Secured Income Fund : Annual Report June 2021

Secured Income Fund plc

(formerly SQN Secured Income Fund plc)

(Registered number 09682883)

ANNUAL REPORT AND FINANCIAL STATEMENTS

For the year ended 30 June 2021

Contents

STRATEGIC REPORT

Key Points

1. In addition to the Ordinary Shares in issue, 1 Management Share of £1 is in issue (2020: 50,000) (see note 21).
2. Total return per Ordinary Share has been calculated by comparing the NAV or share price, as applicable, at the start of the year with the NAV or share price, as applicable, plus dividends and B Share redemptions paid, at the year end.

STRATEGIC REPORT

Overview and Investment Strategy

General information

Secured Income Fund plc (the "Company", "Fund" or "SIF") was incorporated in England and Wales under the Companies Act 2006 on 13 July 2015 with registered number 09682883. It is an investment company, as defined in s833 of the Companies Act 2006. Its shares were admitted to trading on the London Stock Exchange Specialist Fund Segment on 23 September 2015 ("Admission").

Change of name

On 18 July 2020, the Company changed its name from SQN Secured Income Fund plc to Secured Income Fund plc.

Investment objective and policy

On 17 September 2020, the Shareholders approved the adoption of a new investment objective and policy of the Company, as follows:

The Company will be managed with the intention of realising all remaining assets in the Portfolio in a prudent manner consistent with the principles of good investment management and with a view to returning cash to Shareholders in an orderly manner.

The Company will pursue its investment objective by effecting an orderly realisation of its assets in a manner that seeks to achieve a balance between maximising the value received from those assets and making timely returns of capital to Shareholders. This process might include sales of individual assets, mainly structured as loans, or running off the Portfolio in accordance with the existing terms of the assets, or a combination of both.

As part of the realisation process, the Company may also exchange existing debt instruments for equity securities where, in the opinion of the Board, the Company is unlikely to be able to otherwise realise such debt instruments or will only be able to realise them at a material discount to the outstanding principal balance of that debt instrument.

The Company will cease to make any new investments or to undertake capital expenditure except where, in the opinion of both the Board and the Investment Manager (or, where relevant, the Investment Manager's successors):

• the investment is a follow-on investment made in connection with an existing asset in order to comply with the Company's pre-existing obligations; or
• failure to make the follow-on investment may result in a breach of contract or applicable law or regulation by the Company; or
• the investment is considered necessary to protect or enhance the value of any existing investments or to facilitate orderly disposals.

Any cash received by the Company as part of the realisation process prior to its distribution to Shareholders will be held by the Company as cash on deposit and/or as cash equivalents.

The Company will not undertake new borrowing.

Any material change to the investment policy would require Shareholder approval.

Although there was a change in the investment objective and policy, there was no change in the business model in the year as the loans continued to be held under a 'hold to collect' model.

Prior to 17 September 2020, the investment objective and policy were as follows:

Investment objective

The investment objective of the Company was to provide Shareholders with attractive risk adjusted returns, principally in the form of regular, sustainable dividends, through investment predominantly in a range of secured loans and other secured loan-based instruments originated through a variety of channels and diversified by way of asset class, geography and duration.

Investment policy

The Company achieved its investment objective by investing in a range of secured loan assets mainly through wholesale secured lending opportunities, secured trade and receivable finance and other collateralised lending opportunities. Loan assets included both direct loans as well as other instruments with loan-based investment characteristics (for example, but not limited to, bonds, loan participations, syndicated loans, structured notes, collateralised obligations or hybrid securities) and may have included (subject to the limit set out below) other types of investment (for example, equity or revenue- or profit-linked instruments). The Company may have made investments through alternative lending platforms that present suitable investment opportunities identified by the Investment Manager.

STRATEGIC REPORT

Chairman's Statement

Introduction

I am pleased to provide Shareholders with my Chairman's statement, covering the financial year from 1 July 2020 to 30 June 2021. Over the reporting period, the Secured Income Fund plc (the "Company") has focussed on returning capital to Shareholders efficiently and in a timely manner. Since the wind down proposals were adopted in September, the Company has returned 28p per Ordinary Share through a combination of dividends and a B Share Scheme.

Furthermore, the Company has reduced platform and third-party debt to 0.6% of NAV with the balance expected to settle in the upcoming months.

Performance

For the reporting year ended 30 June 2021, the Company generated a net loss of £11.0 million and loss per Ordinary Share of 20.92p (compared to loss of £0.9 million and loss per Ordinary Share of 1.73p for the year ended 30 June 2020). The Company's NAV at 30 June 2021 was £19.1 million (36.28p (cum income) per Ordinary Share) compared to £45.5 million (86.37p per Ordinary Share) as at 30 June 2020.

During the reporting period, there has been a significant increase in the IFRS 9 provision across the direct loans. A large part of this was due to the marked deterioration of the expected cash flows of the film financings portfolio and the changed operating practices across the film industry as a result of the Covid-19 pandemic. The Board and Investment Manager also took the decision to increase the provision against a US Health Care Services Company following the sale of its core business assets which reduced the NAV further. Post-year end, the Investment Manager was informed of a delay in the principal repayment of the largest position in the portfolio, to the SME Loan Company, and as a result the provision has been increased. The position will be monitored closely over the next few weeks.

In addition to the direct loans, there have been some notable changes across the remaining platform loans. The final real estate linked loan from the UK Offshore platform has now been fully impaired following continuous delays in receiving the outstanding balance including accrued penalty interest. The Investment Manager remains in regular dialogue with all the relevant parties to secure a positive resolution where possible.

Moreover, during the period, we received the proceeds for most of the outstanding loans within the UK venture debt portfolio. One final loan remained within the portfolio, a broadband company, which has since been fully impaired. This position has been restructured in the past and any recovery is uncertain. We expect to receive an update providing clarity on the company's future in the coming months.

Finally, with regards to the US promissory note, an agreement was reached before the financial year end in which the position would be settled for 25% of the outstanding principal balance. In September, post-year end, the settlement amount was received.

Further information about the status of the remaining loans along with the respective assigned provisions is provided within the Investment Manager's Report.

The Board has maintained regular distributions to Shareholders throughout the period, in the form of dividends during the first half of the reporting period and then via the B Share Scheme. This has contributed significantly to the decrease in the NAV with a total distribution equivalent to 29.17p per Ordinary Share made during the reporting period.

During the reporting period, the Company traded at an average discount to NAV of 8.7%.

Foreign exchange hedging was removed in September 2020, with details of USD and EUR exposure shown below. As a result of this investors should be aware that there might be some impact on the Company if FX markets move markedly.