JUST GROUP PLC Annual Report and Accounts 2021
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
17 FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE continued Redemption and defaults
The redemption and default assumptions used in the valuation of loans secured by commercial mortgages are derived from the assumptions for the Group’s bond portfolio. The impact of COVID-19 on the timing of future cash flows, and on expected defaults, has been taken into account in the calculation of fair value at 31 December 2021, with no significant impacts noted to fair values. Sensitivity analysis Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of commercial mortgages is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Loans secured by commercial mortgages net increase/(decrease) in fair value (£m)
2021 2020
(25.0) (25.2)
Loans secured by ground rents Loans secured by ground rents are valued using discounted cash flow analysis using assumptions based on the repayment of the underlying loan. Principal assumption underlying the calculation of loans secured by ground rents Credit spreads The valuation model discounts the expected future cash flows using a discount rate which includes a credit spread allowance associated with that asset. Redemption and defaults The redemption and default assumptions used in the valuation of loans secured by ground rents are derived from the assumptions for the Group’s bond portfolio. The impact of COVID-19 on the timing of future cash flows, and on expected defaults, has been taken into account in the calculation of fair value at 31 December 2021, with no significant impacts noted to fair values. Sensitivity analysis Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of ground rents is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Loans secured by ground rents net increase/(decrease) in fair value (£m)
2021 2020
(59.2) (27.7)
Infrastructure loans Infrastructure loans classified as Level 3 are valued using discounted cash flow analyses. Principal assumptions underlying the calculation of infrastructure loans classified as Level 3 Credit spreads The valuation model discounts the expected future cash flows using a discount rate which includes a credit spread allowance associated with that asset. Redemption and defaults The redemption and default assumptions used in the valuation of Level 3 infrastructure loans are derived from the assumptions for the Group’s bond portfolio. Due to the nature of these assets and the sectors in which they operate, being primarily local authorities, renewable energy generation and housing associations sectors, the Group has assessed that there is no significant impact from COVID-19 on the valuation at 31 December 2021. Sensitivity analysis Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of infrastructure loans is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Infrastructure loans net increase/(decrease) in fair value (£m)
2021 2020
(96.6) (90.7)
Other loans Other loans classified as Level 3 are mainly commodity trade finance loans. These are valued using discounted cash flow analyses.
154
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