ICG Longbow Senior Secured UK Property Debt Investments : Annual Financial Report for the year ended 31 January 2024

FINANCIAL SUMMARY

KEY DEVELOPMENTS

• The Company is continuing to pursue an orderly realisation of its assets, against a backdrop of difficult market conditions. During the year, the Company returned £15.7 million of shareholder capital, equating to 12.9 pence per ordinary share.

• As at the date of this report, the Company has now returned capital of 44.90 pence per ordinary share to shareholders, equating to £54.46 million in total.

• The Company is now seeking to realise its investments through formal enforcement actions on all of its remaining loans with the appointment of receivers or administrators over the properties or borrowers in each case.

• Since 31 July 2023, the Company has increased ECL provisions by £11.16 million to £32.48 million. This brings the total ECL provisions made during the year to 31 January 2024 to £28.54 million. The movement in ECL provisions during the year to 31 January 2024 comprises:
• • £6.31 million in respect of the Southport loan, increasing the total provision to £8.60 million.
  • £15.54 million in respect of the RoyaleLife loan, increasing the total provision to £17.18 million.
  • £6.68 million in respect of the Affinity loan, increasing the total provision to £6.70 million.

• Total loans outstanding at gross carrying value, excluding ECL adjustments, amount to £66.12 million as at 31 January 2024. Total loans outstanding after ECL adjustments amount to £33.64 million as at 31 January 2024.

• Following extensive discussion between the Board and the Investment Manager, their fee will reduce to 0.5% of Net Asset Value from 1% previously.

PERFORMANCE

• NAV of £36.22 million as at 31 January 2024 after ECL adjustments of £(32.48 million) (31 January 2023: £77.35 million after ECL adjustments of £(3.94 million)), (31 July 2023: £55.37 million after ECL adjustments of £(21.32 million)).

• NAV per share as at 31 January 2024 of 29.86 pence.

• (Loss)/profit after tax of £(24.87) million for the year ended 31 January 2024 (31 January 2023: £1.96 million).

• (Loss)/Earnings per share for the year of (20.51) pence (31 January 2023: 1.62 pence).

DIVIDEND

• No dividends were declared for the year ended 31 January 2024 (31 January 2023: 3.6 pence per share).

• A Dividend of 0.5 pence per share of £0.61 million, declared in respect of the period ended 31 January 2023 was paid in May 2023.

INVESTMENT PORTFOLIO

• As at 31 January 2024, the Company's investment portfolio comprised three loans with an aggregate principal balance of £58.01 million, and a carrying value after provision for ECL of £33.64 million
  (31 January 2023: five loans with an aggregate principal balance of £67.4 million, and a carrying value of £68.96 million).

CHAIRMAN'S STATEMENT

Overview

INTRODUCTION

On behalf of the Board, I present the eleventh Annual Report for the Company, for the year ended 31 January 2024.

The last 12 months have clearly been very difficult for commercial property and finance markets. The headwinds have been well documented with conflicts in Ukraine and the Middle East, inflationary pressures and a tightening of monetary policy across most western economies creating uncertainty and volatility in many markets. In the UK, rising short- and long-term interest rates, combined with valuation uncertainties, have led to a severe slowdown in commercial property

JACK PERRY CHAIRMANtransaction volumes which has continued into 2024.

At the end of 2023 the UK slipped into a technical recession and, while monthly data for 2024 suggest a return to limited GDP growth, economic and property market conditions are widely expected to remain sluggish in the near term.

Focusing on the sectors relevant to the Company's remaining investments, 2023 is likely to have been one of the worst years on record for the office sector, housing markets having been impacted by higher mortgage costs, while hotel transactions were also at a 10-year low, as the Investment Manager notes below. Offices have undoubtedly been affected by negative sentiment, including from the USA where high vacancy rates across key metropolitan markets and rising costs of finance have led to widespread loan defaults and significant valuation declines. While UK and European markets typically have higher occupancy rates than their US peers, investor views on the sector remain heavily bearish.

In the context of the above, shareholders will be aware that this has been a difficult period for the Company as it seeks

to realise its remaining investments in what continue to be challenging market conditions. While the Company's Northlands loan repaid during the year with ahead of target returns due to default interest and fees, the Company has, through enforcement processes, taken control away from the borrowers of all assets securing the remaining loans. Those assets are either on the market for sale or being readied for sale.

It is important to be clear with shareholders that as the Company's remaining investments are impaired

with receivers or administrators in place, the only exit route is through sale of the underlying assets or loans themselves - refinancing by the borrowers is no longer a plausible route to exit. This exposes the Company to the potential for further delay in realisations, with conditions not supportive of quick or easy asset sales.

As I set out in our Interim Report, an illiquid market with few buyers is clearly unhelpful for any seller, and it is not clear how long it may take for liquidity to improve materially. Buyers are under no pressure to acquire assets and demand steep discounts, as well as being able to stretch out buying processes where there is a lack of competitive bidding. Accordingly, the market environment for the Company to exit its remaining investments is expected to remain challenging in the near term.

Shareholders will recall that, in recognition of the poor market conditions and falling property values, as at 31 July 2023 we recognised Expected Credit Loss (ECL) allowances against our three remaining assets equivalent to 17.57 pence per share. Reflecting the continuing difficult market conditions, which have prevailed since then, along with agency advice and indicative bidding levels for the remaining properties, the Board has determined it necessary to make further provision for impairment against the Company's remaining loans, totalling

5.96 pence per share, as set out further below. This brings the total ECL allowance recognised during the year ended

31 January 2024 to 23.53 pence per share. The total provision for ECL against the remaining investments, including those raised in prior periods, is 26.77 pence per share.

The carrying values as at 31 January 2024 included in this report and accounts have been, as highlighted above, established in a market facing a continued period of uncertainty, reduced credit availability and deteriorating values in many sectors. Accordingly, shareholders' attention

is drawn to the risks to valuations as discussed in the principal risks and notes to the financial statements. The Board believes that the stress analysis gives some guidance to the possible impact of further deterioration in the value of the underlying properties securing its investment portfolio, noting that any further deterioration may not be limited to the examples given.

Governance

Financial Statements

Other Information

As a consequence of the difficult sales environment for the remaining assets, the Board and Investment Manager have been focused on seeking to drive operating performance at property level as well as seeking efficiencies within the Company. In particular, I am aware that shareholders have been eager to see improved alignment of the Investment Management fee structure. Accordingly, as a result of extensive discussion between the Board and the Investment Manager, their fee will reduce to 0.5% of Net Asset Value from 1% previously. This halving of the investment management fee will result in meaningful savings for shareholders over the remaining life of the Company and will apply from today's date. This is discussed further below and in note 13 to the accounts.

PORTFOLIO

At 31 January 2024, the portfolio comprised three loans with a total principal balance outstanding of £58.01 million (before impairment).

During the year the Company received staged repayments, and ultimately full redemption, of the £9.6 million balance of the Northlands loan. With fees and default interest charges, this realised returns for shareholders modestly ahead of underwritten levels.

As highlighted above, exit processes are underway for the remaining portfolio loans, although in order to avoid having to accept a 'forced sale' price, some of these may be protracted. The outlook for the timing of the redemption of

the RoyaleLife loan, in particular, is uncertain, and various options are being explored by the Investment Manager as set out below. The property securing the Affinity loan is being readied for sale following some leasing success, although conditions for the office sector remain difficult. The Southport hotel securing our loan continues to attract interest; however, interested parties are under no competitive pressure

to accelerate their processes. This is discussed further in the Investment Manager's report below.

DIVIDEND

The Company paid a 0.50 pence per share dividend in May 2023, covering the three months to 31 January 2023.

Given the current status of the portfolio, the Board considers it unlikely that any further dividends will be declared which is in line with previous communications to the market.

GOVERNANCE AND MANAGEMENT

As mentioned above, the Board is acutely aware that shareholders additionally wish to see a reduction in central costs and overheads as the Company's portfolio continues to shrink and that this includes the costs of the Board itself. In this crucial stage of the Company's winding up process, the Board and I feel that retaining the varied skillsets of all the Directors is critical to ensuring the best outturn for shareholders. The Directors' fees have remained unchanged in the past year, as they have for the past six years, despite inflationary pressures and the intensity of oversight required of the remaining investments.

OUTLOOK

In our Interim Report and accounts I wrote to you highlighting that the Board expects to have to make difficult decisions on the remaining investments in the context of property market conditions which remain challenging. Despite a somewhat improved economic backdrop I have to report that we have not seen any improvement since that time: liquidity remains constrained, and the market environment is not conducive to quick and easy exits. In my discussions with shareholders during the year, most of you have highlighted a wish for an orderly realisation avoiding the forced sale of assets and this

has been uppermost in the minds of the Board as we seek to balance the acceleration of sales processes with optimising the value to be realised from the remaining investments.

During our regular dialogue with major shareholders over the past year, we have acknowledged the frustration you have with the apparent lack of progress in realising loans, combined with the disappointment of having to recognise further substantial impairment provisions and associated poor share price performance. As I have highlighted previously, regrettably there is no easy way to accelerate realisations without compromising unduly on price. As a result, the Board's focus

is on actively managing the remaining assets to deliver value, to control costs and to continue to seek the optimal recovery possible. We will continue to consult shareholders through our final wind down.

JACK PERRY

Chairman

8 May 2024

INVESTMENT MANAGER'S REPORT

Overview

The Investment Manager's Report refers to the performance of the loans and the portfolio for the year to 31 January 2024, and the general market conditions prevailing at that date. Any forward-looking statements in this report reflect the latest information available as at 1 May 2024.

INVESTMENT OBJECTIVE

The investment objective of the Company, as approved by its shareholders in January 2021, is to conduct an orderly realisation of the assets of the Company.

SUMMARY

As at 31 January 2024 the Company had three investments remaining, all of which are being managed and realised through enforcement processes. This report provides

a summary update on the realisation process for each investment, and steps being taken by the Investment Manager to secure optimum outcomes.

At the year end, and as discussed further below, the Company made further provisions for impairment against each of its remaining loans reflecting deteriorating market conditions

PORTFOLIO SUMMARY

and property values. The aggregate carrying value of the investments is now £33.64 million, or 27.73 pence per ordinary share, against the aggregate principal advanced of £58.01 million.

COMPANY PERFORMANCE

During the period, the Company received a series of partial repayments of the Northlands loan, following sales of certain of the portfolio properties, with full repayment received in December 2023. These payments totalled £9.6 million, together with

£0.5 million in aggregate of interest, default interest and fees.

At the period end, the Company had £2.9 million of cash, which is largely held in high-interest accounts with rated clearing banks. The Company's available cash balances are considered sufficient to cover all the Company's ongoing costs and expected working capital needs while maintaining a prudent liquidity buffer and further capital to invest in the underlying assets, should it prove necessary. At the date of this report, no such investment has been committed although where appropriate we will consider the merits of modest further investment to preserve and enhance value.

Governance

1. During the 6 months from 31 July 2023 to 31 January 2024, £85,389 principal in the Northlands loan was repaid, £174,174 of trapped cash was allocated against the Affinity loan and there was a £300,000 increase to the Southport loan principal.

RECONCILIATION OF CHANGES IN BOOK VALUE

1. Balance outstanding excludes accrued interest. A comparison to the carrying value of the loans is set out in Note 5 to the accounts.

Financial Statements

Other Information

INVESTMENT UPDATE

Southport

The Company's Southport hotel loan continues to be run by the administrator appointed by the Company, with services provided by hotel sector specialists Michels & Taylor.

Despite the uncertainty caused by the administration and cost pressures on hotel operations nationally, the asset traded profitably in 2023 while maintaining the same local management team. Trading at the hotel is seasonal, with

revenues strongest from April to October. Despite the administration, the hotel has seen revenue performance rise to close to the pre-Covid peak. On the costs side, pressure on wages continues although falling utilities prices should help the bottom line in 2024. Nonetheless, given the seasonal nature of trading and impact of administration costs and empty running costs of the adjoining leisure site, the Company does not anticipate distributing any interest or capital repayments from the loan in the near term.

INVESTMENT UPDATE (CONTINUED)

As reported last year, the property had previously been under offer for sale to a large trade buyer, however certain of the purchase conditions linked to freeholder consent could not be satisfied and the buyer withdrew. Following this process we, through the administrator, introduced a new joint selling agent and relaunched the sales process which uncovered further interested parties. At the time of writing, heads of terms have been agreed with a North West focused hotelier known to ICG who have made a credible bid, albeit subject to debt, at a level that supports the carrying value of the loan. While that financing process is being pursued, the agents continue to speak with other interested parties.

RoyaleLife

The Company and its co-lenders appointed administrators over parts of the borrower group in May 2023 and the entire borrower group in August 2023. The Investment Manager, on behalf

of the Company and its co-lenders, has continued to work to restructure the loan and underlying business to maintain existing operations, improve efficiency and create a clean, marketable structure for the medium term. This has been undertaken against the backdrop of a corporate insolvency of the borrower entities and bankruptcy of the ultimate beneficial owner, resulting in material reputational risk to the brand.

During the reporting period and concluding in January, the sites securing the loan were transferred into a new structure with a new operator, with the in-place debt retained. The Company's loan was fully cross-collateralised with a second facility provided by the Company's co-lenders, allowing the Company the benefit of a more diversified security pool, a wider operating platform and greater economies of scale. Given the potential for a conflict of interest in this arrangement, the Board took independent legal advice on the cross-collateralisation before agreeing to this restructure.

Additionally, the restructure also incurred certain legal, working capital and stamp duty costs funded by the co-lenders, and the Board determined that in view of the Company's liquidity position it would seek to meet its share of these costs through a dilution of its share in the transferred loan rather than through a cash payment.

Ahead of the restructure the administrator appointed selling agents to run a marketing process covering the majority of the security properties. The process was short with limited data available to bidders. However, all of the sites marketed received bids (some multiple bids) and three bids were received for the entire marketed portfolio. While much of the bidding interest can be characterised as opportunistic, two institutional bidders emerged and discussions with one of these is ongoing, which, if concluded, may lead to a partial disposal and realisation in the near term. Again, this bidding interest is supportive of the carrying value of the loan.

In tandem, the new operator has developed an independent plan for the relaunch of the business with a view to selling the portfolio and platform as a going concern after stabilisation. This is being run in parallel with sales discussions and we continue to explore the optimal route for recovery.

Whilst population demographics and housing sector tailwinds remain compelling for the portfolio, the nature of the administration and some of the associated publicity has undoubtedly affected buyer liquidity and pricing, which is

reflected in the carrying value of the loan. We would refer shareholders to the sensitivity analysis set out in the financial statements (Note 5 (iv)) which reflect the range of potential outcomes for the investment. The Investment Manager and the Board are seeking to balance the prospect of earlier liquidity against the optimal proceeds from realisation, noting significant shareholder feedback received advocating against any 'fire sale' of the assets and balancing these against the holding costs of the investment.

Affinity

We have previously reported that the office property securing this loan has been historically well occupied, and as at the date of these accounts a new letting was in solicitors' hands with a UK Government entity on the primary vacant space, at a new record rental level for the building. Elsewhere, a lease extension of the lower ground floor was recently completed at a 16% increase to prior levels, illustrative of the continued growth in rental levels in the Bristol market and at the property.

On the downside, one of the larger office tenants exercised a break clause on part of its space within the building which it then vacated in March 2024. While this reduces total income, the Company will not be liable for empty business rates (as there is a receiver appointed), mitigating the bottom line impact. We would highlight that the overall rates shelter provided by the receivership significantly outweighs the cost of the receivership fees incurred and will continue to do so until closer to full occupancy is achieved. Nonetheless, the weighted average length remaining on the leases will continue to reduce, leading to the potential for further tenant turnover in 2025.

Since placing the property into receivership we have worked closely with the receiver and appointed selling agents to better prepare the property for marketing, including discussing an extension of the head leasehold interest with the freeholder, Bristol City Council and have commissioned several third party reports which should help provide comfort to potential buyers and streamline the sale process. In recent months we have seen a small number of office sales conclude in Bristol, after a very challenged 2023, and this combined with the recent rental evidence could allow for a somewhat improved marketing environment. However, we would caution that liquidity remains extremely thin in this market and pricing levels are considered unlikely to rebound or show any signs of strengthening in the near term.

ECONOMY AND FINANCIAL MARKET UPDATE

After a year of uncertainty and periods of volatility in key economic data, the UK economy finished 2023 in a technical recession, after a contraction between October and December. Whilst GDP growth for 2023 remained marginally positive at 0.1%, the wider macroeconomic picture was subdued, with the UK and European economies lagging the growth seen in the United States.

While there have undoubtedly been times where it felt otherwise, the UK's political leadership showed more stability than in 2022, although the significant erosion in support for the governing Conservative party has led to ongoing speculation of the timing of a general election and the expectation of a change in government. Often election uncertainty can lead to a period of inactivity in markets, however there is a perception that the UK outcome is a forgone conclusion, with the US elections perhaps more likely to cause market jitters.

INVESTMENT MANAGER'S REPORT (CONTINUED)

Overview

As in 2022, inflation and interest rates were key drivers of market activity. As with other western economies, the UK saw a significant period of disinflation in the year as base effects took historical energy price rises out of the index. CPI inflation fell from 10.1% to 3.4% for the year to end February, however the high inflation levels observed in the first half of 2023 led to sustained interest rate rises over the period, from 3.5% to 5.25% in August. The combination of these factors, plus the freeze on income tax thresholds, led to a year of heavy pressure on household finances, in many cases more than offsetting wage increases.

As set out below, these macro factors led to a subdued level of activity in the commercial property sector, with uncertainty affecting occupational, purchasing and lending decisions. More recently, as inflation levels have fallen, early GDP data has been more positive and the outlook for interest rates points to cuts, we have seen signs of a return to optimism in certain sectors, leaving market participants to redraw their business plans once again.

OCCUPATIONAL DEMAND/SUPPLY

Offices

Central London office uptake stood flat year on year, with strong pre-let activity and high single-digit prime rental growth indicative of a flight to quality in the occupational markets, particularly in the prime West End market, where prime rents moved to £140 per sq ft. Outside of London, the market showed strength in the Thames Valley and parts of the South East, however uptake amongst the big six regional markets was down 15% year on year across 2023. Reflecting the continued mantra of quality over quantity, Manchester and Edinburgh recorded both the highest rental increases (8% and 12% respectively) as well as the highest overall prime rents (£43 per sq ft), whilst other markets lagged - Bristol take up was at a five-year low, and prime rents remained flat year on year.

Retail & Industrial

The fate of the two other traditional property sectors has at times seemed to be inversely correlated - as occupier demand for physical retail has suffered in recent years, as shoppers migrated online, industrial (including logistics) demand grew ever higher with occupiers seeking to service this consumer need. The market in 2023 tempered this pattern somewhat, as demand for retail saw tentative green shoots emerge just as rampant demand for the industrial sector cooled slightly.

Contradiction in economic indicators was also present in retail. Despite an upswing in the GfK Consumer Sentiment Index

to -22 in December (+20 pts year on year, only 10 pts below the long-term average), Christmas trading was weaker than expected. Strong Black Friday spending coincided with an increase in consumer credit of £2.0bn, indicating the cost of living weighing heavily on households. Interlinking with softer industrial growth, the e-commerce share of retail spend broadly flatlined in 2023.

The occupational retail leasing story, depressed in the earlier quarters of 2023 due to economic uncertainty, showed positive momentum, driven by retailers competing for prime high street pitches and higher quality stores. Locations such as Mount Street in London and Edinburgh's Princes Street saw rental growth in 2023, as international new entrants (e.g. Sephora) and previously online only retailers (e.g. Gymshark, Maniere de Voir)

took prime retail space. Overall, the sector remains polarised with the best space in demand and weaker space remaining out of favour.

In the industrial sector, availability at end Q4 stood at 66.5m sq ft, 16% up year on year, and construction slowed, hampered by factors such as lower demand a relative lack of funding and higher build costs, helpfully mitigating the risk of market oversupply.

Vacancy rates have increased in most markets over the course of 2023, ranging between 4% (Midlands) and 8% (South Yorkshire) across the regions. Prime rents have largely stabilised in the last months of 2023, and a strong Q4 took annual industrial take up to 32.5m sq ft, just 2% below the pre-pandemic average, signalling market normalisation. Whilst larger units lagged due to lessened demand from third party logistics operators and retailers, small and mid-sized units remained strong, reinforcing the sector's resilience.

Leisure

Operationally, the hotel sector witnessed one of the strongest years in memory in terms of topline performance, with Average Daily Rates (ADR) growing 26% over the pre-Covid 2019 baseline. Whilst occupancy remained 40 bps below 2019, RevPAR (Revenue per available room, a key metric) was positive overall. Notably, London's phenomenal performance over 2023 eclipsed the UK regions, which saw much more measured growth with owners attempting to absorb significant cost increases.

Whilst 2023 saw minimal supply growth, weakness in the office markets has accelerated the number of conversions to hotel use underway, converging with a strong push from the Government to return beds currently used to house asylum seekers, implying impending growth in the supply pipeline.

PROPERTY INVESTMENT MARKET

Full year 2023 investment volumes stood at c. £43bn, with office, industrial and residential at c. £10bn each. Apart from residential, volumes remain below long term averages across the board, in what some consider may mark the low point of the cycle. Alternative asset classes continue to be in high demand, and the Build to Rent sector in particular catapulted forward with landmark transactions including a 3,900 unit, £819m Blackstone purchase in Q4, and multiple substantial student housing transactions.

Overall, 2023 saw widespread rebasing of market prices, although early 2024 has seen some signs of confidence re- emerging in certain sectors. As government bond yields have fallen, the spread to commercial real estate yields increased, bolstering the relative attractiveness of the asset class. The strain on construction also eased, and while costs remain high and contractor insolvencies persist, the most significant squeeze is believed to be surmounted, with materials availability and labour cost becoming less of an issue. As in previous quarters, the 2023 theme of flight to quality continued to play out across all asset classes on the investment side. Whilst a number of issues remain on the horizon for 2024, not least

the UK and US elections and a largely flatlining economy, the anticipated lowering of interest rates and fall off in inflation bode positively.

Governance

Financial Statements

Other Information

PROPERTY INVESTMENT MARKET (CONTINUED)

In the office sector, 2023 was one of the worst years on record for investment in both London and the regions. The continued concerns over flexible working, occupier space requirements and ESG retrofitting costs, combined with limited buyer appetite and debt availability being scarce, has pushed yields towards double digit levels for many previously sought after assets.

Industrial investment, previously buoyant, likewise recorded a relatively weaker year, driven by a lack of larger assets transacting, and yields repricing in the face of sustained higher interest rates. A continued bid ask spread stalemate and higher debt cost may weigh on investment volumes into 2024, albeit anecdotally some of our borrower clients are reporting highly competitive bidding re-emerging.

Despite occupational buoyancy in the hotel market, transaction volumes were down year on year, and stood at a 10-year low (excluding the Covid-impacted 2020). The regional market was particularly impacted, and yields moved out 75-100 bps over the year. Holiday Park operators reported a marked drop in caravan and lodge sales in 2023, particularly at the upper end, on the back of the economic climate, and both leisure parks and regional pubs saw outward movements in yields over the course of year.

FINANCE MARKETS

We believe loan to value (''LTV'') ratios for new lending have restabilised at lower levels and as such, a clearer picture of the debt funding gap is emerging. As a consequence of reduced property values and lower LTVs, in addition to declining interest coverage ratios, there is a significant gap between available debt capital and that required to refinance existing loans. Across Europe, in both the public (listed) and private sectors, this gap has been estimated at €300bn. While this may reduce as interest rates come off, the gap remains a significant issue to borrowers seeking refinance.

Whilst alternative debt funds were well poised to take a large slice of this gap, a different obstacle to this has become more prominent over 2023 - the after-effects of pension funds and insurers rebalancing their portfolios (and reducing their real estate debt allocation) has led to a reduction in the ability of many of these players to raise funds and take advantage of this situation.

ICG REAL ESTATE

8 May 2024