markets of Jersey, Guernsey and Gibraltar.

The business has written in excess of £1.2 billion of loans since inception and as at 31 December 2021 the Group loan book stood at £142m. Sancus is targeting significant growth of loans under management over the coming years. Assembling the team, having the right structure, effective institutional management systems and becoming increasingly technology enabled is necessary to achieve increased scale. The investment in these areas is underway and will continue in 2022.

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. Banks having retrenched from both SME and development financing 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.

The successful delivery of Sancus's growth objectives will be driven by the four key pillars of the Group's business: Origination, Loan Management, Funding and Finance & Operations.

Origination

Originating sufficient lending volumes across the target jurisdictions and product types will provide the business with the scale and diversification it needs to deliver sustainable profitable growth. Significant investment has been made in recruiting experienced business development team members in each of our markets during 2021, an initiative which will continue in 2022.

In the 15 months to March 2022, we took the total business development heads from 8.5 to 15, with a particular focus on our sales activity in the UK with business development heads in this region going from 2 to 8 over the last 15 months. The new team members come from experienced backgrounds in the industry and bring with them a large pool of potential sources of new business. Team members will be incentivised to deliver quality new business with a focus on the business earning an appropriate return for where a given loan sits on the risk / return spectrum.

Whilst it is possible that further hiring will be required in the future, we consider that this recruitment drive provides the team that can substantially deliver against the Group's required targets. The Board will remain alert to market dynamics and future opportunities as they present themselves and will look to add to the team in line with business requirements.

As part of the risk management process, no members of the credit committee have an origination function. This ensures an appropriate separation between the origination and credit functions.

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