TIDMHONY
RNS Number : 1442O
Honeycomb Investment Trust PLC
28 May 2020
HONEYCOMB INVESTMENT TRUST PLC
Annual Financial Report for the year ended to 31 December
2019
The Directors present the Annual Financial Report of Honeycomb
Investment Trust plc (the "Company") for the year ended 31 December
2019. A copy of the Company's Annual Report will shortly be
available to view and download from the Company's website,
www.honeycombplc.com. Neither the contents of the Company's website
nor the contents of any website accessible from hyperlinks on the
Company's website (or any other website) is incorporated into or
forms part of this announcement.
The information set out below does not constitute the Company's
statutory accounts for the year ended 31 December 2019 but is
derived from those accounts. Statutory accounts for the year ended
31 December 2019 will be delivered to the Registrar of Companies in
due course. The Auditors have reported on those accounts; their
report was (i) unqualified, (ii) did not include a reference to any
matters to which the Auditors drew attention by way of emphasis
without qualifying their report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006.
The rest of the Auditors' report can be found in the Company's
Annual Report and Accounts at page 55.
The following text is copied from the Annual Report &
Accounts:
Strategic Report
Investment Objective
The investment objective of Honeycomb Investment Trust plc (the
"Company") and its subsidiaries (together, the "Group") is to
provide shareholders with an attractive level of dividend income
and capital growth primarily through investing in asset secured
loans ("Credit Assets") and selected equity investments that are
aligned with the Group's strategy and that present opportunities to
enhance the Group's returns from its investments ("Equity
Assets").
Financial and Operational Highlights
31 December 2019 31 December 2018
================================= ================= =================
NET ASSET VALUE
NET ASSET VALUE (CUM INCOME)
(GBP'000) (1) 400,361 400,710
NET ASSET VALUE (EX INCOME)
(GBP'000) (2) (3) 393,784 394,404
MARKET CAPITALISATION (GBP'000)
(3) (4) 383,650 445,784
================================= ================= =================
PER SHARE METRICS
SHARE PRICE (AT CLOSE) (5) 972.5p 1,130.0p
NAV PER SHARE (CUM INCOME)
(1) 1,014.9p 1,015.7p
NAV PER SHARE (EX INCOME) (2)
(3) 998.2p 999.8p
SHARES IN ISSUE 39,449,919 39,449,919
================================= ================= =================
PERFORMANCE INDICATORS AND
KEY RATIOS
PREMIUM / (DISCOUNT) (3) (6) (4.2)% 11.3%
ANNUAL NAV PER SHARE RETURN
(3) (7) 7.8% 8.4%
ITD TOTAL NAV PER SHARE RETURN
(3) (8) (9) 33.2% 25.1%
DEBT TO EQUITY (3) (10) 51.7% 47.2%
REVENUE RETURN (3) (11) 7.8% 7.8%
DIVID RETURN (3) (12) 8.0% 8.0%
ONGOING CHARGES (3) (13) 1.8% 1.6
================================= ================= =================
(1) NET ASSET VALUE (CUM INCOME): will include the value of
investments, other assets and cash, including current year revenue,
less liabilities. NAV per share is calculated by dividing the
calculated figure by the total number of shares.
(2) NET ASSET VALUE (EX INCOME): will be the NAV (Cum Income)
excluding net income (both revenue and capital income) that is yet
to be transferred to reserves as described below. For this purpose
net income will comprise all income not yet moved to reserves (both
revenue and capital income), less the value of (i) any dividends
paid in respect of that income and (ii) any dividends in respect of
that income which have been declared and marked ex dividend but not
yet paid. Any income in respect of a financial year, which is
intended to remain undistributed will be moved to reserves on the
first business day of the immediately following year, meaning that
each figure for NAV (Ex-Income) reported during a financial year
will equate to the NAV (Cum Income) less undistributed income which
has not been moved to reserves. (NAV per share is calculated by
dividing the calculated figure by the total number of shares.)
(3) ALTERNATIVE PERFORMANCE MEASURES: Alternative Performance
Measures ("APMs") are used to improve the comparability of
information between reporting periods, either by adjusting for
uncontrollable or one-off factors which impact upon IFRS measures
or, by aggregating measures, to aid the user understand the
activity taking place. The Strategic Report includes both statutory
and adjusted measures, the latter of which, reflects the underlying
performance of the business and provides a more meaningful
comparison of how the business is managed. APMs are not considered
to be a substitute for IFRS measures but provide additional insight
on the performance of the business. Reconciliations to amounts
appearing in the financial statements can be found in section
5.
( (4) MARKET CAPITALISATION: the closing mid-market share price
multiplied by the number of shares outstanding at month end.
( 5) SHARE PRICE (AT CLOSE): closing mid-market share price at
month end (excluding dividends reinvested).
( 6) PREMIUM / (DISCOUNT): the amount by which the price per
share of an investment trust is either higher (at a premium) or
lower (at a discount) than the net asset value per share (cum
income), expressed as a percentage of the net asset value per
share.
(7) ANNUAL NAV PER SHARE RETURN: is calculated as Net Asset
Value (Cum Income) at the end of the year, plus dividends declared
during the year, divided by NAV (Cum Income) calculated on a per
share basis at the start of the year.
( (8) ITD: inception to date - excludes issue costs.
( 9) TOTAL NAV PER SHARE RETURN: is calculated as Net Asset
Value (Cum Income) at the end of the year, plus dividends declared
during the year, divided by NAV (Cum Income) calculated on a per
share basis at the start of the year. There was a 1.06 per cent
uplift on the inception to date total NAV per share return due to
the effect of shares being issued at a premium during May-17
capital raise and 0.73 per cent in relation to the April-18 capital
raise.
( (10) DEBT TO EQUITY: is calculated as the Group's interest
bearing debt divided by the net asset value, expressed as a
percentage.
( (11) REVENUE RETURN: based on revenue account net income
divided by average Net Asset Value during the year.
( (12) DIVID RETURN: is calculated as the total declared
dividends for the period divided by IPO issue price.
(1 (3) ONGOING CHARGES RATIO: The Annualised Ongoing Charge is
calculated using the Association of Investment Companies
recommended methodology. It is calculated as a percentage of
annualised ongoing charge over average reported Net Asset Value.
Ongoing charges are those expenses of a type which are likely to
recur in the foreseeable future, whether charged to capital or
revenue, and which relate to the operation of the investment
company as a collective fund, excluding the costs of
acquisition/disposal of investments, financing charges and
gains/losses arising on investments. Ongoing charges are based on
costs incurred in the year as being the best estimate of future
costs. The AIC excludes performance fees from the Ongoing Charges
calculation.
Investment Characteristics
The GROUP is an investment trust focusing on lending
The Group seeks to acquire credit assets which meet the
specified underwriting criteria through two routes; (1) providing
structured loans to specialist finance companies whereby the Group
takes security on the assets originated by the borrower with the
borrower also providing 'first loss' in the form of 'real capital'
whilst the Group provides the senior capital; and (2) acquiring
portfolios of whole loans whereby the Group is exposed to the
underlying risk and rewards of the loan that have the potential to
provide attractive returns for investors on a risk-adjusted
basis.
The Group accesses commercial and consumer borrowers who are
underserved by traditional banking channels primarily by financing
loans generated by its own network of non-bank lenders. The UK
specialty lending market opportunity is sizeable, at GBP330 billion
[1] of outstanding principal balance.
Managed by Pollen Street Capital, an experienced investor in
lending businesses
Pollen Street Capital Limited (the "Investment Manager") serves
as the Group's investment manager. The Pollen Street team has
focussed on the financial services sector since 2008.
Long-term opportunity to deliver attractive returns from
specialty finance strategy
Mainstream lenders have elected to focus on large markets where
they can achieve scale with generic processes. This provides
opportunity in sectors which are not well suited to such generic
processes.
Direct lending through trusted origination partners
The Group's strategy provides access to sectors and lending with
the most attractive return characteristics. The Group partners with
non-bank lenders who have an ability to integrate technologies and
respond quickly to new customer demands.
The Group invests in high growth partners to enhance returns for
shareholders. These investments are aligned with the Group's
strategy to generate attractive lending returns.
ASSET-SECURED LING PROVIDES A MORE RESILIENT RETURN PROFILE
The Group's investment approach focuses on delivering attractive
risk-adjusted returns, as well as robust downside protection. The
average size of the underlying loans is small, which provides
higher predictability in cashflows and lower event-driven risk. The
majority of loans are amortising and floating rate so there is
minimal interest rate and refinancing risk.
8.0% per ordinary share per annum target dividend, payable
quarterly
Once the Group has incurred borrowings in line with its
borrowing policy, the Group targets the payment of dividends which
equate to a yield of 8.0 per cent per ordinary share per annum on
the issue price for the Group's IPO placing, payable in quarterly
instalments (the "Target Dividend") based upon the average number
of shares in issue during a given period. Investors should note
that the Target Dividend, including its declaration and payment
dates, is a target only and not a profit forecast.
How the Business Works
The Investment Manager, on behalf of the Group, actively
identifies sub-segments of the large consumer, property and Small
and Medium enterprise ("SME") lending market that it believes
delivers attractive net returns. It then targets channels,
origination partners and loan portfolio vendors through which it
can access Credit Assets while diversifying the Group's investment
opportunities.
Each lending opportunity is underwritten by the Investment
Manager or Honeycomb Finance Limited (the "Origination Partner") to
assess whether the risk of the borrower is acceptable. There are
various processes undertaken to underwrite each opportunity to
ensure a consistent approach to risk-based pricing to ensure the
weighted risk adjusted return provides an attractive level of
dividend income with an acceptable risk profile for shareholders of
the Company.
The Group, directly or via the Origination Partner, has
arrangements with a number of referral partners, including the
referenced Platforms below, through which the Group acquires Credit
Assets, either individually; as portfolios; or via structured
facilities. These facilities are secured on a granular pool of
performing loans and structured such that the Origination Platform
and or borrower bears the first loss risk, and the Group finances
the senior risk.
The Directors believe that the Group has attractive access to
diverse investment opportunities across its market segments of
consumer, property and SME lending, each with different borrower
profiles and different risk return characteristics. Through
relationships with multiple referral partners and other
counterparties, the Group will reduce its dependence on any one
single source of opportunities to acquire Credit Assets and expects
to gain strong access to high quality assets.
The Group believes it is important to provide best-in-class loan
servicing to ensure that Credit Assets within the portfolio are
managed efficiently throughout their lifecycle. As such, the Group
optimises its collection strategy across the different asset
classes by appointing servicers best placed to service the
respective investment assets, as well as utilising the Investment
Manager's industry experts for high value-add activities.
The Group may invest in Equity Assets that are aligned with its
strategy and that present opportunities to enhance the Group's
returns. The Group expects, that most of its investments in Equity
Assets will take the form of non-controlling interests in referral
partners, in alignment with the Group's investment policy.
Chairman's Statement
I am delighted to present the Annual Report for Honeycomb
Investment Trust plc which covers the year ended 31 December
2019.
The Company is a UK listed company dedicated to providing
investors with access to UK lending opportunities which the
Investment Manager believes have potential to provide attractive
and consistent risk-adjusted returns throughout the cycle.
INVESTMENT STRATEGY
The Group has continued to perform well in the year driven by
the sustained application of our business model which has given the
Group the ability to carefully select assets with attractive
risk-adjusted returns alongside a strong base of investments made
in the past. A detailed assessment of the progress of the Group
follows in the Investment Manager's review.
INVESTMENT PERFORMANCE
Earnings for the year increased by 10.6 per cent to GBP31.2
million (2018: GBP28.2 million). This translated into a NAV return
of 7.8 per cent for the year (2018: 7.7 per cent excluding the
impact of the issuance of shares at a premium in April 2018). The
strong returns reflect the strategy of selecting only the assets
that meet the strict risk adjusted returns criteria and maintaining
strong credit quality through predominantly lending on secured
assets supported by specialist underwriting expertise.
At 31 December 2019, the Group's net assets were GBP400.4
million (cumulative of income), with market capitalisation at
GBP383.7 million. NAV per share (cumulative of income) was 1,014.9
pence, with the share price (at close) 972.5 pence, representing a
discount to NAV of 4.2 per cent. The Group has achieved a NAV per
share return of 33.2 per cent since inception.
DIVIDS
The Company has continued to declare dividends at 20.00 pence
per share for each quarter in the year and has therefore continued
to meet the target dividend yield of 8.0 per cent annualised
dividend on issue share price at the Company's initial public
offering.
RISK MANAGEMENT AND OVERSIGHT
The board plays a key role in supporting and challenging the
Group's long-term strategic planning. This includes a rigorous
assessment of both the risks and opportunities presented by the
evolving market environment and considering the interests of key
stakeholders. The oversight is exercised through the board's
committee structure and further information is provided in the
board committee reports.
During 2019, the Directors considered the application of the new
Corporate Governance Code to the Company and introduced a series of
measures to strengthen the governance arrangements, including a
policy of Director rotation and agreeing a policy on Board
diversity. In addition, the Board considered the Company culture
and stakeholder engagement. Further detail on how the Board have
regard to its various stakeholders is set out below.
Shareholders
During the start of 2020, the composition of the share register
changed materially. A number of high quality new global
institutional investors were welcomed onto the share register. This
is an important strategic development for the Company and has
removed the 'overhang' associated with shareholders with liquidity
pressure and places the Company with a significantly more diverse
shareholder base for 2020. I look forward to working with new
shareholders over the course of 2020 and beyond. During the same
period, the Company purchased 2,200,000 of its own shares.
Outlook
The World Health Organisation recognised an outbreak of a new
virus that causes coronavirus disease 2019 ("COVID-19") as a
pandemic in March 2020. COVID-19 has caused disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets. There are a wide range of
forecasts and expectations around the impact of this on the
economy, unemployment and society. The Board considers the
emergence and spread of COVID-19 to be a non-adjusting post balance
sheet event. It is not practicable at this time to provide a
reliable quantitative estimate of the impact on the Group because
of the inherent uncertainty around the length of the lockdown
period, the effect of the various government initiatives and the
behaviour of borrowers after any payment holiday period expires.
The Board is monitoring the situation closely and will ensure
investors are kept informed of the latest developments in the
monthly newsletter.
The Investment Manager has adopted a prudent approach given the
uncertain economic environment with the focus on the existing
portfolio and ensuring cash collections remain robust and the
appropriate strategies are put in place. We expect the economic
environment to create some compelling new opportunities for the
Group which the Investment Manager will selectively review and
deploy capital into, however the priority will be to reduce net
debt during this period of uncertainty. In May 2020 the Company has
refinanced its main Topco debt facility to support this
strategy.
I look forward to working with Pollen Street over 2020 as they
continue to manage Honeycomb to deliver the best outcomes for
shareholders in this rapidly evolving situation.
Board Composition
Finally, I would like to thank Ravi Takhar for his valuable
service on the Board. Ravi was appointed in December 2015 and
stepped down in June 2019.
In July 2019, we were delighted to appoint Richard Rowney to the
board. Richard has a wealth of experience in financial services and
brings valuable expertise to the Board and Committees of the
Board.
Robert Sharpe
Chairman
27 May 2020
Investment Manager's Report
The Investment Manager is a member of the Pollen Street Capital
Group ("PSC"). PSC is an independent asset manager that has GBP2.5
billion (2018: GBP2.6 billion) of assets-under-management ("AUM")
across private equity and credit strategies. The Group was formed
in 2013 and possesses a strong and consistent track record within
the financial and business services sectors.
PSC has significant experience in lending markets with GBP1.6
billion of AUM within its credit strategies. It works with the
specialty finance market, which the Investment Manager believes is
underserved by the banking industry, capital markets and more
generalist credit funds. The strategy is supported by changes in
the focus of mainstream lenders together with the implementation of
new models that utilise data, analytics and technology more
effectively. It provides an opportunity to deliver better products
to borrowers while generating attractive risk adjusted returns for
investors.
The platforms are typically better than mainstream lenders at
servicing their markets based upon focus, expertise, efficiency and
entrepreneurialism. In many cases, they also share the risk
exposure with their own balance sheet and capital. The Investment
Manager partners with the highest quality originators in order to
access exciting investment opportunities in direct lending assets
and, where there is an aligned strategic opportunity, certain
minority equity stakes.
This Investment Manager provides the Group with access to an
established network of specialist lenders, market leading
underwriting capabilities and strategic insight into the optimal
collection strategy. The relationship with the platforms extends
beyond Pollen Street being simply providers of capital. PSC
leverages its expertise to enable the platforms it partners with to
outperform across all stages of the credit cycle. The relationships
and expertise created are difficult to replicate and help provide
more stable and attractive returns. The Investment Manager is
deeply involved in the underwriting decisions, the customer
journey, and collections.
2019 Highlights
2019 has been another successful year. The main achievements
include:
-- Maintaining the Group's track record with NAV return of 7.8
per cent per annum (2018: 7.7 per cent excluding the impact of the
issuance of shares at a premium in April 2018)
-- Growing earnings by 11 per cent, year on year
-- Diversifying the funding base of the Group by raising GBP81.0
million of debt under a two-year debt facility.
-- Repositioning the portfolio away from consumer whole loans
into more structured and secured loans. This gives the portfolio
more downside protection because the structured loans benefit from
the platform bearing the first loss risk, and the Group finances
the more senior risk.
Financial performance
The financial performance of the Group has remained strong.
Earnings for the year were GBP31.2 million (2018: GBP28.2 million),
an increase of 10.6 per cent. This was driven by an increase of
15.3 per cent in interest income to GBP62.6 million (2018: GBP54.4
million) with a modest decrease in the impairment charges to GBP7.4
million (2018: GBP7.5 million). The closing credit assets have
remained stable at GBP581.0 million at the year-end (2018: GBP576.5
million).
The earnings translated into basic earnings per share of 79.1
pence (2018: 77.3 pence), and NAV return of 7.8 per cent for the
year (2018: 8.4 per cent, which benefited by 0.73 per cent from the
issuance of shares at a premium in April 2018).
The year's strong returns reflect the strategy of selecting only
the assets that meet the strict risk adjusted returns criteria and
maintaining strong credit quality through predominantly lending on
secured assets supported by specialist underwriting expertise.
Quarterly NAV return
In our initial guidance issued at the time of the Group's
initial public offering, we stated that we were targeting a
dividend yield of at least 8.0 per cent (based on issue price).
Dividend Per Share and Annualised Dividend Yield
After initial listing costs, the Group had a NAV of 982 pence
per share at the time of listing in 2015, with the NAV per share
(cumulative of income) growing to 1,014.9 pence per ordinary share
(2018: 1,015.7 pence per ordinary share) at 31 December 2019,
which, including dividends declared or paid, is equivalent to a NAV
return of 33.2 per cent since inception.
Although the Group has performed strongly the share price of the
Group at 31 December 2019 was 972.5 pence per share (2018: 1,130.0
pence per share), representing a 4.2 per cent discount to NAV
(cumulative of income) (2018: 11.3 per cent premium to NAV
(cumulative of income)). We are disappointed that the Group is
trading below its net asset position and doesn't reflect the strong
underlying performance we have seen to date in the Group. The
Company repurchased 2,200,000 of its own shares during January 2020
at a price of 850 pence per share to enhance shareholder
returns.
Investment Assets and Debt to Equity Ratio
This strong performance is as a result of the successful
strategy to focus on specialist markets and loans with either
downside protection or seasoning which exhibit stable
performance.
In an evolving market and regulatory environment, we committed
to maintaining the discipline of our established business model.
Our ability to build deep and sustainable relationships has helped
our partners to continue to develop. Further referral partners have
been on-boarded which have supported this growth with the profile
of risk and return that is in line with expectations.
Portfolio
The portfolio is diversified across two types of facilities,
structured loans and whole loans, and three sectors, consumer,
property and SME.
As at 31 December 2019, the portfolio of structured loans
consisted of 23 facilities with an average balance outstanding per
facility of GBP12.5 million. The facilities have an average
effective advance rate of 66 per cent and typically benefit from
robust covenants. The facilities are collateralised by over 400,000
underlying loans and receivables.
The Group's portfolio of whole loans consists of 24 deals with
an average balance outstanding per relationship c.GBP12.8 million,
58 per cent of whole loans are secured on property, average loan to
value ("LTV") c70 per cent. 40 per cent are consumer unsecured and
2 per cent are SME.
Expected credit loss performance
Under IFRS 9, impairment losses are recognised in the Group 's
financial statements on a forward-looking basis, taking into
account both the risk profile of the loan book and the
macroeconomic outlook at the balance sheet date. As part of the
annual review of the forward-looking economic expectations the
Group introduced revised models that reflect greater economic
uncertainty and a more pessimistic view of the near-term potential
of the UK economy. Although there is an impact on the NAV return
there is no change to the expected cashflows of the portfolio.
As at 31 December 2019 the Expected Credit Loss ("ECL") balance
was GBP30.2 million (31 December 2018 GBP22.8 million). The
consumer portfolio makes up 65.8 per cent of this total split
GBP19.8 million, property GBP10.1 million and SME GBP0.3 million.
The key driver for the increase in the ECL on the prior year is a
GBP7.4 million charge in the period, with the consumer lending
contributing GBP7.1 million, property GBP0.2 million and SME GBP0.1
million. Assets moving to Stage 3 which display objective evidence
of default at the reporting date was the key driver behind
this.
Outlook
During February 2020, the Manager introduced a range of high
quality global institutional investors onto the share register with
the Company participating in the transaction, by repurchasing
2,200,000 of its own shares. This removed the 'overhang' associated
with shareholders with liquidity pressure and places the Company in
a stronger position for 2020.
The outbreak of COVID-19 has caused major disruption across the
globe. The principal effects of the outbreak in the UK occurred in
March and therefore it has not had a material effect on the
financial year under review. However, by Q1 2020 we have started to
see some requests for forbearance and continue to monitor this
closely.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. It believes that this approach together with the
structural protection and asset backing of the portfolio will keep
the Group in a robust position. The unsecured component of the
portfolio is seasoned and stable such that the Investment Manager
believes that the Group is well positioned to perform robustly
throughout the crisis. The portfolio has demonstrated in 2019 that
it delivers strong yields with high levels of bad debt
coverage.
However, given the Group's UK focus, its performance is linked
to the health of the UK economy. The Group could experience further
impairments and consequently reduced profits if economic
expectations deteriorate further. However, the overall effect of
this cannot be quantified reliably, because of the uncertainty over
the length of the lockdown period, the impact of the government's
assistance scheme and the behaviour of borrowers as they reach the
end of any payment holidays. The Investment Manager has adopted a
prudent approach with the focus on the existing portfolio and
ensuring cash collections remain robust as the appropriate
strategies are in place.
The Investment Manager is proposing to re-invest the cash
generated by the portfolio very selectively during this period of
uncertainty with the majority of cash going to reduce net debt. The
Company may also continue buybacks to enhance shareholder returns
where possible.
In the structured portfolio, where the Group provides finance to
nonbank lenders, the Investment Manager is working with the
borrowers to help them navigate the difficult environment whilst
ensuring most of the cash generated by their portfolio is utilised
to repay our loan.
The Investment Manager has refinanced the Company's main debt
facility to support the approach described above. The maturity has
been extended to May 2021 and there is an option to extend the
facility beyond this date with the lender's consent.
The monthly newsletter includes the latest information about the
performance of the Group.
Top Ten Holdings
Country Asset Type Sector Value of Percentage
holding of assets
at year-end (1)
(GBPm)
=== ======================= ============= ========================= ============= ===========
United
1 Creditfix Limited Kingdom Structured Consumer 51.0 8.6%
=== ======================= ============= ============= ============ ============= ===========
United
2 Sancus Loans Limited Kingdom Structured Real Estate 44.3 7.5%
=== ======================= ============= ============= ============ ============= ===========
1st Stop Group United
3 Limited (2) Kingdom Structured Consumer 28.0 4.8%
=== ======================= ============= ============= ============ ============= ===========
Madison CF UK United
4 Limited Kingdom Structured Consumer 26.7 4.5%
=== ======================= ============= ============= ============ ============= ===========
PF Capital Finance United
5 Limited Kingdom Structured Real Estate 19.5 3.3%
=== ======================= ============= ============= ============ ============= ===========
United
6 IWOCA Limited Kingdom Structured SME 16.4 2.8%
=== ======================= ============= ============= ============ ============= ===========
Caledonian Consumer
Finance Limited
& Carnegie Consumer United
7 Finance Limited Kingdom Structured Consumer 13.4 2.3%
=== ======================= ============= ============= ============ ============= ===========
Allium Lending
Group Limited United Structured
8 (3) Kingdom & Equity Consumer 12.1 2.1%
=== ======================= ============= ============= ============ ============= ===========
Amigo Loans Limited United
9 Bond Security Kingdom Bond Consumer 10.1 1.7%
=== ======================= ============= ============= ============ ============= ===========
United
10 Duke Royalty Limited Kingdom Structured SME 10.0 1.7%
=== ======================= ============= ============= ============ ============= ===========
(1) Percentage of total investment assets of the Group
(investment assets calculated as the carrying balance of all credit
assets at amortised cost and equity investments held at fair value
through profit or loss).
(2) 1st Stop Group Limited is a portfolio company of funds
managed or advised by the Investment Manager.
(3) Value of holding is a combination of structured debt and
equity investment, Allium Lending Group Limited ("Allium")
(formally GDFC Group Limited, Hiber Limited and The Green Deal
Finance Company Limited).
As at 31 December 2019 the value of the top 10 assets totalled
GBP231.5 million (2018: GBP190.0 million) which equated to 39.3 per
cent (2018: 32.3 per cent) of investment assets (investment assets
calculated as the carrying balance of all credit assets at
amortised cost and equity investments held at fair value through
profit or loss).
Business Review
The Strategic Report above has been prepared to help
shareholders assess how the Group works and how it has performed.
The Strategic Report has been prepared in accordance with the
requirements of Section 414A to 414D of the Companies Act 2006 (the
"Act"). The business review section of the Strategic Report
discloses the Group and Company risks and uncertainties as
identified by the Board, the key performance indicators used by the
Board to measure the Group's performance, the strategies used to
implement the Group's objectives, the Group's environmental, social
and ethical policy and the Group's anticipated future
developments.
KEY INFORMATION
Honeycomb Investment Trust plc (the "Company") is a closed-ended
investment company incorporated and domiciled in the United Kingdom
on 2 December 2015 with registered number. The Company is a
publicly listed company. The registered office is 6th Floor, 65
Gresham Street, London, EC2V 7NQ, United Kingdom.
Principal activity
The Group carries on business as an investment trust and its
principal activity is investing in Credit Assets and Equity Assets
(each as defined below), with a view to achieving the Group's
investment objective. Investment companies are a way for investors
to make a single investment that gives a share in a much larger
portfolio. A type of collective investment, they allow investors
opportunities to spread risk and diversify in investment
opportunities which may not otherwise be easily accessible to them.
For more information on investment companies, please see:
http://www.theaic.co.uk/guide-to-investment-companies.
IMPAIRMENT REVIEW
As at 31 December 2019 the Expected Credit Loss ("ECL") balance
was GBP30.2 million (31 December 2018 GBP22.8 million). The
consumer portfolio makes up 65.8 per cent of this total split
GBP19.8 million, property GBP10.1 million and SME GBP0.3 million.
The key driver for the increase in the ECL on the prior year is a
GBP7.4 million charge in the period, with the consumer portfolio
contributing GBP7.1 million, property GBP0.2 million and SME GBP0.1
million. Assets moving to Stage 3 were the key driver behind this.
The consumer portfolio has seen the biggest ECL as it unsecured and
therefore does not benefit from any structural protection or
security that could reduce the impact once someone has rolled into
arrears.
The outbreak of COVID-19 has caused major disruption across the
globe. The principal effects of the outbreak in the UK occurred in
March and therefore it has not had a material effect on the
financial year under review. However, by end of April 2020 we have
started to see requests for forbearance. Requests for payment
holidays differs by platform and sector. For the consumer sector
the average is between 5 to 10 per cent of customers requesting a
temporary reduction in payments. The SME segment has seen the
biggest initial impact from the COVID-19 restrictions with
forbearance and missed payments at 20 per cent of the portfolio at
the time of writing. In most agreed forbearance plans borrowers are
still paying at least the full interest payment. The property
exposure can be divided into term mortgages and shorter-term
bridging and development exposures. The term mortgage exposure
consists predominately of second charge residential (13 per cent of
portfolio) and first charge commercial mortgages (15 per cent of
portfolio). The second charge residential mortgages have had
forbearance requests averaging between c5-10 per cent. The first
charge commercial mortgage portfolio mainly consists of mortgages
secured on mixed use property (office with a residential flat
above, retail with a residential flat above, residential,
industrial and land etc) has seen a higher proportion of requests
for payment holidays since the onset of COVID-19 (averaging c20 per
cent). Whilst the impact in this portfolio has been more
significant, we would note that in most cases the properties
generate a diversified income stream and the average loan to value
of c60 per cent provides the Company with significant protection in
the event of increased defaults. The majority of bridging and
development exposures in the portfolio have continued construction
through the lockdown as smaller developments have largely been able
to progress work uninterrupted. While the Investment Manager does
expect some duration extension in the loans as property sales or
refinancing activity are likely to be delayed, it does believe that
the overall risk position is prudent and sound.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. It believes that this approach together with the
structural protection and asset backing of the portfolio will
robustly position the Group. The unsecured component of the
portfolio is seasoned and stable such that the Investment Manager
believes that the Group is well positioned to perform robustly
throughout the crisis.
However, given the Group's UK focus, its performance is linked
to the health of the UK economy. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably because
the impact of the government's various support initiatives is not
yet known, but they are expected to reduce the potential expected
credit loss impact. The government has launched a number of
initiatives aimed at providing finance to SMEs. Two of our largest
borrowers are in the process of lending under the CBIL government
guarantee scheme which will also refinance part of their exposure
with the benefit of the government guarantee. The Investment
Manager has adopted a prudent approach with the focus on the
existing portfolio and ensuring cash collections remain robust as
the appropriate strategies are in place.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
The NAV for 31 March 2020 was released on 1 May 2020 and
included a GBP1.8 million expected credit loss provision arising
from the change to the economic scenarios due to the COVID-19
situation. This provision was based on the data available at the
time and the assumptions will continue to be updated as more
information on the lockdown and development of the pandemic
continues.
Strategic and investment policy
The Group's investment objective is to provide shareholders with
an attractive level of dividend income and capital growth through
investing in loans where the underlying collateral is either
consumer, commercial or property backed ("Credit Assets") together
with related investments that are aligned with the Group's strategy
and that present opportunities to enhance the Group's returns from
its investments ("Equity Assets").
Once the Group has incurred borrowings in line with its
borrowing policy, the Group will target the payment of dividends
which equate to a yield of at least 8.0 per cent per ordinary share
per annum on the issue price for the IPO placing, based upon the
average number of shares in issue for the period, payable in
quarterly instalments (the "Target Dividend"). Investors should
note that the Target Dividend, including its declaration and
payment dates, is a target only and not a profit forecast.
The Group believes that certain sub-segments of the speciality
finance market have the potential to provide attractive returns for
investors on a risk-adjusted basis, and that changes in the focus
of mainstream lenders, together with the implementation of new
models that make the best use of data, analytics and technology,
provide an opportunity to deliver attractive products to borrowers
while generating attractive returns for the Group.
The Group has entered into an origination agreement with
Honeycomb Finance Limited (the "Origination Partner") whereby the
Origination Partner has agreed to provide the Group with
opportunities to acquire Credit Assets originated or acquired by it
which meet specified underwriting criteria relating to the
underlying borrower and the corresponding terms of credit (which
may be modified from time to time at the discretion of the
Investment Manager). Similar arrangements are entered into from
time to time with additional origination partners. The Origination
Partner has also entered into agreements with several referral
partners to source such lending opportunities. The Group and the
Investment Manager will also actively seek opportunities to acquire
portfolios from third parties and make investments in loans to
specialist lenders.
Asset allocation and risk diversification
Credit Assets invested in by the Group consist of financing
loans, within a range of sub-sectors selected based on their
risk/return characteristics. These sub-categories may include, but
are not limited to, personal loans, point of sale financing, home
improvement loans and loans to small businesses.
The Group's investment in Credit Assets encompasses the
following investment models:
1. Senior Secured Loans. The Group identifies top performing
non-bank lenders that provide finance to a tightly defined target
audience. We provide senior financing with security over real
assets;
2. Secondary Portfolios. These opportunities are sourced from
established relationships and networks; and
3. Direct loan acquisitions. The Group sets criteria for loan
origination with speciality platforms. A significant component of
economic returns to the speciality platform partners are
subordinated to the credit asset returns, creating strong alignment
of interests between the Group and the partner, as well as
providing additional downside protection.
The Group may undertake such investments directly, or via
subsidiaries or special purpose vehicles ("SPVs"). It is also
possible that the Group may seek to use alternative investment
structures which achieve comparable commercial results to the
investments described above (such as, without limitation,
sub-participations in loans, credit-linked securities or fund
structures), but which offer enhanced returns for the Group or
other efficiencies (such as, without limitation, efficiencies as to
origination, funding, servicing or administration of the relevant
Credit Assets).
The Group also invests in Equity Assets. The Group shall invest
no more than 10 per cent of the aggregate net proceeds of any issue
of shares in Equity Assets, calculated, in each case, at the time
of acquisition of any relevant Equity Assets based on the
consideration payable for those Equity Assets and the aggregate
consideration paid for all previous investments in Equity Assets
which form part of the portfolio. This restriction shall not apply
to any consideration paid by the Group for the issue to it of any
Equity Assets that are convertible securities. However, it will
apply to any consideration payable by the Group at the time of
exercise of any such convertible securities or any warrants issued.
The Group may invest in Equity Assets indirectly via other
investment funds (including those managed by the Investment Manager
or its affiliates).
Investment restrictions
The Group will invest in Credit Assets originated across various
sectors and across credit risk bands to ensure diversification and
to seek to mitigate concentration risks. The following investment
limits and restrictions apply to the Group to ensure that the
diversification of the portfolio is maintained, that concentration
risk is limited and that limits are placed on risk associated with
borrowings.
The Group will not invest, in aggregate, more than 10 per cent
of the aggregate value of total assets of the Group ("Gross
Assets"), at the time of investment, in other investment funds that
invest in Credit Assets.
The Group will not invest, in aggregate, more than 50 per cent
of Gross Assets, at the time of investment, in Credit Assets
comprising investments in loans alongside or in conjunction with
Shawbrook Bank ("Shawbrook") or referred to the Origination Partner
by Shawbrook.
The following restrictions apply, in each case at the time of
the investment by the Group:
-- No single Credit Asset comprising a consumer credit asset
shall exceed 0.15 per cent of Gross Assets;
-- No single SME or corporate loan, or trade receivable, shall
exceed 5.0 per cent of Gross Assets; and
-- No single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any borrowing
ring-fenced within any SPV which would be without recourse to the
Group) shall exceed 20 per cent of Gross Assets. For the avoidance
of doubt, this restriction shall not prevent the Group from
directly acquiring portfolios of Credit Assets which comply with
the other investment restrictions described in this section.
The Group will not invest in Equity Assets to the extent that
such investment would, at the time of investment, result in the
Group controlling more than 35 per cent of the issued and voting
share capital of the issuer of such Equity Assets.
No restrictions were breached at any point during the year ended
31 December 2019, or the year ended 31 December 2018.
Other restrictions
The Group may invest in cash, cash equivalents, money market
instruments, money market funds, bonds, commercial paper or other
debt obligations with banks or other counterparties having single-A
(or equivalent) or higher credit rating as determined by an
internationally recognised agency or systemically important bank,
or any "governmental and public securities" (as defined for the
purposes of the Financial Conduct Authority's Handbook of rules and
guidance) for cash management purposes and with a view to enhancing
returns to shareholders or mitigating credit exposure.
The Group will not invest in Collateralised Loan Obligations
("CLO") or Collateralised Debt Obligations ("CDO"). CLO's are a
form of securitisation whereby payments from multiple loans are
pooled together and passed on to different classes of owners in
various tranches. CDO's are pooled debt obligations where pooled
assets serve as collateral.
These restrictions were not breached in year ended 31 December
2019 or the year ended 31 December 2018.
Borrowing
Borrowings may be employed at the level of the Group and/or at
the level of any investee entity (including any SPV that may be
established by the Group in connection with incurring borrowings
against any of its assets). The Group may borrow (through bank or
other facilities on an unsecured or secured basis), whether
directly or indirectly through a subsidiary or an SPV, up to a
maximum of 100 per cent of Net Asset Value in aggregate (calculated
at the time of draw down under any facility that the Group has
entered into). The maximum borrowing limit includes investments
made by the Group on a subordinated basis. The Group targets
borrowings in the range of 50 per cent to 75 per cent of Net Asset
Value.
The Group may seek to securitise all or parts of its Credit
Assets and may establish one or more SPVs in connection with any
such securitisation. To the extent that the Group establishes any
SPV in connection with incurring borrowings against any of its
assets or in connection with the securitisation of its Credit
Assets, it is likely that any such vehicles will be wholly owned
subsidiaries of the Company. The Company may use SPVs for these
purposes to seek to protect the securitised portfolio from Company
level bankruptcy or financing risks. The Company may also, in
connection with seeking such borrowings or securitising its Credit
Assets, seek to assign or transfer existing assets to one or more
SPVs and/or seek to acquire Credit Assets using an SPV (to the
extent permitted by applicable law and regulation).
These restrictions were not breached in year ended 31 December
2019 or the year ended 31 December 2018.
In May 2020, the Company's main debt facility was refinanced.
The new facility has a maturity date of May 2021 and there is an
option to extend beyond this date with the lender's consent. The
new facility is a 1-year term and revolving, asset backed
facility.
Hedging
Fluctuations in interest rates are influenced by factors outside
the Group's control and can adversely affect the Group's results,
operations and profitability in a number of ways. The Group invests
in Credit Assets which may be subject to a fixed rate of interest,
or a floating rate of interest (which may be linked to base rates
or LIBOR). The Group expects that its borrowings will be subject to
a floating rate of interest. Any mismatches the Group has between
the income generated by its Credit Assets, on the one hand, and the
liabilities in respect of its borrowings, on the other hand, may be
managed, in part, by matching any floating rate borrowings with
investments in Credit Assets that are also subject to a floating
rate of interest. The Group may use derivative instruments,
including interest rate swaps, to reduce its exposure to
fluctuations in interest rates.
To the extent that the Group does rely on derivative instruments
to hedge interest rate risk, it will be subject to counterparty
risk. Any failure by a hedging counterparty of the Group to
discharge its obligations could have a material adverse effect on
the Group's results, operations and/or and financial condition.
The Manager monitors the interest rate risk position
continuously and did not deemed it appropriate to enter into any
interest rate hedges for the period ending 31 December 2019 or the
period ending 31 December 2018.
Cash management
Whilst it is intended that the Group will be close to fully
invested in normal market conditions, the Group may invest surplus
capital in cash deposits, cash equivalent instruments and fixed
income instruments. There is no restriction on the amount of cash
or cash equivalent instruments that the Group may hold and there
may be times when it is appropriate for the Group to have a
significant cash position instead of being fully or near fully
invested. The Group increased its cash reserves over the period
with GBP15.2 million of assets held in cash at 31 December 2019 (31
December 2018: GBP5.6 million).
Business model
The management of the Group's assets and the Group's
administration has been outsourced to third-party service
providers. The Board has oversight of the key elements of the
Group's strategy, including the following:
-- The Group's level of gearing. The Group has a maximum limit
of 100 per cent of Net Asset Value in aggregate (calculated at the
time of draw down under any facility that the Company has entered
into) as detailed in the Company's prospectuses dated 18 December
2015, 25 May 2017 and 21 December 2018 (the "Prospectus");
-- The Group's investment policy which determines the diversity
of the Group's portfolio. The Board sets limits and restrictions
with the aim of reducing risk and maximising returns;
-- The appointment, amendment or removal of the Group's third-party service providers;
-- An effective system of oversight over the Group's risk
management and corporate governance; and
-- Premium/discount control mechanism. The Board compares the
Group's share price against its then prevailing Net Asset
Value.
In order to effectively undertake its duties, the Board may seek
expert legal advice. It can also call upon the advice of the
company secretary. In 2015 the Board appointed Slaughter and May to
provide ongoing legal services to the Group.
The Board have acted in a way that they consider, in good faith,
would be most likely to promote the success of the Group for the
benefit of its shareholders as a whole, and in doing so have regard
(amongst other matters) to:
-- The likely consequences of any decision in the long-term;
-- The impact of the Group's operations on the community and the environment;
-- The desirability of the Group maintaining a reputation for
high standards of business conduct; and
-- The need to act fairly to avoid conflicts between the
interests of the Directors and those of the Group.
Based on the Group's current position and the performance of the
assets acquired the principal risks that it faces and their
potential impact on its future development and prospects, the
Directors have concluded that there is a reasonable expectation
that the Group will be able to continue its business model and meet
its liabilities as they fall due over the three-year period to the
AGM in 2023. Please see the viability statement below for more
detail.
Future developments
The Group's anticipated future developments and outlook are
discussed in more detail in the Chairman's Statement on and the
Investment Manager's Report above.
Premium/Discount management
The Board closely monitors the premium or discount at which the
Company's ordinary shares trade in relation to the Company's
underlying Net Asset Value and acts accordingly. During the year
under review the Company's ordinary shares traded at a premium to
its underlying Net Asset Value until October 2019 from when it
traded at a discount to NAV. The Board is of the view that an
increase of the Company's ordinary shares in issue provides
benefits to shareholders, including a reduction in the Company's
administrative expenses on a per share basis and increased
liquidity in the Company's shares.
The Board has been authorised to allot 23,149,973 ordinary
shares, such authority lasting until the conclusion of the 2020
Annual General Meeting ("AGM") of the Company (or, if earlier,
until close of business on 31 August 2020). Of this, up to
23,149,973 ordinary shares may be allotted on a non-pre-emptive
basis, provided that the issue price is no lower than the latest
published NAV per ordinary share. To date, no ordinary shares have
been issued by the Company pursuant to this authority.
In addition, the Directors have been authorised to issue and
allot up to 25,000,000 C shares on a non-pre-emptive basis, such
authority to expire at the conclusion of the 2020 AGM of the
Company.
Shareholders' pre-emption rights over this unissued share
capital have been partially disapplied so that the Board will not
be obliged to offer any newly issued shares to shareholders pro
rata to their existing holdings. The reason for this is to retain
flexibility to issue new shares to investors. Notwithstanding this
authority, no ordinary shares will be issued (whether on a
pre-emptive basis to existing shareholders or otherwise) under this
authority at a gross price which is less than the Net Asset Value
per existing ordinary share at the time of their issue.
The Board believes that it is in the shareholders' best
interests to prevent the Company's shares trading at a discount to
Net Asset Value because shareholders will be unable to realise the
full value of their investments.
As a means of addressing the discount to Net Asset Value at
which the Company's shares may, from time to time, trade,
shareholders have authorised the Company to buy back ordinary
shares. The Directors have the authority to purchase in the market
up to 5,913,543 ordinary shares, such authority expiring at the
conclusion of the 2020 annual general meeting of the Company (or,
if earlier, until close of business on 31 August 2020). During the
year the Company's shares traded at a premium to NAV until October
2019 from when it traded at a discount to NAV with the highest
discount being 4.2 per cent as at 31 December 2019. The last
published NAV statement at the date of signing these accounts was
the NAV for 31 March 2020. At this point the share price was at
discount of 26.5 per cent to the NAV.
Due to this discount on 27 January 2020 the Company repurchased
into treasury 2,200,000 Ordinary Shares at a price of 850 pence per
Ordinary Share. Following completion of the Buyback, the Company
has 39,449,919 Ordinary Shares in issue, of which 2,200,000
Ordinary Shares are held in treasury. At the forthcoming AGM the
Board will seek to renew the Company's powers to buy back ordinary
shares.
The full text of the proposed resolutions authorising the
Company to buy back shares or allot shares can be found in the
Notice of the Company's forthcoming AGM.
Directors' Duties
Section 172 of the Companies Act 2006
The Directors' overarching duty is to act in good faith and in a
way that is the most likely to promote the success of the Group as
set out in Section 172 of the Companies Act 2006. In doing so, the
Directors must take into consideration the interests of the various
stakeholders of the Group, the impact the Group has on the
community and the environment, take a long-term view on
consequences of the decisions they make as well as aim to
maintaining a reputation for high standards of business conduct and
fair treatment between the members of the Group.
Fulfilling this duty naturally supports the Group in achieving
its Investment Objective and helps to ensure that all decisions are
made in a responsible and sustainable way. In accordance with the
requirements of the Companies (Miscellaneous Reporting) Regulations
2018, the Group explains how the Directors have discharged their
duty under Section 172 below.
To ensure that the Directors are aware of, and understand, their
duties they are provided with the pertinent information when they
first join the Board as well as receive regular and ongoing updates
and training on the relevant matters. They also have continued
access to the advice and services of the Group Secretary, and when
deemed necessary, the Directors can seek independent professional
advice.
Decision-making
The importance of the stakeholder considerations, in particular
in the context of decision-making, is taken into account at every
Board and Committee meeting. All discussions involve careful
considerations of the longer-term consequences of any decisions and
their implications for stakeholders. For example, in any strategic
planning discussions the Board will consider in detail the
portfolio's performance and forecasts; asset allocation within the
portfolio; as well as financial performance, liquidity and balance
sheet management. In addition, the Board and the Investment Manager
hold separate strategy focused sessions at least once per annum to
consider and analyse the investment strategy.
Stakeholders
The Board seeks to understand the needs and priorities of the
Group's stakeholders and these are taken into account during all
its discussions and as part of its decision-making. As an
externally managed investment firm the Group does not have any
employees or customers, nor does it have a direct impact on the
community or environment in the conventional sense. Further
explanation on environmental, human rights, employee, social and
community issues is set out below.
The description of the way the Group operates above explains the
various stakeholders in the lending market involved in the
investment strategy of the Group. The Board has considered its key
stakeholders include:
Shareholders
Continued shareholder support and engagement are critical to
existence of the business and the delivery of the long-term
strategy of the business.
A resolution to continue the life of the Group is put to the
shareholders every five years. Having last been approved by
shareholders at a General Meeting on 16 December 2019, the next
vote would take place at the Group's 2024 AGM.
The Group's shareholders consist of institutional, professional
and professionally advised and knowledgeable investors. The Group
understands the need to effectively communicate with existing and
potential shareholders, briefing them on strategic and financial
progress and attaining feedback. The Board is committed to
maintaining open channels of communication and to engage with
shareholders in a manner which they find most meaningful, in order
to gain an understanding of the views of shareholders. The Board
engagement includes:
-- Annual General Meeting - The Group welcomes engagement from
shareholders at the AGM as it sees it as an important opportunity
for all shareholders to engage directly with the Board. Due to the
restrictions on public gatherings during the COVID-19 pandemic, the
Board has decided to run the 2020 AGM as a closed meeting and
unfortunately shareholders will not be able to attend in person.
However, shareholders are strongly urged to provide voting
instructions and it is also intended that shareholders will be
given the opportunity to submit questions in advance of, or at the
meeting which will be held on 26 June 2020. Further details are
included in the Notice of AGM which will shortly be posted to
shareholders. The Board values any feedback and questions it may
receive from shareholders ahead of and during the AGM and will take
action or make changes, when and as appropriate. All directors
attended the 2019 AGM. All voting at general meetings of the
Company is conducted by way of a poll. All shareholders have the
opportunity to cast their votes in respect of proposed resolutions
by proxy, either electronically or by post. Following the AGM, the
voting results for each resolution are published and made available
on the Company's website;
-- Publications - The Annual Report and Half-Year results are
made available on the Group 's website and the Annual Report is
circulated to shareholders. These reports provide shareholders with
a clear understanding of the underlying portfolio and the financial
position of the Group. This information is supplemented by analyst
presentations which were made available on the Group's website in
April and September 2019 in line with the publishing of the Group
Annual Report. A supplementary prospectus was also published in
August 2019. The Group also publishes monthly the NAV per share and
a monthly factsheet which are available on the website and the
publication of which is announced via the London Stock Exchange.
The monthly factsheet updates the market with underlying
performance and commentary around this for that month. Feedback
and/or questions the Group and the Investment Manager receive from
the shareholders and analysts help the Board evolve its
reporting;
-- Shareholder concerns - In the event shareholders wish to
raise issues or concerns with the Directors, they are welcome to do
so at any time by writing to the Chairman at the registered office.
Other members of the Board are also available to shareholders if
they have concerns that have not been addressed through the normal
channels. Feedback can also be gained via the Group's corporate
brokers, which is communicated to the Board and Investment Manager;
and
-- Working with external partners - the Investment Manager and
the Corporate Broker maintain an active dialogue with shareholders
and potential investors at scheduled meetings or analyst briefings
following financial results and provide the Board regular reports
and feedback on key market issues and shareholder concerns. This
includes market dynamics and corporate perception.
The Investment Manager
The Investment Manager's performance is critical for the Group
to successfully deliver its investment strategy and meet its
objective to provide shareholders with an attractive level of
dividend income and capital growth through investing in primarily
asset secured loans ("Credit Assets") and selected equity
investments that are aligned with the Group's strategy and that
present opportunities to enhance the Group's returns from its
investments ("Equity Assets").
Maintaining a close and constructive working relationship with
the Investment Manager is crucial as the Board and the Investment
Manager both aim to continue to achieve consistent, long-term
returns in line with its investment objective. Important components
in the collaboration with the Investment Manager, representative of
the Group's culture are:
-- Encouraging open discussion with the Investment Manager;
-- Adopting a tone of constructive challenge when appropriate;
-- Drawing on Board Members' individual experience and knowledge
to support the Investment Manager in its monitoring the portfolio
of investments; and
-- That the Board and the Investment Manager should act within
the agreed investment restrictions and risk appetite statement and
not seek to add further investment risk.
The Company Secretary, the Administrator, the Registrar, the
Depositary, The Broker
In order to function as an investment trust and a constituent of
the specialist fund segment on the London Stock Exchange, the Group
relies on a diverse range of advisors for support with meeting all
relevant obligations.
The Board maintains regular contact with its key external
providers, primarily at the Board and committee meetings, as well
through the Investment Manager from its own interactions with the
external providers outside of the regular meeting cycle. In
addition, the Management Engagement Committee is tasked with period
reviews of the external service providers, assessing their
performance, fees and continuing appointment at least annually to
ensure that the key service providers continue to function at an
acceptable level and are appropriately remunerated to deliver the
expected level of service.
Lenders
Availability of funding and liquidity are crucial to the Group's
ability to take advantage of investment opportunities as they
arise.
Therefore, the Group aims to demonstrate to lenders that it is a
well-managed business, capable of consistently delivery long-term
returns.
Regulators
The Group can only operate with the approval of its regulators
who have a legitimate interest in how the Group operates in the
market and treats its shareholders. We have an open and transparent
relationship with our regulators and other government authorities
including HMRC.
The Group regularly considers how it meets various regulatory
and statutory obligations and follows voluntary and best-practice
guidance, and how any governance decisions it makes can have an
impact on its stakeholders, both in the shorter and in the
longer-term.
Corporate and operational structure
Corporate Structure
On 20 June 2019 the Group incorporated Sting Funding Limited
("Sting"), a limited Company incorporated under the law of England
and Wales. The Group is considered to control Sting through holding
100 per cent of the issued shares. As a result, the financial
statements for the year ended 31 December 2019 are prepared on a
consolidated basis.
Sting became active on 28 August 2019 when it drew down on a
debt facility backed by commercial and second charge residential
mortgages.
Operational and portfolio management
The Group has outsourced its operations and portfolio management
to various service providers as detailed below:
-- Pollen Street Capital Limited has been appointed as the
Group's investment manager and Alternative Investment Fund Manager
("AIFM") for the purposes of the Alternative Investment Fund
Managers Directive ("AIFMD");
-- Apex Fund Services (UK) Limited has been appointed to act as the Group's Administrator (the "Administrator");
-- Link Company Matters Limited has been appointed to act as the
Company's Secretary (the "Secretary");
-- Indos Financial Limited has been appointed to act as the
Group's Depositary (the "Depositary");
-- Sparkasse Bank Malta plc has been appointed to act as the
Group's Custodian (the "Custodian");
-- Computershare Investor Services plc has been appointed as the
Group's Registrar (the "Registrar"); and
-- Liberum Capital Limited has been appointed to act as the
Group's corporate broker and financial adviser.
In addition to the above, the Group has been provided with legal
advice for the work undertaken in respect of share placings and in
respect of various of its unquoted investments.
Alternative Investment Fund Managers Directive ("AIFMD")
In accordance with the AIFMD, the Group has appointed Pollen
Street Capital Limited to act as the Group's AIFM for the purposes
of the AIFMD. The AIFM ensures that the Group's assets are valued
appropriately in accordance with the relevant regulations and
guidance. The Group has appointed Indos Financial Limited as
depositary. In addition, the Group entered into an amended
Depository Agreement enabling it to delegate certain custody
functions as required by the AIFMD to Sparkasse Bank Malta plc (the
"Custodian") on 17 November 2017.
Anti-bribery and corruption policy
The Group has no employees or operations but uses the
anti-bribery and corruption policy of the Investment Manager,
ensuring compliance with all applicable anti-bribery and corruption
laws and regulations, including the UK Bribery Act 2010.
Environment, human rights, employee, social and community
issues
The Group is required by law to provide details of environmental
matters (including the impact of the Group's business on the
environment), employee, human rights, social and community issues
(including information about any policies it has in relation to
these matters and the effectiveness of those policies). The Group
does not have any employees and the Board is composed of
independent non-executive Directors. As an investment trust, the
Group does not have any direct impact on the environment. The Group
aims to minimise any detrimental effect that its actions may have
by adhering to applicable social legislation, and as a result does
not maintain specific policies in relation to these matters.
The Group has no internal operations and therefore no greenhouse
gas emissions to report nor does it have responsibility for any
other emissions producing sources under the Companies Act 2006
(Strategic Report and Directors' Reports) Regulations 2013,
including those within its underlying investment portfolio.
However, the Group believes that high standards of corporate social
responsibility such as the recycling of paper waste will support
its strategy and make good business sense.
In carrying out its investment activities and in relationships
with suppliers, the Group aims to conduct itself responsibly,
ethically and fairly.
The Investment Manager is committed to maintaining and enhancing
its focus on the societal impact of its actions in a way that
generates enduring long-term returns for investors and society.
To do this, the Investment Manager has embedded Environmental,
Social and Governance "ESG" as a core part of its investment
process - from identifying ESG risks pre-acquisition, through to
working with portfolio companies post-acquisition to embed this ESG
framework, drive value creation and monitor performance against key
criteria - and operates on a continuous-improvement basis. ESG is
multi-faceted and there are many ways to engage with it, so the
Investment Manager tries to focus on those ESG considerations that
are most pertinent and where they feel they can have the most
impact and these are outlined in their published ESG policy.
At its core, the Investment Manager's ESG Framework centres on
the following impact categories:
-- Marketplace: How do the products and services provided
benefit end-customers, suppliers and investors, and how could they
be detrimental to them?
-- Governance & Leadership: How is the Investment Manager
appropriately accountable for their decisions?
-- Workplace: How as the Investment Manager created a positive
working environment for their people at the Group and portfolio
level, and what more could they be doing to engage and promote
diversity and inclusion?
-- Community: How can the Investment Manager be strategic with
their Social Investment efforts, to best leverage the skills and
resources they and the portfolio companies they invest in have
available? Are the Investment Manager's efforts providing real
benefits and are they focusing on the right issues?
-- Environment: What does the Investment Manager do that harms
the environment, and what can they do to protect it?
The Investment Manager is a signatory to the UN Principles of
Responsible Investment and seeks to drive continued improvement
through the ESG initiatives that it has in place across the
portfolio.
Modern Slavery Act
The Board gives due regard to human rights considerations, as
defined under the European Convention on Human Rights and the UK
Human Rights Act 1998.
We are aware of our responsibilities and obligations under the
Modern Slavery Act and other relevant legislation relating to the
detection and prevention of modern slavery and human trafficking.
The Board is committed to implementing and enforcing effective
systems and controls that seek to ensure that modern slavery is not
taking place anywhere in its business or in its supply chains.
Further details of our compliance with the Modern Slavery Act
can be found on our website.
Board diversity
The Board acknowledges the benefits of greater diversity,
including gender diversity and remains committed to ensuring that
the Directors bring a wide range of skills, knowledge, experience,
backgrounds and perspectives.
All appointments are made on merit against objective criteria
identified with due regard for the benefits of diversity on the
Board, so as to achieve the overall balance of skills and
experience that the Board judges that it needs in order to remain
effective in meeting the challenges and opportunities that it
anticipates.
During the year to 31 December 2019 the Board of Directors
consists of three non-executive Directors, none of whom are female.
During 2019, the Board adopted a Board Diversity and Inclusion
policy and has established measurable objectives for achieving
diversity on the Board and has undertaken to only engage executive
search firms who have signed up to the voluntary Code of Conduct on
gender diversity and best practice.
Principal Risks and Uncertainties
The Group is exposed to a number of potential risks and
uncertainties. These risks could have a material impact on
financial performance and position and could cause actual results
to differ materially from expected and historical results.
The Group faces a number of risks both principal and emerging
and as a result, the management of the risks we face is central to
everything we do. These risks could have a material impact on
financial performance and position and could cause actual results
to differ materially from expected and historical results.
The Board has carried out a robust assessment of its principal
and emerging risks and the controls to help mitigate the risks. It
has established a robust process which involves the maintenance of
a risk register, which identifies the risks facing the Group and
assesses each risk on a scale, classifying the probability of the
risk and the potential impact that an occurrence of the risk could
have on the Group. The risk register was last reviewed by the Board
on 22 April 2020 and is reviewed as part of the Audit and Risk
Committee meetings during the year. The day-to-day risk management
functions of the Group have been delegated to the Investment
Manager, which reports to the Audit and Risk Committee.
Operational Risks
Third Party Service Providers
The Group has no employees and the Directors have all been
appointed on an independent non-executive basis. Whilst the Group
has taken all reasonable steps to establish and maintain adequate
procedures, systems and controls to enable it to comply with its
obligations, the Group is reliant upon the performance of
third-party service providers for its executive function. In
particular, the Investment Manager, Depositary, Custodian,
Administrator, Registrar and servicers, amongst others, will be
performing services which are integral to the day-to-day operation
of the Group.
As part of this, the operations of the third-party service
providers are highly dependent on IT systems. Any critical system
failure, prolonged loss of service availability or material breach
of data security could cause serious damage to the third-party's
ability to provide services to the Group, which could result in
significant compensation costs or regulatory sanctions or a breach
of applicable regulations. In particular, failures or breaches
resulting in the loss or publication of confidential customer data
could cause long-term damage to reputation and could affect
regulatory approvals and competitive position which could undermine
their ability to attract and retain customers.
The termination of service provision by any service provider, or
failure by any service provider to carry out its obligations either
by fraud or error to the Group, or to carry out its obligations to
the Group in accordance with the terms of its appointment, could
have a material adverse effect on the Group's operations and its
ability to meet its investment objective.
Mitigation
The Group has appointed third party service providers who are
experienced in their field and have a reputation for high standards
of business conduct. Further, day-to-day oversight of third-party
service providers is exercised by the Investment Manager and
reported to the Board on a quarterly basis. As appropriate to the
function being undertaken, each of the service providers is subject
to regular performance and compliance monitoring. The performance
of the Investment Manager in its duties to the Group is subject to
ongoing review by the Board on a quarterly basis as well as formal
annual review by the Group's Management Engagement Committee.
The appointment of each service provider is governed by
agreements which contain the ability to terminate each of these
counterparties with limited notice should they continually or
materially breach any of their obligations to the Group.
As part of the response to COVID-19 all outsourced third party
service providers have successfully implemented business continuity
processes such as working from home. This has meant that the
service levels received by the Group have been maintained in this
difficult time.
Reliance on key individuals
The Group will rely on key individuals at the Investment Manager
to identify and select investment opportunities and to manage the
day-to-day affairs of the Group. There can be no assurance as to
the continued service of these key individuals at the Investment
Manager. The departure of key individuals from the Investment
Manager without adequate replacement may have a material adverse
effect on the Group's business prospects and results of operations.
Accordingly, the ability of the Group to achieve its investment
objective depends heavily on the experience of the Investment
Manager's team, and more generally on the ability of the Investment
Manager to attract and retain suitable staff.
Mitigation
The interests of the Investment Manager are closely aligned with
the performance of the Group through the management and performance
fee structures in place and direct investment by certain key
individuals of the Investment Manager. Furthermore, investment
decisions are made by a team of professionals, mitigating the
impact loss of any single key professional within the Investment
Manager's organisation. The performance of the Investment Manager
in its duties to the Group is subject to ongoing review by the
Board on a quarterly basis as well as formal annual review by the
Group's Management Engagement Committee.
Fluctuations in the market price of the Company's shares
The market price of the Company's shares may fluctuate widely in
response to different factors and there can be no assurance that
the Company's shares will be repurchased by the Company even if
they trade materially below their Net Asset Value. Similarly, the
shares may trade at a premium to Net Asset Value whereby the shares
can trade on the open market at a price that is higher than the
value of the underlying assets. There can be no assurance, express
or implied, that shareholders will receive back the amount of their
investment in the Company's shares.
Mitigation
The Investment Manager and the Board closely monitor the level
of discount or premium at which the Company's shares
trade on the open market. The Company may purchase the shares in
the market with the intention of enhancing the Net Asset Value per
ordinary share. However, there can be no assurance that any
repurchases will take place or that any repurchases will have the
effect of narrowing any discount to Net Asset Value at which the
ordinary shares may trade. When the Company's shares trade at a
premium the Company may issue shares to reduce the premium at which
shares trade. As at 31 December 2019 the Company's shares were
trading at a discount to Net Asset Value (31 December 2018 the
Company's shares were trading at a discount to Net Asset Value).
The last published NAV statement at the date of signing these
accounts was the NAV for 31 March 2020. At this point the share
price was at a discount of 26.5 per cent to the NAV.
On 27 January 2020 Honeycomb Investment Trust plc repurchased
into treasury 2,200,000 Ordinary Shares at a price of 850 pence per
Ordinary Share. Following completion of the Buyback, the Company
has 39,449,919 Ordinary Shares in issue, of which 2,200,000
Ordinary Shares are held in treasury. The total number of voting
rights in the Company is therefore 37,249,919 Ordinary Shares.
Investments
Achievement of the Investment Objective
There can be no assurance that the Investment Manager will
continue to be successful in implementing the Group's investment
objective.
Mitigation
The Group's investment decisions are delegated to the Investment
Manager. Performance of the Group against its investment objectives
is closely monitored on an ongoing basis by the Investment Manager
and the Board and is reviewed in detail at each Board meeting. The
Board has set investment restrictions and guidelines which the
Investment Manager monitors and reports on quarterly to the Board.
In the event it is required, any action required to mitigate
underperformance is taken as deemed appropriate by the Investment
Manager.
The Investment Manager has adopted a prudent approach given the
uncertain economic environment with the focus on the existing
portfolio and ensuring cash collections remain robust and the
appropriate strategies are put in place. We expect the economic
environment to create some compelling new opportunities for the
Group which the Investment Manager will selectively review and
deploy capital into, however the priority will be to reduce net
debt during this period of uncertainty.
Borrowing
The Group may use borrowings in connection with its investment
activities including, where the Investment Manager believes that it
is in the interests of shareholders to do so, for the purposes of
seeking to enhance investment returns. Such borrowings may subject
the Group to interest rate risk and additional losses if the value
of its investments fall. Whilst the use of borrowings should
enhance the Net Asset Value of the Group's issued shares when the
value of the Group's underlying assets is rising, it will have the
opposite effect where the underlying asset value is falling. In
addition, in the event that the Group's income falls for whatever
reason, the use of borrowings will increase the impact of such a
fall on the Group's return and accordingly will have an adverse
effect on the Group's ability to pay dividends to shareholders.
Mitigation
The Investment Manager and the Board closely monitors the level
of gearing of the Group. The Group has a maximum limitation on
borrowings of 100 per cent of Net Asset Value (calculated at the
time of draw down) which the Investment Manager may affect at its
discretion. As at the date of this report, the Group anticipates
that the majority of the cash produced by the portfolio will be
used to reduce debt.
In May 2020 the Company's main topco debt facility was
refinanced with a 1-year term and revolving facility with extension
options at the lender's consent. The Group retains the flexibility
to refinance the facility.
Exposure to Credit Risk
As a lender to small businesses and individuals, the Group is
exposed to credit losses if customers or counterparties are unable
to repay loans and outstanding interest and fees or through fraud.
The Group is expected to invest a significant proportion of its
assets in Credit Assets which, by their nature, are exposed to
credit risk and may be impacted by adverse economic and market
conditions, including through higher impairment charges, increased
capital losses and reduced opportunities for the Group to invest in
Credit Assets. Additionally, competition could serve to reduce
yields and lower the volume of loans generated by the Group. The
Origination Partner has not guaranteed to provide a minimum number
of Credit Assets.
The outbreak of COVID-19 has caused major disruption across the
globe. At the time of writing the portfolio has not seen a material
impact in payment performance yet albeit some end borrowers have
requested and been granted payment holidays. However, given the
Group's UK focus, its performance is linked to the health of the UK
economy. The Group could experience further impairments and
consequently reduced profits, particularly if economic expectations
deteriorate further from the base case. However, the overall effect
of this cannot be quantified reliably because of uncertainty in the
duration of the government's lockdown, the impact of the various
government initiatives and the behaviour of customers as the reach
the end of their payment holidays. The government has also launched
a number of initiatives aimed at providing finance to SMEs. Two of
our largest borrowers are in the process of lending under the CBIL
government guarantee scheme which will also refinance part of their
exposure with the benefit of the government guarantee. The
Investment Manager has adopted a prudent approach with the focus on
the existing portfolio and ensuring cash collections remain robust
as the appropriate strategies are in place.
Mitigation
The Group will invest in a granular portfolio of assets,
diversified by the number of borrowers, the type, and the credit
risk (ranked A-E) of each borrower. Each loan is subject to,
amongst other restrictions, a maximum single loan exposure limit.
Additionally, the Group has made assumptions around loss and
arrears rates within the portfolio in its financial projections.
Further, the Investment Manager has established stringent
underwriting criteria which includes credit referencing, income
verification and affordability testing, identity verification and
various forward-looking indicators of a borrower's likely financial
strength. The Group also provides structured lending facilities to
Corporate entities which can be larger value loans. Please see Note
14 to the financial statements for more details on Credit Risk.
Origination rates and performance of the underlying assets of
the Group are closely monitored on an ongoing basis by the
Investment Manager and the Board and are reviewed in detail at each
Board meeting. The Group has entered agreements with a number of
referral partners to provide a diversified range of sources from
which to select attractive assets. The Group looks to add
additional referral partners on an ongoing basis in order to
further diversify its origination sources. For structured lending
facilities the Group undertakes a robust process. Facilities are
secured and typically structured with minimum asset coverage ratios
and covenants to provide early warning of credit deterioration and
adequate asset cover in the event of stress. The Group operates
within the Investment policy guidelines and lends on a secured
basis against identifiable and accessible assets.
In relation to COVID-19 the impact is being mitigated where
possible through the Investment Manager proposing not to re-invest
the cash generated by the portfolio in new investments until there
is more visibility on the impact of the lockdown restrictions on
performance and a return to some level of normality in the economy.
In the structured portfolio where the Group provides finance to
non-bank lenders, the Investment Manager is working with the
borrowers to help them navigate the difficult environment whilst
ensuring most of the cash generated by their portfolio is utilised
to repay the Group's loan.
Interest Rate Risk
The Group intends to invest in Credit Assets which may be
subject to a fixed rate of interest, or a floating rate of interest
(which may be linked to base rates or LIBOR) and expects that its
borrowings will be subject to a floating rate of interest. Any
mismatches the Group has between the income generated by its Credit
Assets, on the one hand, and the liabilities in respect of its
borrowings, on the other hand, may subject the Group to interest
rate risk.
Mitigation
Interest rate risk exposures may be managed, in part, by
matching any floating rate borrowings with investments in Credit
Assets that are also subject to a floating rate of interest. The
Group may use derivative instruments, including interest rate
swaps, to reduce its exposure to fluctuations in interest rates,
however some unmatched risk may remain.
The current COVID-19 outbreak has seen the Bank of England lower
interest rates on 19 March 2020 to 0.1 per cent, the lowest they
have been in its 325-year history. The Board will continue to
monitor this development.
Following the recommendations of the Financial Stability Board,
a fundamental review and reform of the major interest rates
benchmarks, including Interbank offered rate ("Ibors"), are
underway across the world's largest financial markets. In some
cases, the reform will include replacing interest rate benchmarks
with alternative risk-free rates ('RFRs'). This replacement process
is at different stages, and is progressing at different speeds,
across several major currencies. There is therefore uncertainty as
to the basis, method and timing of transition and their
implications on the participants in the financial markets. Until
there is market acceptance on the form of alternative RFRs for
different products, the legal mechanisms to effect transition
cannot be confirmed, and the impact cannot be determined, nor any
associated costs accounted for. Going forward the Group needs to
assess the potential effects of these 'Libor replacement' and has
the intention of minimising disruption through appropriate
mitigating actions.
Liquidity of Investments
The Group may invest in Credit and Equity Assets that are
aligned with the Group's strategy and that present opportunities to
enhance the Group's return on its investments. Such assets may have
fixed maturity dates or amortisation schedules or may not have any
maturity dates. Investments in unquoted equity securities, by their
nature, involve a higher degree of valuation and performance
uncertainties and liquidity risks than investments in listed
securities and therefore may be more difficult to realise.
Mitigation
The Group monitors the maturity profile of its Credit Assets and
borrowing as well as trends in cash payment rates.
The Group has established investment restrictions on the extent
to which it can invest in Equity Assets, such that no more than 10
per cent of the net proceeds of any placing are invested in Equity
Assets. Compliance with these restrictions is monitored by the
Investment Manager on an ongoing basis and by the Board
quarterly.
Regulations
The Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks. The Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
Tax
Any changes in the Group's tax status or in taxation legislation
could affect the value of investments held by the Group, affect the
Group's ability to provide returns to shareholders and affect the
tax treatment for shareholders of their investments in the
Group.
Mitigation
The Group intends at all times to conduct its affairs so as to
enable it to qualify as an investment trust for the purposes of
Section 1158 of the Corporation Tax Act 2010. Both the Board and
the Investment Manager are aware of the requirements which are to
be fulfilled in any accounting period for the Group to maintain its
investment trust status. The conditions required to satisfy the
investment trust criteria are monitored by the Administrator and
performance of the same shall be reported to the Board on a
quarterly basis.
Breach of applicable legislative obligations
The Group and its third-party service providers are subject to
various legislative and regulatory regimes, including, but not
limited to, the Consumer Credit Act General Data Protection
Regulation and the Data Protection Act 2018. Any breach of
applicable legislative and/or regulatory obligations could have a
negative impact on the Group and impact returns to
shareholders.
Mitigation
The Group engages only with third party service providers which
hold the appropriate regulatory approvals for the function they are
to perform and can demonstrate that they can adhere to the
regulatory standards required of them. Each appointment is governed
by agreements which contain the ability for the Group to terminate
the arrangements with each of these counterparties with limited
notice should such counterparty continually or materially breach
any of their legislative obligations, or their obligations to the
Group more broadly. Additionally, each of the counterparties is
subject to regular performance and compliance monitoring by the
Investment Manager, as appropriate to their function, to ensure
that they are acting in accordance with applicable regulations and
are aware of any upcoming regulatory changes which may affect the
Group. Performance of third-party service providers is reported to
the Board on a quarterly basis, whilst the performance of the
Investment Manager in its duties to the Group is subject to ongoing
review by the Board on a quarterly basis as well as formal annual
review by the Group's Management Engagement Committee.
emerging risks
The Group utilises an established framework to monitor its
portfolio for emerging risks, supporting organisational readiness
for external volatility.
This incorporates input and insight from both a top-down and
bottom-up perspective:
-- Top-down: Emerging risks identified by directors at a group
level via the Audit and Risk Committee and the Board.
-- Bottom-up: Emerging risks identified at a business level and
escalated, where appropriate by the Investment Manager, via risk
updates into the Audit and Risk Committee and the Board.
Emerging risks are monitored by the Audit and Risk Committee on
an ongoing basis, with agreed actions tracked to ensure the Group's
preparedness should an emerging risk crystallise.
The most significant emerging risk is the ongoing outbreak of
the COVID-19. We are monitoring the situation carefully as it
evolves. The Group's business model aims to ensure that it is able
to continue to trade and support its clients in all economic
conditions.
Key Performance Indicators (KPIs)
The Board monitors success in implementing the Group's strategy
against a range of key performance indicators (KPIs), which are
viewed as significant measures of success over the longer term.
Although performance relative to the KPIs is also monitored over
shorter periods, it is success over the long-term that is viewed as
more important, given the inherent volatility of short-term
investment returns. The principal KPIs are set out below:
-- The movement in Net Asset Value per ordinary share;
-- Dividend per share;
-- Dividend return;
-- The share price premium/(discount) to NAV;
-- The movement in the share price;
-- Ongoing charges ratio; and
-- Revenue return.
Approval
The Strategic Report was approved by the Board of Directors on
27 May 2020 and signed on its behalf by:
Robert Sharpe
Chairman
27 May 2020
Directors' Report
Bo a r d of Di r e c t o rs
Robert Sharpe (1)
Chairman of the Board, Remuneration and Nomination and the
Management Engagement Committees and a member of the Audit and Risk
Committee
Robert has over 45 years' experience in retail banking. He is
currently chairman at Hampshire Trust Bank plc and Bank of Ireland
UK plc. He has had an extensive number of appointments both in the
UK and the Middle East including Non-executive Director ("NED") at
Aldermore Bank plc, George Wimpy plc, Barclays Bank UK Retirement
Fund, Vaultex Limited, LSL Properties plc, RIAS plc and several
independent NED roles at banks in Qatar, UAE, Oman and Turkey.
Robert was previously Chief Executive Officer at West Bromwich
Building Society, a role he took to chart and implement its rescue
plan. Prior to this, he was Chief Executive Officer at Portman
Building Society and Bank of Ireland in the UK.
Jim Coyle (1)
Chairman of the Audit and Risk Committee, and member of the
Remuneration and Nomination and Management Engagement
Committees
Jim is a non-executive Director, chair of the Audit committee
and member of the Risk committee at HSBC UK Bank plc, chairman of
HSBC Trust Group (UK) Ltd and Marks & Spencer Unit Trust
Management Limited. He is also a non-executive Director and
Chairman of the Audit and Risk Committee at Scottish Water,
non-executive Director at Marks & Spencer Financial Services
plc and HSBC Private Bank (UK) Limited and an independent
non-executive member of Deloitte UK Oversight Board. He was
previously Chairman at Worldfirst, non-executive Director at the
Scottish Building Society, non-executive director and Chairman of
the Audit Committee of Vocalink plc, and Group Financial Controller
at Lloyds Banking Group, having earlier held a role as Divisional
Finance Director, Group Operations. Prior to this, Jim was Group
Chief Accountant for the Bank of Scotland, having joined the bank
in 1991. He qualified as a Chartered Accountant with KPMG before
spending 10 years in the oil industry, holding senior positions
with BP. Jim is a Fellow of the Chartered Institute of Bankers in
Scotland, a former member of the Council of the Institute of
Chartered Accountants of Scotland and the Financial Reporting
Council Committees.
Richard Rowney (2)
Member of the Audit and Risk, Remuneration and Nomination and
Management Engagement Committees
Richard was most recently Group Chief Executive of LV= a leading
financial services provider and a mutual where he worked as an
executive Member of the Board for 13 years. Richard left LV at the
end of 2019 following the sale of the General Insurance business to
the Allianz Group. Richard has led the business to win the
Moneywise Most Trusted Life Insurer award as well as YouGov's UK's
Most Recommended Insurer. Prior to his position as CEO he had been
Managing Director of the group's Life & Pensions business which
he successfully turned into one of the UK's leading Protection and
Retirement specialist companies. Prior to his time at LV= Richard
held various Director roles across Barclays corporate and retail
banking. Richard holds a first-class degree in Geography from the
University of Leeds, an MBA from Henley Business School and has
completed the Harvard Management Programme in 2006.
(1) Appointed 14 December 2015
(2) Appointed 1 July 2019
Statutory Information
The Directors of Honeycomb Investment Trust plc (Registered:
09899024) present their report and audited financial statements of
the Company and its subsidiaries (together, the "Group") for the
year ended 31 December 2019. The shares are listed on the
Specialist Fund Segment of the London Stock Exchange.
Board members, and directors' and officers' insurance
The names and biographical details of the Board members who
served on the Board as at the year-end can be found on above.
During the year under review the Group maintained directors' and
officers' liability insurance for its Directors and officers as
permitted by section 233 of the Companies Act 2006. The Group
acquired specific Public Offering and Securities Insurance which
commenced on 24 February 2015 with a five-year run-off period. This
was subsequently renewed until 5 December 2020.
Status of the Company
The Company is an investment company within the meaning of
section 833 of the Companies Act 2006.
The Company operates as an investment trust in accordance with
Section 1158 of the Corporation Tax Act 2010 and the Investment
Trust (Approved Company) (Tax) Regulations 2011. HM Revenue &
Customs approved the Company as an investment trust upon its
listing on 23 December 2015. In the opinion of the Directors, the
Company has conducted its affairs so that it is able to maintain
its status as an investment trust.
The Company is an externally managed closed-ended investment
company with an unlimited life and has no employees (2018: no
employees).
The Company was incorporated in England and Wales on 2 December
2015 and started trading on 23 December 2015, immediately upon the
Company's listing.
Internal controls and risk management
The Board has established an ongoing process for identifying,
evaluating and managing risk on behalf of the Group. Further
details of the Group's principal risks and uncertainties can be
found in the Strategic Report above and details of the Group's
internal controls can be found below. Details of the Group's
hedging policies are set out in the Strategic Report above.
Share capital - voting and dividend
As at 31 December 2019, the Company had 39,449,919 ordinary
shares in issue and no shares were held in Treasury (31 December
2018: 39,449,919). As at the date of this report, the Company had
39,449,919 ordinary shares in issue, of which 2,200,000 ordinary
shares are held in Treasury. The total number of voting rights in
the Company is therefore 37,249,919. On 6 June 2019, at the
Company's last Annual General Meeting ("AGM"), the Board was
granted authority to allot the Company's ordinary shares of GBP0.01
each or grant rights to subscribe for, or convert any security into
ordinary shares in the Company up to a maximum nominal amount of
GBP231,499.73 representing 23,149,973 ordinary shares. The
authority will expire (unless previously renewed, varied or
revoked) on the conclusion of the 2020 AGM of the Company (or, if
earlier, at the close of business on 31 August 2020).
The ordinary shares carry the right to receive dividends and
have one voting right per ordinary share. There are no shares which
carry specific rights with regard to the control of the Company.
The shares are freely transferable. There are no restrictions or
agreements between shareholders on the voting rights of any of the
ordinary shares or the transfer of shares.
The Company does not have a fixed life, however, pursuant to the
articles of association, a continuation vote was scheduled to be
held at the AGM of the Company in 2021 and, if passed, every five
years thereafter. However, in order to provide greater certainty as
to the Company's investment period to secure optimal terms in a
replacement leverage facility, the Directors convened a General
Meeting on 16 December 2019 at which a resolution for the
continuation of the Company was proposed and passed by
Shareholders. The Group is now in a stronger position to negotiate
more favourable terms with lenders which the Directors believe will
provide enhanced returns to Shareholders. In addition, increased
certainty as to the life of the Group will further enable the Group
to continue to build effective long-term partnerships with key new
and existing counterparties and borrowers. It will also allow the
Group the opportunity to continue to grow and diversify its
portfolio whilst continuing to deliver its investment objective of
providing Shareholders with an attractive level of dividend income
and capital growth.
At the AGM held on 6 June 2019, the Directors were granted the
authority to purchase in the market up to 5,913,543 ordinary
shares, such authority expiring at the conclusion of the 2020 AGM
of the Company (or, if earlier, until close of business on 31
August 2020). During the year the Company had not bought back any
shares but post year-end, 2,200,000 ordinary shares were bought
back on 27 January 2020 by the Company pursuant to this authority
and are held in treasury. The Company intends to seek approval from
the shareholders, by special resolution, to renew this authority at
the next AGM.
In addition, where in a financial period of the Company ending
on or after 31 December 2016 the ordinary shares have traded, on
average over that financial period, at a discount in excess of 10
per cent to Net Asset Value per ordinary share, the Company will be
required to propose a special resolution at the next AGM for the
discontinuation of the business of the Company in its present form.
If such a discontinuation resolution is passed, proposals will be
put forward by the Directors to shareholders within four months to
address the trading discount to Net Asset Value per ordinary share
(which may include proposals for the reorganisation, reconstruction
or winding up of the Company).
On a winding up or a return of capital by the Company, the
ordinary shareholders are entitled to the capital of the
Company.
No final dividend is being recommended. The Company's policy is
to pay dividends on a quarterly basis, as set out in the Company's
prospectuses dated 18 December 2015, 25 May 2017 and 21 December
2018 (the "Prospectus"). The dividends paid or payable in respect
of the year ended 31 December 2019 are set out Note 10 to the
financial statements. A reconciliation of movements in reserves is
presented in the Statement of Changes in Shareholders' Funds in the
financial statements. The Company may make distributions from the
Revenue Reserve, the Special Distributable Reserve or from realised
capital gains. There were no unrealised gains in the year.
Substantial share interests
As at 31 December 2019, the Company had been notified in
accordance with Disclosure Guidance and Transparency Rule 5 of the
following interests in the voting rights attaching to the Company's
issued share capital.
Holder Ordinary Percentage
shares of total
voting
rights
===================== ========== ===========
Link Fund Solutions
Limited* 7,009,634 17.77%
===================== ========== ===========
* The Company was notified that part of the voting control
interest previously held by Woodford Investment Management LLP was
transferred to Link Fund Solutions as new manager
Between 31 December 2019 and the date of this report, the
Company had been notified in accordance with Disclosure Guidance
and Transparency Rule 5 of the following interests in the voting
rights attaching to the Company's issued share capital:
Holder Ordinary Percentage
shares of total
voting
rights
========================= =========== ===========
C C Beekeeper
Limited 4,542,006 12.19%
Weiss Asset
Management
LP 3,000,000 8.05%
The Thameside
1979 Settlement 2,702,000 7.25%
The Phoenix
Holdings Limited 2,935,306 7.88%
Close Asset
Management
Limited 2,003,000 5.38%
Quilter Investors
Limited 10,450,928 28.05%
Brookdale International
Partners, L.P 3,000,000 8.05%
M&G Investment
Management
Limited 2,000,000 5.36%
========================= =========== ===========
Independent auditors
The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC"), were re-appointed at the Company's AGM in 2019 and have
expressed willingness to continue to act as the Group's auditors
for the forthcoming financial year. The Audit and Risk Committee
has carefully considered the auditors' appointment, as required in
accordance with its Terms of Reference, and, having regard to its
effectiveness and the services it has provided the Group during the
year under review, has recommended to the Board that the
independent auditors be re-appointed at the forthcoming 2020 AGM.
At the 2020 AGM resolutions are therefore to be proposed for the
re-appointment of the independent auditors and to authorise the
Directors to agree its remuneration for the forthcoming financial
year. In reaching its decision, the Audit and Risk Committee
considered the points detailed below in the Audit and Risk
Committee's report.
Audit information
As required by section 418 of the Companies Act 2006, the
Directors who held office at the date of this report each confirm
that, so far as they are aware, there is no relevant audit
information of which the Group's auditor are unaware and each
Director has taken all the steps required of a Director to make
themselves aware of any relevant audit information and to establish
that the Group's auditor are aware of that information.
Articles of Association
Any amendments to the Company's Articles of Association must be
made by special resolution.
Going concern
The Directors have reviewed the financial projections of the
Group from the date of this report, which shows that the Group will
be able to generate sufficient cash flows in order to meet its
liabilities as they fall due. Countries around the world have been
affected by COVID-19 despite significant mitigating action
including self-isolation for people suspected of having the virus,
and an effective lockdown through social distancing for all but
essential workers, the impact of the virus looks likely to be
significant in terms of extent and timing. This represents a
significant risk to the operations of the Group as a whole. The
Directors have assessed the impact of COVID-19 and given the
Group's UK focus, its performance is linked to the health of the UK
economy. The Board expect the Group could experience further
impairments and consequently reduced profits, particularly if
economic expectations deteriorate further. However, the overall
effect of this cannot be quantified reliably as we expect the
impact of the government's assistance to non-bank lenders and the
introduction of the furlough scheme to assist end borrowers are yet
unknown, but they are expected to reduce the potential expected
credit loss impact. The Group has performed a prudent financial
stress geared towards ensuring that it has sufficient cash
resources to weather the pandemic so that it can meet its
liabilities as they fall due particularly in relation to its debt
facility commitments and subsequently emerge in a strong enough
position to selectively re-invest the cash generated. The
conclusion of the stress testing is that the business has more than
adequate cash resources to meet its liabilities as they fall due.
Accordingly, the Directors are satisfied that the going concern
basis remains appropriate for the preparation of the financial
statements. The Group also has detailed policies and processes for
managing the risk, set out in the Strategic Report above.
Viability statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code, published by the Financial Reporting Council in
April 2016 (the "Code"), the Directors have assessed the prospects
of the Group over the three-year period to the AGM in 2023. The
Board believes this period to be appropriate taking into account
the current trading position and the potential impact of the
principal risks, in particular the effect of COVID-19, that could
affect the viability of the Group.
To prepare the viability statement the Board have considered the
prospects of the Group in light of its current position and the
potential impact of the health of the UK economy as a result of
COVID-19. The Directors have considered these in relation to the
Group's revenue and expenditure projections, working capital
requirements and the fact that the Group's investments do not
comprise readily realisable assets. The Board have considered each
of the Group's principal risks and uncertainties and mitigating
factors are detailed above.
Based on the Group's current position and the wider
macro-economic uncertainty surrounding COVID-19, analysis to assess
viability has focused on the risks in generating cashflows and
meeting the debt facility covenants in relation to both the new
refinanced Topco facility that was closed in May 2020 and the
existing Sting facility. To do this a series of projections have
been considered on the basis that the Investment Manager has
adopted a prudent approach with the focus on the existing portfolio
and ensuring cash collections remain robust as well not
re-investing the cash generated by the portfolio in new investments
until there is more visibility on the impact of the lockdown
restrictions on performance and a return to some level of normality
in the economy. With this there is also an expectation that we see
an increase in expected credit losses. Given the maturity date of
the debt facilities the Board have also projected the impact of
changing funding levels as well as funding costs taking into
account the possibility of an increase in funding costs as COVID-19
continues.
The analysis indicates that due to the stability and cash
generating nature of the portfolio the Group would be able to
withstand the impact of the risks identified. Based on the Group's
current position and the performance of the assets acquired the
principal risks that it faces and their potential impact on its
future development and prospects, the Directors have concluded that
there is a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the three-year period to the AGM in 2023.
Management and administration
Administrator
The Group's Administrator is Apex Fund Services (UK) Ltd (the
"Administrator"), a company authorised and regulated by the
Financial Conduct Authority ("FCA"). The Administrator provides the
day-to-day administration of the Group. The Administrator is
responsible for the Group's general administrative functions, such
as the calculation of the Net Asset Value and maintenance of the
Group's accounting records and ensures that the Group complies with
its continuing obligations as an investment trust.
Under the terms of the administration agreement, the
Administrator charges a fee for its fund administration services
equal to the greater of: (i) GBP5,305 per month (increased by 3 per
cent on 1 January in each year); and (ii) an amount equal to the
sum of 1/12 of 0.06 per cent of the portion of Net Asset Value up
to GBP150 million, and 1/12 of 0.05 per cent of the excess of Net
Asset Value above GBP150 million. The monthly fee is then reduced
by GBP2,083.33 to reflect the fact that the Administrator no longer
provides company secretarial services to the Group. The
Administrator is also entitled to reimbursement of all reasonable
out of pocket expenses incurred by it in connection with the
performance of its duties. The administration agreement can be
terminated by either party by providing 90 days' written
notice.
Company Secretary
Company Secretary Link Company Matters Limited (the "Company
Secretary") has been appointed as the company secretary of the
Group. The Company Secretary was appointed in September 2018. The
Company Secretary undertakes the general secretarial functions
required by the Companies Act and is responsible for the
maintenance of specified statutory registers of the Company. The
Company Secretary is entitled to a general annual fee of GBP54,180
(all fees excluding VAT). The Company Secretary shall also be
entitled to reimbursement of reasonable out of pocket expenses
incurred in connection with the performance of its duties (without
prior consent of the Company, but such expenses are subject to
limits).
Registrar
Computershare Investor Services plc has been appointed as the
Company's registrar to provide share registration services. Under
the terms of the Registrar Agreement, the Registrar is entitled to
an annual register maintenance fee from the Company equal to
GBP1.30 per Shareholder per annum or part thereof, subject to a
minimum of GBP3,800 per annum and a potential annual fee increase
capped by inflation.
Other activity beyond the agreed services will be charged for in
accordance with the Registrar's normal tariff as published from
time to time.
Investment Manager
The Investment Manager, a UK-based company authorised and
regulated by the FCA, has been appointed the Group's investment
manager and Alternative Investment Fund Manager ("AIFM") for the
purposes of the Alternative Investment Fund Managers Directive
("AIFMD"). The Investment Manager is responsible for the
discretionary management of the Group's assets and ensures that
these are valued appropriately in accordance with the relevant
regulations and guidance.
Under the terms of the management agreement, the Investment
Manager is entitled to a management fee and a performance fee
together with reimbursement of reasonable expenses incurred by it
in the performance of its duties. From the period from first
admission, the management fee payable was based on 1.0 per cent of
the Gross Asset Value (which includes only value attributable to
credit assets and equity assets held by the Group for investment
purposes). Once more than 80.0 per cent of the listing proceeds of
any placing are invested the management fee payable is based on 1.0
per cent of the Gross Assets. Further details on the management fee
and the performance fee can be found in Note 6 to the financial
statements. The management agreement can be terminated by either
party providing twelve months' written notice.
For as long as the Origination Partner is part of the same group
as the Investment Manager the fees payable to the Origination
Partner, which are calculated as a percentage of the purchase price
for each Credit Asset acquired by the Group from the Origination
Partner, shall be deducted from the management fee payable to the
Investment Manager. There was GBPnil payable to the Origination
Partner at 31 December 2019 and 2018.
Depositary
The Group's depositary is Indos Financial Limited (the
"Depositary"), a company authorised and regulated by the FCA. Under
the terms of the depositary services agreement the Depositary is
entitled to a periodic fee calculated as follows:
(A) Where NAV is less than or equal to GBP200 million, 0.02 per
cent of NAV per annum, subject to a minimum monthly fee of
GBP2,500; and
(B) Where NAV is greater than GBP200 million, 0.02 per cent of
NAV per annum in respect of the first GBP200 million of NAV
and:
i. 0.0175 per cent per annum of that part of NAV which is in
excess of GBP200 million but less than or equal to GBP400 million ;
plus
ii. 0.015 per cent per annum of that part of NAV which is in excess of GBP400 million.
The Depositary invoices the Group monthly in arrears in respect
of the periodic fee (together, if applicable, with any VAT
thereon), which shall be payable by the Group within 30 days of the
relevant invoice.
The Depositary is entitled to charge an additional fee where the
Group undergoes a lifecycle event (e.g. a reorganisation or a
distribution) which entails additional work for the Depositary.
Such a fee is agreed with the Group on a case by case basis.
All charges may be subject to change from time to time, with the
agreement of the Depositary and the Group. All charges are
exclusive of VAT, if applicable.
The Depositary is entitled to be reimbursed for certain expenses
properly incurred in performing or arranging for the performance of
functions conferred upon it under the agreement.
The Group may terminate the depositary services agreement for
convenience on nine months' written notice. If the Depositary
wishes to retire and stop providing the services under the
agreement, it must give the Group not less than nine months'
written notice of its wish to do so. To the extent that the Group
is required to have a depositary under applicable law, the
Depositary may not retire until a successor is appointed. The
depositary agreement may be terminated immediately by either the
Group or the Depositary on the occurrence of certain events,
including: (i) if the other party has committed a material and
continuing breach of the terms of the agreement; or (ii) in the
case of the other's insolvency.
Custodian
The Depositary has delegated its obligations in respect of the
safe keeping of the Group's financial instruments to Sparkasse Bank
Malta plc. The Depositary is primarily liable to the Group and
investors for losses of financial instruments held by the by the
Custodian, however, the Group and Investment Manager have permitted
the transfer of that obligation to the Custodian in compliance with
Articles 21(13) or 21(14) of the AIFMD. The Depositary has
transferred such obligation and therefore the Custodian, and not
the Depositary, will be liable to the Group for a loss of financial
instruments held in custody, but the Depositary must take
reasonable steps to pursue and enforce any associated claim on
behalf of the Group. No amount is payable by the Group to the
Custodian.
Corporate broker and financial adviser
Liberum Capital Limited ("Liberum"), a company authorised and
regulated in the United Kingdom by the FCA, has been appointed as
the Group's corporate broker and financial adviser.
Change of control
There are no agreements to which the Company is party that might
be affected by a change of control of the Company except for the
agreement in relation to the Company's debt facility. Pursuant to
the terms of that agreement, on a change of control of the Company,
the Company shall promptly notify the lender. The lender is not
obliged to fund a utilisation except in relation to a rollover loan
and if negotiations to continue the facility are not concluded
within 30 days, the liability may be repayable.
Subsequent events
Save as noted below, there have been no events to disclose since
the year end under review.
On 27 January 2020 Honeycomb Investment Trust plc repurchased
into treasury 2,200,000 Ordinary Shares at a price of 850 pence per
Ordinary Share. Following completion of the Buyback, the Company
has 39,449,919 Ordinary Shares in issue, of which 2,200,000
Ordinary Shares are held in treasury. The total number of voting
rights in the Company is therefore 37,249,919 Ordinary Shares.
On 27 March 2020, a dividend of 20.0 pence per ordinary share
was paid.
In March 2020, the World Health Organisation recognised an
outbreak of a new virus that causes coronavirus disease 2019
("COVID-19") as a pandemic. COVID-19 has caused disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets. There are no comparable
recent events which may provide guidance as to the effect of the
spread of COVID-19 and a potential pandemic, and, as a result, the
ultimate impact of the COVID-19 outbreak or a similar health
epidemic is highly uncertain and subject to change.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. The Investment Manager believes that the company
is well positioned to perform solidly throughout the crisis.
However, given the Group's UK focus, its performance is linked
to the health of the UK economy. We expect the Group could also
experience further impairments, particularly if economic
expectations deteriorate further from the base case. However, the
overall effect of this cannot be quantified reliably as we expect
the impact of the government's assistance schemes are yet unknown,
but they are expected to reduce the potential expected credit loss
impact. The government has also launched a number of initiatives
aimed at providing finance to SMEs. Two of our largest borrowers
are in the process of lending under the CBIL government guarantee
scheme which will also refinance part of their exposure with the
benefit of the government guarantee. The Investment Manager has
adopted a prudent approach with the focus on the existing portfolio
and ensuring cash collections remain robust as the appropriate
strategies are in place.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
The NAV for 31 March 2020 was released on 1 May 2020 and
included a GBP1.8 million provision arising from the change to the
economic scenarios due to the COVID-19 situation. This provision
was based on the data at the time and the assumptions will continue
to be updated as more information on the lockdown and development
of the pandemic continues.
In May 2020 the Company's main topco debt facility was
refinanced with the maturity extended to May 2021. This new
facility has a combination of a term loan and a revolving loan and
is secured on a diverse range of assets. The Group retains the
flexibility to refinance the facility.
As at 27 May 2020, the Company's latest published NAV per
Ordinary Share as at 31 March 2020 was 1,020.0 pence and the latest
share price was 740 pence per share, which was the closing price on
the 26 May 2020.
Donations
The Group made no political or charitable donations during the
year under review to organisations either within or outside the EU
(2018: None).
GREENHOUSE GAS EMISSIONS
The Group has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic Report
and Directors' Report) Regulations 2013, including those within its
underlying investment portfolio.
Future developments
Indications of likely future developments in the business of the
are discussed in more detail in the Chairman's Statement and the
Investment Manager's Report above.
Regulatory disclosures
The disclosures below are made in compliance with the
requirements of Listing Rule 9.8.4.
Listing Rule
======================== ======================================================
9.8.4 (1) - capitalised The Group has not capitalised any interest
interest in the year under review.
======================== ======================================================
9.8.4(2) - unaudited The Company publishes a monthly NAV statement.
financial information The Company published a supplementary prospectus
approved by the UK Listing Authority on 12
August 2019. The publication of the Supplementary
Prospectus is a regulatory requirement under
the Prospectus Rules and did not constitute
a profit forecast or profit estimate in accordance
with listing rule 9.2.18. The Company also
published its interim report and unaudited
financial statements for the period from 1
January 2019 to 30 June 2019.
======================== ======================================================
9.8.4 (4) - incentive The Group has no incentive schemes in operation.
schemes
======================== ======================================================
9.8.4 (5) and (6) No Director of the Company has waived or agreed
- waiver to waive any current or future emoluments from
the Group.
======================== ======================================================
9.8.4 (7), (8) and During the year under review, Honeycomb Investment
(9) Trust plc did not issue shares, however Sting
Funding Limited was incorporated and as such
issued share capital which Honeycomb Investment
Trust plc the sole owner of these shares.
======================== ======================================================
9.8.4 (8) and 9.8.4 During the year an unlisted subsidiary undertaking
(9) - relate to of the Group; Sting Funding Limited was incorporated
companies that are with Honeycomb Investment Trust plc owning
part of a group 100 per cent of the share capital.
of companies
======================== ======================================================
9.8.4 (10) - contract During the year under review, there were no
of significance contracts of significance subsisting to which
the Group is a party and in which a Director
of the Group is or was materially interested
or between the Group and a controlling shareholder.
======================== ======================================================
9.8.4 (11) The Company is not party to any contracts for
the provision of services to the Company by
a controlling shareholder.
======================== ======================================================
9.8.4 (12) and (13) During the year under review, there were no
- arrangements under which a shareholder has
waiving dividends waived or agreed to waive any dividends or
future dividends.
======================== ======================================================
9.8.4 (14) As set out in the Prospectus, the Company has
not voluntarily adopted Listing Rule 9.8.4(14).
======================== ======================================================
Corporate Governance Statement
The corporate governance statement explains how the Board has
sought to protect shareholders' interests by protecting and
enhancing shareholder value. Since the Company's listing, the
Financial Reporting Council's UK Corporate Governance Code (the
"Code") has been voluntarily followed by the Company. The Directors
are ultimately responsible for the stewardship of the Company and
this section explains how they have fulfilled their corporate
governance responsibilities. This corporate governance statement
forms part of the Directors' report.
As the Company's shares are not admitted to the UK Listing
Authority's Official List, the UK Listing Rules applicable to
closed-ended investment companies which are listed on the premium
listing segment of the UK Listing Authority do not apply to the
Company. However, as set out in the Prospectus, the Company has
voluntarily adopted certain key provisions of the UK Listing Rules.
Pursuant to the Listing Rules as voluntarily adopted by the
Company, the Company must "comply or explain" against each of the
provisions of the Code. The Board is committed to high standards of
corporate governance. The Listing Rules and the Disclosure Guidance
and Transparency Rules ("DTR") require the Board to disclose how it
has applied the principles of the UK Code, published by the
Financial Reporting Council ("FRC") in July 2018. A copy of the
Code is available from the website of the Financial Reporting
Council at www.frc.org.uk. The Association of Investment Companies
("AIC") has revised and published the AIC Code of Corporate
Governance (the "AIC Code") in February 2019. The AIC Code provides
a comprehensive guide to best practice in certain areas of
governance where the specific characteristics of investment trusts
suggest alternative approaches to those set out in the Code. The
Company is not a member of the AIC but has voluntarily adopted
reporting against the AIC Code to meet its obligations in relation
to the Code and the associated disclosure requirements of the DTR.
The AIC Code is available from the AIC's website at
www.theaic.co.uk .
The Board considers that voluntarily reporting against the
principles and recommendations of the AIC Code will provide better
information to shareholders.
Statement of compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Code, except as set out
below.
The Code includes provisions relating to:
-- The role of the Chief Executive;
-- Executive Directors' remuneration;
-- The Senior Independent Director;
-- The need for an internal audit function;
-- The Chairman's position as Chairman of the Remuneration Committee; and
-- The requirement for a separate Nomination Committee.
For the reasons set out in the Code, the Board considers the
role of the chief executive, Executive Director's remuneration and
the need for a Senior Independent Director as being not relevant to
the Company, being a small board with only three members and an
externally managed investment company. In particular, all of the
Company's day-to-day management and administrative functions are
outsourced to third parties. As a result, the Company has no
executive Directors, employees or internal operations. The Company
has therefore not reported further in respect of these
provisions.
The Board has decided that the systems and procedures employed
by the Investment Manager and the other third-party providers in
relation to the Company give sufficient assurance that a sound
system of internal control, which safeguards the Company's assets,
is maintained, without the need for an internal audit function. An
internal audit function specific to the Company is therefore
considered unnecessary. Although updates on the Investment
Manager's outsourced internal audit function are bought to the
Board on a quarterly basis.
The Board does not, at present, consider that separate
Nomination Committee would be appropriate at this stage in the
Company's life and given the Board's size, being three members in
total. Currently, decisions concerning the Board's nomination and
Board appraisals are undertaken by the Remuneration and Nomination
Committee.
The Company has not followed the recommendation of the AIC Code
that the Chairman of the Board should not chair the Remuneration
Committee. It was considered that Robert Sharpe was most suited to
the role of Chairman of the Committee due to the dual
responsibility of the Committee in remuneration and nomination
matters and his independence was not compromised as a result.
However, the committee composition, the need for a separate
Nomination Committee and an internal audit function will be
considered on an annual basis.
The Board of Directors
The Board consists of three Directors, all of whom are
independent non-executive Directors. Biographies of the Directors
are shown above and demonstrate the wide range of skills and
experience that they bring to the Board. The Directors possess
business and financial expertise relevant to the direction of the
Company and consider themselves to be committing sufficient time to
the Company's affairs.
External search consultancy services were used to aid
recruitment of Board members prior to the Company's listing and in
the most recent Director appointment. the Board engaged Lomond
Consulting, who had previously been engaged in the recruitment of
the Directors prior to the Company's IPO, to assist in the search.
The Board will consider using an external search consultancy to aid
in the recruitment of future Board members.
None of the Directors has a service contract with the Company,
nor are any such contracts proposed. Each Director has been
appointed pursuant to a letter of appointment entered into with the
Company in accordance with the Company's articles of association.
The Directors' appointment can be terminated in accordance with the
Company's articles of association and without compensation. There
are no agreements between the Company and any Director which
provide for compensation for loss of office in the event that there
is a change of control of the Company.
Copies of the letters of appointment are available on request
from the Company Secretary and will be available at the Company's
2020 AGM.
The Chairman, Robert Sharpe, is independent and considers
himself to have sufficient time to commit to the Company's affairs.
The Chairman's other commitments are detailed in his biography
above. The responsibilities of the Chairman have been agreed by the
Board and are available to view on the Company's website.
The Directors have determined that the size of the Company's
Board does not warrant the appointment of a senior independent
Director at this time. All the Directors are available to address
shareholder queries or engage in consultation as required. In the
absence of a Senior Independent Director, the Board has nominated
the Audit & Risk Committee Chairman to lead the evaluation of
the Chairman on behalf of the other Directors as part of the annual
evaluation process.
The operation of the Board
The Board of Directors meets at least four times a year and more
often if required. The table below sets out the Directors'
attendance at scheduled Board and Committee meetings during the
year under review.
Director Board Audit Committee Remuneration Management Engagement
and Nomination Committee
Committee
================ ===== =============== =============== =====================
Robert Sharpe 4 4 2 1
Jim Coyle 4 4 2 1
Ravi Takhar* 2 2 2 1
Richard Rowney* 2 2 - -
================ ===== =============== =============== =====================
* Following the introduction of the Director rotation policy by
the Remuneration and Nominations Committee Ravi Takhar resigned as
a Director on 6 June 2019 and Richard Rowney was appointed to the
Board on 1 July 2019.
No individuals other than the Committee or Board members are
entitled to attend the relevant meetings unless they have been
invited to attend by the Board or relevant Committee.
Directors are provided with a comprehensive set of papers for
each Board or Committee meeting, which equips them with sufficient
information to prepare for the meetings.
The Board has a formal schedule of matters specifically reserved
to it for decision and also has oversight of the Investment
Manager's operations and certain corporate actions to ensure
effective control of strategic, financial, operational and
compliance issues, which includes:
-- The Group's structure including share issues and setting a
discount/premium management programme;
-- Risk management;
-- Appointing the Investment Manager and other service providers and setting their fees;
-- Reviewing and approving Board changes;
-- Considering and authorising Board conflicts of interest;
-- Reviewing and approving the Group's audited annual financial
statements and half yearly financial statements including
accounting policies;
-- Reviewing Investment Manager's conflicts of interest and whistleblowing policies;
-- Reviewing and approving the Group's level of gearing;
-- The review and approval of terms of reference and membership of Board Committees; and
-- Reviewing and approving liability insurance.
There is a procedure in place for the Directors to take
independent professional advice at the expense of the Company.
Professional advice has been taken by the Directors during the year
under review in relation to the Power of Attorney granted to the
Investment Manager. This did not amend the scope of what the
Investment Manager was already set out to be able to do, in line
with the powers delegated by the Board to the Investment Manager
under the Investment Management Agreement.
The Company has taken out directors' and officers' liability
insurance, such cover to be maintained for the full term of each
Director's appointment.
Culture
During 2019, the Directors considered and defined the Company's
culture, purpose and values. By formally identifying the important
elements of the Company's culture, the Directors are able to assess
and monitor it and ensure that it remains well aligned with the
Company's purpose, values and strategy.
The Company has a well-defined and communicated purpose, as set
out in the investment objective above. The Directors have
considered the values to be transparency and clarity in its
reporting to shareholders, constructive challenge in maintaining a
strong relationship with the Investment Manager whilst preventing
the addition of avoidable risk in the Company's operations. In its
strategy, the Board have committed to work closely with and support
the Investment Manager to deliver the returns from opportunities in
specialty lending.
The culture of the Board is considered as part of the annual
performance evaluation and strategy review processes and the review
of the Investment Manager's engagement.
Independence of Directors
Each of the Directors was considered, on appointment, to be
independent of the Investment Manager and free from any business or
other relationship that could materially interfere with the
exercise of his independent judgement and remained so throughout
the year. There are no relationships or circumstances relating to
the Company that are likely to affect the judgement of any of the
Directors.
Care will be taken at all times to ensure that the Board is
composed of members who, as a whole, have the required knowledge,
abilities and experience to properly fulfil their role and are
sufficiently independent.
Directors' interests
No Director holds shares in the Company.
Board evaluation
The performance of the Board, its committees and Directors and
the independence of the Directors during 2019 was evaluated by
means of a Director self-assessment questionnaire. The results of
the evaluation process were reviewed by the Remuneration and
Nomination Committee in February 2020 and actions arising from the
evaluation process were agreed.
Any training needs identified as part of the Board evaluation
process will be added to the agenda of the next Board meeting.
Board training and induction.
The Company Secretary, the Board or the Investment Manager upon
request of the Board or any Director individually, will offer
induction training to new Directors about the Company, its key
service providers, the Directors' duties and obligations and other
matters as may be relevant from time to time.
The Board members are encouraged to keep up to date and attend
training courses on matters which are directly relevant to their
involvement with the Company.
Board appointment, election and tenure
The rules concerning the appointment and replacement of
Directors are contained in the Company's articles of association
and the Companies Act 2006.
None of the Directors consider length of service as an
impediment to independence or good judgement but, if they felt that
this had become the case, the relevant Director would stand
down.
The Chairman of the Company acts as Chairman of the Management
Engagement Committee. The Terms of Reference of all committees are
available from the Company Secretary's office and the Company's
website at www.honeycombplc.com .
The Board considers that all of the current Directors contribute
effectively to the operation of the Board and the strategy of the
Company. The Board has considered each Board member's independence
from the Company and Investment Manager. As such the Board believes
that it is in the best interests of shareholders that each of the
Directors be re-elected at the forthcoming AGM. The next AGM will
be held in June 2020.
Management agreement and continuing appointment
Details of the Investment Manager's agreement and fees are set
out in Note 6 to the financial statements.
The Board keeps the performance of the Investment Manager under
continual review. The Company's Management Engagement Committee
undertook its annual appraisal of the Investment Manager during the
year under review on 18 February 2020. The Management Engagement
Committee recommended to the Board that the appointments of all the
Company's third-party service providers continue. It was felt that
their appointment was in the best interests of the shareholders as
the Investment Manager had performed in line with expectations and
the Board is of the opinion that the continuing appointment of the
Investment Manager on the terms agreed is in the interests of the
Company's shareholders as a whole.
Conflicts of interest
The Company's articles of association provide that the Directors
may authorise any actual or potential conflict of interest that a
Director may have, with or without imposing any conditions that
they consider appropriate on the Director in question. Directors
are not able to vote in respect of any contract, arrangement or
transaction in which they have a material interest, and, in such
circumstances, they are not counted in the quorum at the relevant
Board meeting. A process has been developed to identify any of the
Directors' potential or actual conflicts of interest. This includes
declaring any potential new conflicts before the start of each
Board meeting. A schedule is maintained of each Director's
potential conflicts of interest.
Audit and Risk Committee
The Board has delegated certain responsibilities to its Audit
and Risk Committee. As there are only three members of the Board,
including the Chairman of the Board it is felt appropriate that all
Directors are members of the Audit Committee. The Board has
established formal terms of reference for the Audit and Risk
Committee which are available on the Group's website
www.honeycombplc.com or from the Company Secretary upon request. An
outline of the remit of the Audit and Risk Committee and its
activities during the year are set out below.
The Audit and Risk Committee is chaired by Jim Coyle and meets
on a quarterly basis. It is responsible for ensuring that the
financial performance of the Group is properly reported and
monitored and provides a forum through which the Group's external
auditors may report to the Board. It is also responsible for
reviewing the Group's internal control and risk management systems.
The Audit and Risk Committee reviews and recommends to the Board
the annual and half-yearly reports and financial statements,
financial announcements, internal control systems, risk metrics,
decisions requiring a significant element of judgement and
procedures and accounting policies of the Group.
Further details on the work of the Audit and Risk Committee can
be found in the report of the Audit and Risk Committee below.
Management Engagement Committee
The Management Engagement Committee meets once a year. Its
principle duties are to formally review the actions and judgements
of the Investment Manager and the terms of the Investment
Management Agreement. The Committee reports to the Board on its
proceedings after each meeting.
Company secretary
The Board has direct access to the advice and services of the
Company Secretary, which is responsible for ensuring that the Board
and Committee procedures are followed, and that applicable rules
and regulations are complied with. The Company Secretary is also
responsible for ensuring good information flows between all
parties.
Review of shareholder profile
The Board reviews reports provided by qualified independent
industry consultants and the Company's broker on the Company's
shareholder base and its underlying beneficial owners. The
Investment Manager and brokers disclose any concerns raised by
shareholders to the Board.
Relations with shareholders
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM and any general meetings of
shareholders.
The notice of the AGM, which is sent out at least 21 days in
advance of the AGM, sets out the business of the meeting and any
item not of an entirely routine nature is explained in the
Directors' report. Separate resolutions are proposed in respect of
each substantive issue.
Shareholders are encouraged to attend the AGM and to participate
in proceedings. The Chairman of the Board and the Directors,
together with representatives of the Investment Manager, will be
available to answer shareholders' questions at the AGM. Proxy
voting figures are available to shareholders at the AGM.
The Investment Manager holds regular discussions with major
shareholders, the feedback from which is provided to and greatly
valued by the Board. The Directors are available to enter into
dialogue and correspondence with shareholders regarding the
progress and performance of the Company. Further information about
the Company can be found on the Company's website
www.honeycombplc.com .
Internal control review
The Board has elected not to have an internal audit function as
the Company delegates its operations to third-party service
providers and does not employ any staff. Instead it has been agreed
that the Company will rely on the internal controls which exist
within its third-party providers.
The Administrator, Depositary and Investment Manager have
established internal control frameworks to provide reasonable
assurance on the effectiveness of the internal controls operated on
behalf of their clients. The Investment Manager, the Administrator,
the Depositary and the Company Secretary will report on any
breaches of law or regulation, if and when they arise, periodically
in scheduled Board reports. The Audit and Risk Committee considers
annually whether there is any need for an internal audit function,
and it has agreed that it is appropriate for the Company to rely on
the internal audit controls which exist within its third-party
providers. Updates on the Investment Manager's outsourced internal
audit function are bought to the Board on a quarterly basis.
The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by
the Group and for reviewing the effectiveness of the Group's system
of internal controls including financial, financial reporting,
operational, compliance and risk management. The Board has in place
a robust process to assess and monitor the risks of the Group. The
Board has reviewed the effectiveness of the Administrator and the
Investment Manager's systems of internal control and risk
management. During the year under review, the Board has not
identified any significant failings or weaknesses in the internal
control systems of its service providers.
The Group has established a risk matrix, consisting of the key
risks and controls in place to mitigate those risks. The Board
confirms that there is an ongoing process for identifying,
evaluating and managing the principal risks faced by the Group.
Details of the Group's risks can be found above, together with an
explanation of the controls that have been established to mitigate
each risk. The risk matrix provides a basis for the Audit and Risk
Committee and the Board to regularly monitor the effective
operation of the controls and to update the matrix when new risks
are identified.
The system of internal control and risk management is designed
to meet the Group's particular needs and the risks to which it is
exposed. The Board recognises that these control systems can only
be designed to manage, rather than eliminate, the risk of failure
to achieve business objectives and to provide reasonable, but not
absolute, assurance against material misstatement or loss.
Alternative Investment Fund Management Directive Disclosure
Quantitative remuneration disclosure
In accordance with 3.3.5 (5) of the FCA's Investment Funds
Sourcebook ("FUND") and in accordance with FCA Finalised guidance -
General guidance on the AIFM Remuneration Code (SYSC 19B) ("the
Guidelines"), dated January 2014, the total remuneration paid by
Pollen Street Capital Group companies which include the AIFM during
the year was GBP19.4 million, split GBP10.6 million into variable
and GBP8.8 million in fixed remuneration. During the year, the
average number of beneficiaries at the Group which includes the
AIFM were 77 and the aggregate amount of remuneration paid in
relation to the Senior Management of the firm was GBP6.4 million.
Fixed remuneration is amounts paid as salaries. Variable
remuneration is amounts paid under bonus arrangements and
distributions. The AIFM does not consider that any individual
member of staff of the AIFM has the ability to materially impact
the risk profile of the Company.
Other disclosures
The AIFMD requires that the AIFM ensures that certain other
matters are actioned and or reported to investors. Each of these is
set out below.
-- Provision and content of an Annual Report (FUND 3.3.2 and
3.3.5). The publication of the Annual Report and Financial
Statements of the Company satisfies these requirements.
-- Material changes of information. The AIFMD requires certain
information to be made available to investors in the Company before
they invest and requires that material changes to this information
be disclosed in the Annual Report.
Periodic disclosure (FUND 3.2.5 and 3.2.6)
There are no assets subject to special arrangements due to their
illiquid nature and no new arrangements for the managing of the
liquidity of the Company.
There is no change to the arrangements, as set out in the
Prospectus, for managing the Company's liquidity.
The current risk profile of the Company is set out in the
Strategic Report: Principal Risks and Uncertainties above and in
Note 13 to the financial statements, Financial Risk Management.
The Company is permitted to be leveraged and has borrowing
restrictions in place. In accordance with the Company's
prospectuses dated 18 December 2015, 25 May 2017 and 21 December
2018 (the "Prospectus"), the Company has a maximum limit of 100 per
cent of NAV, the actual leverage employed by the Company as a
percentage of NAV was 51.7 per cent. There have been no breaches of
the permitted leverage limits within the year and no changes to
maximum level of leverage employed by the Company.
The table below sets out the current maximum permitted and
actual leverage under the gross and commitment method in accordance
with Annex IV Article 8 of the AIFMD. This differs from the
Company's borrowing restriction, which is an absolute measure. The
gross and commitment method are ratios between the Company's gross
assets and NAV. The gross method represents the sum of the
Company's positions (total assets) after deducting cash balances.
The commitment method represents the sum of the Company's positions
without deducting cash balances. The Company is required to state
its maximum and actual leverage levels, calculated as prescribed by
the AIFMD as at 31 December 2019, and are as follows:
As a percentage Gross Commitment
of net asset method method
value
================ ======= ==========
Maximum l e
ve l of l e
verage 200% 200%
Le verage as
at 3 1 De c
em b er 2 0
19 151% 104%
================ ======= ==========
Other matters
The Investment Manager can confirm that the required reporting
to the FCA has been undertaken in accordance with FUND 3.4.
Approval
This Directors' Report was approved by the Board of Directors on
27 May 2020.
On behalf of the Board
Robert Sharpe
Chairman
27 May 2020
Report of the Audit and Risk Committee
As Chairman of the Audit and Risk Committee I am pleased to
present the Audit and Risk Committee report for the year ended 31
December 2019. Full details of the number of committee meetings and
attendance by individual committee members can be found above.
Membership of the Audit and Risk Committee
The Audit and Risk Committee comprises all Directors and is
chaired by Jim Coyle. Please see the members' biographies above.
All members of the Committee have recent and relevant financial
experience, as a result of their involvement in financial services
and other industries.
As Chairman of the Audit and Risk Committee, I can confirm that
I am a Chartered Accountant and I maintain my membership of the
Institute of Chartered Accountants of Scotland. As such, I have
relevant financial experience. The AIC Corporate Governance Code
stipulates that should the Chairman of the Board be a member of the
Audit and Risk Committee an explanation should be provided as to
why this is considered appropriate. Given the size of the Board and
Mr. Sharpe's relevant financial experience gained through his
involvement with other businesses during his career and given our
opinion that the Chairman is independent, it is considered
appropriate that he is a member of the Audit and Risk
Committee.
The role of the Audit and Risk Committee
The role of the Audit and Risk Committee is defined in its terms
of reference, which can be found on the Company's website at
www.honeycombplc.com. In summary, the role includes the
following:
-- To monitor the financial reporting process;
-- To review and monitor the integrity of the half-year and
annual financial statements and review and challenge where
necessary the accounting policies and judgements of the Investment
Manager and Administrator;
-- To review the adequacy and effectiveness of the Group's
internal financial and internal control and risk management
systems;
-- To make recommendations to the Board on the re-appointment or
removal of the external auditors and to approve its remuneration
and terms of engagement;
-- To review and monitor the external auditors' independence and objectivity; and
-- To review and consider on an annual basis the need for an internal audit function.
Matters considered during the year
The Audit and Risk Committee has met four times during the year
under review (please see above for member's attendance) and
considered the following items:
-- The Group's Audited Annual Report and Financial Statements
for the year ended 31 December 2019 and advised the Board
accordingly;
-- The Company's half-year financial statements for the period
ended 30 June 2019 and advised the Board accordingly;
-- The independence and re-appointment of the external auditor;
-- The audit plan for the Group's annual audit shared by the external auditors;
-- The policy on non-audit services;
-- Monitored the Investment Manager's impairment approach required by IFRS 9;
-- In order to support the Board's approval of the going concern
assessment and viability statement above as to the longer-term
viability of the Group, the Committee reviewed papers from the
Investment Manager supporting the going concern and the viability
statement;
-- The Company's dividend policy; and
-- The Investment Manager's whistleblowing policy.
The Audit and Risk Committee also reviewed the following
items:
-- Whether there was a requirement for an internal audit function;
-- The risk management report presented by the Investment
Manager along with the Group's risk appetite statement, risk matrix
and the internal controls implemented to manage those risks;
and
-- The appropriateness of the Group's accounting policies and
whether appropriate estimates and judgements have been made.
UK non-audit services
In relation to non-audit services, the Audit and Risk Committee
has reviewed and implemented a policy on the engagement of the
auditors to supply non-audit services and this is reviewed on an
annual basis. All requests or applications for other services to be
provided by the auditors over a threshold are submitted to the
Audit and Risk Committee and will include a description of the
services to be rendered and an anticipated cost. The Group's policy
has been updated to follows the requirements of the Financial
Reporting Council's Revised Ethical Standard for Auditors published
in December 2019 and which implemented the European Union's revised
Statutory Audit Directive (the revised Ethical Standard became
effective for periods commencing on or after 15 March 2020). The
policy specifies a number of prohibited services which it is not
permitted for the auditors to provide under the revised Ethical
Standard.
The auditors did not provide reporting accountant services
during 2019. During 2018, the auditors provided reporting
accountant services on the prospectus dated 21 December 2018 in
relation to the Company's subsequent further issuance of ordinary
shares. These non-audit fees amounted to GBP62,266.
The Audit and Risk Committee reviewed the level of non-audit
services and were satisfied that the auditors maintained their
independence.
Significant accounting matters
The Audit and Risk Committee met on 22 April 2020 to review the
report and financial statements for the year ended 31 December
2019. The Audit and Risk Committee considered the following
significant issues, including principal risks and uncertainties in
light of the Group's activities and issues communicated by the
Auditors during their audit, all of which were satisfactorily
addressed:
Issue considered How the issue was addressed
========================= ==================================================================
Risk of misappropriation T h e Audit and Risk Com mit t e e r e v ie w s
of assets and r e p o r t s fr o m it s s e r v i ce p r o v id
ownership of investments ers on k e y cont rols ove r the as sets o f the
Group. Any si g n ific ant i s s ues a re r e p
o rted to t he Bo ard by t he Investment M a nager
or t he C om p an y 's Depositary. T he Investment
M a nager h as p ut in p l ace proce du r es to
e n su re t h at i nve s t m e n ts c an on ly be
m ade to t he e xte nt t h at t he appropr iate
contractual and legal a rran g ements a re in place
to p r o t e c t t h e Group' s assets. The Company's
Depositary issues a quarterly report on the status
of the assets to the Directors for review.
========================= ================================================================
The risk that The Board regularly reviews income statements from
income is overstated, the Investment Manager, noting the consistency of
incomplete or approach with prior years. The Investment Manager
inaccurate through reviews income performance against budget on a monthly
failure to recognise basis and reviews its recognition policies for appropriateness
proper income and accuracy on a regular basis to ensure they meet
entitlements or the accounting policy set out in Note 1 to the financial
to apply the appropriate statements.
accounting treatment
for recognition
of income
========================= ================================================================
The risk of material The Audit and Risk Committee views credit provisioning
misstatement of as the key accounting estimate area for the Group.
expected credit As in previous years, it received presentations
losses under IFRS from the Investment Manager explaining key judgement
9 Financial instruments areas, such as, consistency of approach and the
Group's business mix. After challenging the Investment
Manager, the Committee concluded that the provisioning
approach and key judgements were reasonable. The
Investment Manager also reviews impairment performance
on a monthly basis and reviews its impairment policy
for appropriateness and accuracy on a regular basis
to ensure they meet the accounting policy set out
in Note 1 to the financial statements. As the Group
enters the 2020 financial year, the Committee has
continued to monitor this area closely given the
expected material impact of C OVID -19 on expected
credit losses. Expected credit losses are anticipated
to increase however this cannot be accurately quantified
as the effect and length of government measures
around lockdown, the government economic stimulus
and the resultant impact on underlying borrower's
ability to pay are currently all unknown. The Board
considers the emergence and spread of COVID-19 to
be a non-adjusting post balance sheet event.
========================= ================================================================
Going concern The Audit and Risk Committee reviewed a paper from
and viability the Investment Manager in support of the going concern
statement basis and the longer-term viability of the Group.
The Committee noted the stability of the Group's
business model, its successful track record, the
Group's three-year financial projections and the
results of internal stress testing in relation to
C OVID -19 and concluded this provided sufficient
evidence to support the Board's viability statement
set out above. The Committee will continue to monitor
this area closely given the expected material impact
of C OVID -19 on the profitability of the business
as the longer-term effects on the UK economy begin
to be seen.
========================= ================================================================
Fair, balanced On behalf of the Board, the Audit and Risk Committee
and understandable reviewed the financial statements as a whole in
order to assess whether they were fair, balanced
and understandable. The Committee discussed and
challenged the balance and fairness of the overall
report and ensured that appropriate disclosure was
made in relation to the impact of C OVID -19. The
Board considers the emergence and spread of COVID-19
to be a non-adjusting post balance sheet event,
however, has included detail on the effects of this
post year end. The Committee was satisfied that
the Annual Report could be regarded as fair, balanced
and understandable and proposed that the Board approve
the Annual Report in that respect.
========================= ================================================================
Retention of Investment T he Aud it and Risk Comm i ttee rece i v es a report
Trust Status from t he Investment Manager confirming if the Company
has remained compliant with the requirements to
maintain its Investment Trust status. HMRC approved
the investment status of the Company. The Directors
regularly review the investments and their mix to
ensure they remain diversified, its retained income
levels to ensure sufficient distributions are made
and the Company's shareholdings to determine if
the Company has become a close company.
========================= ================================================================
External auditors
The Group's external auditors, PricewaterhouseCoopers LLP
("PwC"), were appointed on 16 May 2016 and last re-appointed on 6
June 2019 at the Company's AGM. Under the Financial Reporting
Council's transitional arrangements, the Company is required to
re-tender, at the latest, by 2025. The Audit and Risk Committee
intends to re-tender within the timeframe set by the Financial
Reporting Council.
The individual at PwC who acts as the Group's appointed audit
partner is Mr. Richard McGuire. In accordance with UK legislation,
the audit partner must rotate at least every five years. As this is
Mr. McGuire's fourth year as audit partner, he will be due to
rotate out of this role during 2021 at the latest.
The audit and non-audit fees for the year under review can be
found in Note 7 to the financial statements.
The Audit and Risk Committee monitors the auditors' objectivity
and independence on an ongoing basis. In determining PwC's
independence, the Audit and Risk Committee has assessed all
relationships with PwC and received confirmation from PwC that it
is independent and that no issues of conflicts arose during the
year. The Audit and Risk Committee is therefore satisfied that PwC
is independent.
The Audit and Risk Committee monitors and reviews the
effectiveness of the external audit process on an annual basis and
makes recommendations to the Board on its re-appointment,
remuneration and terms of engagement of the auditors. The Audit and
Risk Committee has met with the audit partner and assessed PwC's
performance to date. I have met with Mr. McGuire separately to
discuss the Group's audit and other matters concerning the Group. I
can confirm that Mr. McGuire did not raise any issues of concern
during our meeting. The review has involved an examination of the
auditors' remuneration, the quality of its work including the
quality of the audit report, the quality of the audit partner and
audit team, the expertise of the audit firm and the resources
available to it, the identification of audit risk, the planning and
execution of the audit and the terms of engagement. Accordingly,
the Audit and Risk Committee has recommended to the Board that it
proposes to shareholders via an ordinary resolution that PwC be
re-appointed as auditors at the AGM. PwC has confirmed its
willingness to continue in office.
The Audit and Risk Committee has direct access to the Group's
auditors and provides a forum through which the auditor's report to
the Board. Representatives of PwC attend the Audit and Risk
Committee meetings at least twice annually.
Internal audit
The Audit and Risk Committee believes that the Group does not
require an internal audit function, principally because the Group
delegates its day-to-day operations to third parties, which are
monitored by the Audit and Risk Committee, and which provide
control reports on their operations at least annually. Updates on
the Investment Manager's outsourced internal audit function are
bought to the Board on a quarterly basis.
Approval
This Report was approved by the Audit and Risk Committee on 27
May 2020.
Jim Coyle
Chairman of the Audit and Risk Committee
27 May 2020
Directors' Remuneration Report
Statement from the Chairman
The Remuneration and Nomination Committee (the "Committee")
comprises all Directors and is chaired by Robert Sharpe. Please see
above for the member's biography's, and full details of the number
of committee meetings and attendance by individual committee
members can be found above.
I am pleased to present the Directors' remuneration report for
the year ended 31 December 2019, prepared in accordance with The
Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 and the Companies Act 2006. The
Group's auditors are required to verify certain information within
this report subject to statutory audit by the Companies Act 2006.
Where information set out below has been audited it is indicated as
such.
We are required to seek shareholder approval of the Directors'
remuneration policy at least every third year and the remuneration
report annually. Any changes to the Directors' remuneration policy
in the interim require shareholder approval.
Ordinary resolutions to approve the Directors' remuneration
policy and the Directors' remuneration report will be put to
shareholders at the 2020 AGM. The full text of the Directors'
remuneration policy is set out below, the Directors have made a
minor amendment to the policy to reflect the Directors' Succession
Policy adopted during 2019.
As at 31 December 2019, the Board comprised three non-executive
Directors, all of whom are independent of the Investment
Manager.
Given the size of the Board, and as the Company has no
employees, it is not considered appropriate for the Company to
establish a separate Nomination Committee.
It is the responsibility of the Committee to consider and
approve Directors' remuneration, review the structure, size and
composition of the Board, plan for adequate Board succession and
evaluate the balance of experience and diversity of the Board. At
the start of 2019 the Directors remuneration was set at a rate of
GBP45,000 per annum for the Chairman and GBP38,000 per annum for
the other Directors. A further GBP5,000 per annum was payable to
the Chairman of the Audit and Risk Committee. The Committee met on
21 February 2019 and considered the continued time commitment
required to carry out their duties and the development and growing
complexity of the business. The Committee recommended to the Board
an increase of the Board's fees by GBP3,000 for the Chairman and
GBP2,000 for all other members from 1 March 2019. The Directors
remuneration was therefore set at a rate of GBP48,000 per annum for
the Chairman and GBP40,000 per annum for the other Directors. A
further GBP5,000 per annum will be paid to the Chairman of the
Audit and Risk Committee. The Committee met on 18 February 2020 and
considered the continued time commitment required to carry out
their duties and recommended no change in Board salaries.
Many parts of The Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013 do not apply to
the Company as the Board is comprised entirely of non-executive
Directors and the Company has no employees. The Board has
considered and approved a formal policy for the approval of
Directors' expenses.
Directors' succession Policy
At the start of 2019, the Association of Investment Companies
(the "AIC") has published an updated AIC Code of Corporate
Governance. The Committee welcomed the AIC's approach to tenure of
chairs of investment companies which, recognising that the
circumstances of chairs of investment companies differed from other
companies, the AIC recommended that instead of adhering to a nine
year limit on chair tenure, the Boards could determine and disclose
their policy on the chair tenure instead. The Committee and then
the Board debated its approach to tenure and after careful
consideration, it adopted a policy on Directors' Succession. In
accordance with the policy, the Company put into effect an orderly
rotation of the Board which commenced at the 2019 AGM and will
subsequently occur every other year.
Directors' remuneration policy
The fees for the Board as a whole are limited to GBP250,000 per
annum in accordance with the Prospectus, divided between the
Directors as they may determine. Subject to this limit, the Board's
policy is that remuneration of non-executive Directors should
reflect the experience of each Board member and the time commitment
required by Board members to carry out their duties and is
determined with reference to the appointment of Directors of
similar investment companies. The level of remuneration has been
set with the aim of promoting the future success of the Group.
With this in mind the Board considers remuneration in order to
attract individuals of a calibre appropriate to promote the
long-term success of the Company and to reflect the specific
circumstances of the Company and its field of investment, the
duties and responsibilities of the Directors and the value and
amount of time commitment required of Directors to the Group's
affairs.
Due regard is taken of the Board's requirement to attract and
retain individuals with suitable knowledge and experience and the
role that individual Directors fulfil. There are no specific
performance-related conditions attached to the remuneration of the
Board and the Board members are not eligible for bonuses, pension
benefits, share options, long-term incentive schemes or other
non-cash benefits or taxable expenses. No other payments are made
to Directors other than reasonable out-of-pocket expenses which
have been incurred as a result of attending to the affairs of the
Company.
In addition to the Board's remuneration, Board members are
entitled to such fees as they may determine in respect of any extra
or special services performed by them, having been called upon to
do so. Such fees would only be incurred in exceptional
circumstances. An example of such a circumstance would be if the
Company was to undertake a corporate action, which would require
the Board to dedicate additional time to review associated
documents and to attend additional meetings. Such fees would be
determined at the Board's absolute discretion and would be set at a
similar rate to other comparable investment companies who have
undertaken equivalent activities. The fees would be set with the
Company's long-term success in mind and the interests of the
Company's members as a whole would be considered prior to the
setting of such fees.
The Directors are entitled to be paid all expenses properly
incurred by them in attending meetings with shareholders or other
Directors or otherwise in connection with the discharge of their
duties as Directors.
Shareholders have the opportunity to express their views in
respect of Directors' remuneration at the Company's AGM. The
Company has not sought shareholder views on its remuneration
policy. Any comment volunteered by shareholders on the remuneration
policy will be carefully considered and appropriate action taken.
No communications have been received from shareholders on the
Company's remuneration policy.
The Company's remuneration policy and its implementation are
reviewed by the Board as a whole on an annual basis. Reviews are
based on third parties' information on the fees of other similar
investment trusts.
None of the Directors has a service contract with the Company,
nor are any such contracts proposed. Instead, Directors are
appointed pursuant to a letter of appointment entered into with the
Company. There is no notice period specified in the letters of
appointment or Articles of Association for the removal of
Directors. Directors are not appointed for a specific term, subject
to any policy on tenure or orderly succession which may be adopted
by the Board from time to time. Copies of the Directors' letters of
appointment are available at each of the Company's AGMs and can be
obtained from the Company's registered office.
The Directors are not entitled to exit payments and are not
provided with any compensation for loss of office.
As with most investment trusts there is no Chief Executive
Officer and no employees. The Company's remuneration policy will
apply to new Board members, who will be paid the equivalent amount
of fees as current Board members holding similar roles.
Subject to shareholder approval, this policy will take effect
from the 2020 AGM.
The components of the remuneration package for non-executive
Directors, which are comprised in the Directors' remuneration
policy of the Company, are set out below with a description and
approach to determination:
Remuneration Type - Fixed Fees
The fees for the Board as a whole are limited to GBP250,000 per
annum in accordance with the Prospectus, divided between the Directors
as they may determine.
Annual fees are set to reflect the experience of each Board member
and the time commitment required by Board members to carry out their
duties and is determined with reference to the appointment of Directors
of similar investment companies.
Directors do not participate in discussions relating to their own
fee.
Remuneration Type - Additional Fees
Additional fees may be paid to any Director who fulfils the role
of Chairman, who chairs any committee of the Board or who is appointed
Senior Independent Director. Such fees will be set at a competitive
level to reflect experience and time commitment.
Board members are entitled to such fees as they may determine in
respect of any extra or special services performed by them, having
been called upon to do so. Such fees would be determined at the
Board's absolute discretion and would be set at a similar rate to
other comparable investment companies who have undertaken equivalent
activities.
Remuneration Type - Expenses Fees
The Directors are entitled to be paid all expenses properly incurred
by them in attending meetings with shareholders or other Directors
or otherwise in connection with the discharge of their duties as
Directors.
Remuneration Type - Other
Board members are not eligible for bonuses, pension benefits, share
options, long-term incentive schemes or other non-cash benefits
or taxable expenses.
Voting at Annual General Meeting
The Directors ' Remuneration Report for the year ended 31
December 2018 and the Directors ' Remuneration Policy were approved
by shareholders at the Annual General Meetings held on 6 June 2019
and 2 June 2017 respectively. The votes cast by proxy were as
follows:
Directors' Remuneration Report Directors' Remuneration Policy
========== ================================ ================================
Number % of Number % of votes
of Votes votes of Votes cast
cast
========== =================== =========== =============== ===============
For 35,323,936 100.00 17,226,166 100.00
Against - - - -
Total
votes
cast 35,323,936 100.00 17,226,166 100.00
Number - - - -
of votes
withheld
========== =================== =========== =============== ===============
The Directors' remuneration report, excluding the implementation
of the Directors' remuneration policy, is subject to an annual
advisory vote via an ordinary resolution. An advisory vote is a
non-binding 'advisory' resolution. In the event that shareholders
vote against the 'advisory' resolution, the Board will be required
to put its remuneration policy to shareholders for approval at the
next AGM, regardless of whether the remuneration policy was
approved by shareholders. The votes cast at the 2020 AGM on the
advisory resolutions will be disclosed in the remuneration report
for the year to 31 December 2020.
Directors' fees (audited)
Single total aggregate Directors' remuneration for the year
under review was GBP131,834 (2018: GBP126,000). The Directors who
served during the year under review received the following
emoluments:
Fixed Fees Variable Fees
paid during paid during
the the Taxable Non-taxable 31 December 31 December
Director year (1) year (1) benefits benefits 2019 2018
========= ============= ============== ========== ============ ============ ============
Robert GBP47,500 - - - GBP47,500 GBP45,000
Sharpe
(Chair)
========= ============= ============== ========== ============ ============ ============
Jim GBP44,667 - - - GBP44,667 GBP43,000
Coyle
========= ============= ============== ========== ============ ============ ============
Richard GBP20,000 - - - GBP20,000 -
Rowney
(2)
========= ============= ============== ========== ============ ============ ============
Ravi GBP19,667 - - - GBP19,667 GBP38,000
Takhar
(3)
========= ============= ============== ========== ============ ============ ============
Total GBP131,834 - - - GBP131,834 GBP126,000
========= ============= ============== ========== ============ ============ ============
(1) Fees paid to the Directors during the year under review does
not include any employment taxes or valid business expenses.
(2) Richard Rowney was appointed on 1 July 2019
(3) Ravi Thakar resigned from his position on 6 June 2019
No payments were made to past Directors for loss of office. In
the absence of further major increases in the workload and
responsibility involved, the Board does not expect fees to increase
significantly over the next three years. The overall remuneration
of each Director will continue to be monitored by the Board, taking
into account those matters referred to in the annual statement
above. The Company did not pay any other benefits including
bonuses, pension benefits, share options, long-term incentive
schemes or other non-cash benefits or taxable benefits.
The Company has not made any loans to the Directors, nor has it
ever provided any guarantees for the benefit of any Director or the
Directors collectively nor does it intend to.
Company Performance
The Board is responsible for the Company's investment strategy
and performance, although day-to-day management of the Company's
affairs, including the management of the Company's portfolio, has
been delegated to third-party service providers. An explanation of
the performance of the Company is given in the Chairman's statement
and Investment Manager's review above.
Expenditure by the Company on Directors' remuneration compared
with distributions to shareholders
The following table is provided in accordance with The Small and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 which sets out the relative importance
of spend on pay in respect of the year ended 31 December 2019. The
table shows the remuneration paid to Directors for the year under
review, compared to the distribution payments to shareholders.
31 December 31 December
2019 2018
GBP'000 GBP'000
=================== =========== ===========
Total remuneration
paid to Directors 132 126
Shareholder
distributions
- dividends
or share buybacks 31,560 27,750
=================== =========== ===========
Directors' interests (audited)
The Company does not have any requirement for any Director to
own shares in the Company.
As at 31 December 2019, the Directors do not hold shares in the
Company (31 December 2018: None).
There have been no changes to any holdings between 31 December
2019 and the date of this report.
Approval of the Annual Report on remuneration and the Directors'
remuneration policy
The Annual Report on remuneration was approved by the Board on
27 May 2020 and signed on behalf of the Board by:
Robert Sharpe
Chairman of the Remuneration and Nomination Committee
27 May 2020
Management Report and Statement of Directors'
Responsibilities
Listed companies are required by the Financial Conduct
Authority's Disclosure Guidance and Transparency Rules (the
"Rules") to include a management report in their annual Financial
statements. The information required to be in the management report
for the purpose of the Rules is included above in the Chairman's
Statement, the Investment Manager's Report, Top Ten Holdings,
Portfolio composition the Business Review and the Report of the
Directors. Therefore, a separate management report has not been
included.
Directors' Responsibilities Statement in Relation to the
Financial Statements
The Directors are responsible for preparing the Annual Report
and the Group and Company Financial statements in accordance with
applicable United Kingdom law and those International Financial
Reporting Standards ("IFRS") as adopted by the European Union. The
Directors are also required to prepare a Strategic Report,
Directors' Report, Directors' Remuneration Report and Corporate
Governance Statement. Under company law, the Directors must not
approve the Financial statements unless they are satisfied that
they present a fair, balanced and understandable report and provide
the information necessary for shareholders to assess the Company's
performance, business model and strategy. In preparing the
Financial statements, the Directors are required to:
-- select suitable accounting policies in accordance with IAS 8:
'Accounting Policies, Changes in Accounting Estimates and Errors'
and then apply them consistently;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company's financial position and financial
performance;
-- state that the Company has complied with IFRS, subject to any
material departures disclosed and explained in the financial
statements;
-- make judgements and estimates that are reasonable and prudent; and
-- prepare the financial statements on a going concern basis
unless it is inappropriate to assume that the Company will continue
in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the Financial position of the Group and Company and enable
them to ensure that the Group and Company's Financial statements
and Directors' Remuneration Report comply with the Companies Act
2006. They are also responsible for safeguarding the assets of the
Group and Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Responsibility Statements under the Disclosure Guidance and
Transparency Rules Each of the Directors confirms that to the best
of his or her knowledge:
-- the Group and Company's Financial statements, prepared in
accordance with IFRS as adopted by the European Union, give a true
and fair view of the assets, liabilities, Financial position and
profit or loss of the Company;
-- the Strategic Report (comprising the Chairman's Statement,
Manager's Report, top ten largest Holdings, Analysis of Investment
Portfolio by Sector and Business Model and Strategy) and the Report
of the Directors include a fair review of the development and
performance of the business and the position of the Company
together with a description of the principal risks and
uncertainties that it faces;
-- taken as a whole, the Annual Report and Financial statements
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy;
-- the Financial statements include details on related party transactions; and
-- having assessed the principal risks and other matters
discussed in connection with the Viability Statement, it is
appropriate to adopt the going concern basis in preparing the
Financial statements.
The Annual Report and Accounts were approved by the Board and
the above responsibility statement was signed on its behalf by:
Robert Sharpe
Chairman
27 May 2020
Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
For the year ended 31 For the year ended 31
December 2019 December 2018 (Restated)
Notes Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=== ========================== ======== ======== ======== ========= ======== ========
Income
Interest Income
on credit assets
at amortised cost 5 62,697 - 62,697 54,445 - 54,445
Income / (Loss)
on equity assets
at fair value
through profit
and loss - 30 30 - (750) (750)
Credit impairment
losses 11 (7,372) - (7,372) (7,467) - (7,467)
Third Party Servicing (3,739) - (3,739) (3,523) - (3,523)
=========================== ======== ======== ======== ========= ======== ========
Net operating
income/expense
before financing
and fund costs 51,586 30 51,616 43,455 (750) 42,705
Finance costs 12 (8,417) - (8,417) (5,429) - (5,429)
=========================== ======== ======== ======== ========= ======== ========
Net operating
income/expense
before fund costs 43,169 30 43,199 38,026 (750) 37,276
Management fee 6 (5,971) (95) (6,066) (4,907) (90) (4,997)
Performance fee 6 (3,468) - (3,468) (2,873) - (2,873)
Fund expenses 7 (2,454) - (2,454) (1,209) - (1,209)
Total operating
expenses (11,893) (95) (11,988) (8,989) (90) (9,079)
Profit / (loss)
before taxation 31,276 (65) 31,211 29,037 (840) 28,197
Tax expense 8 - - - - - -
Profit / (loss)
after taxation 31,276 (65) 31,211 29,037 (840) 28,197
=========================== ======== ======== ======== ========= ======== ========
Earnings per share
(basic and diluted) 9 79.3p (0.2)p 79.1p 79.6p (2.3)p 77.3p
=========================== ======== ======== ======== ========= ======== ========
The total column of this statement represents the Statement of
comprehensive income prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union. The supplementary revenue return and capital return columns
are both prepared under guidance issued by the Association of
Investment Companies ("AIC"). All items in the above statement
derive from continuing operations.
No operations were discontinued during the year.
The Company does not have any income or expense that is not
included in net profit for the year. Accordingly, the net profit
for the year is also the Total Comprehensive Income for the year,
as defined in IAS1 (revised). There is no other comprehensive
income for the year.
The notes below form an integral part of the financial
statements.
Consolidated Statement of Financial Position
As at 31 December 2019
Notes 31 December 31 December
2019 2018 GBP'000
GBP'000 (Restated)
====================================== ===== =========== =============
Non-current assets
Equity Investments held at fair
value through profit or loss 12 8,390 9,980
Credit Assets at amortised cost 11 580,998 576,530
Fixed assets 15 41 217
====================================== ===== =========== =============
589,429 586,727
Current assets
Cash and cash equivalents 15,154 5,559
Receivables 16 8,875 3,375
====================================== ===== =========== =============
24,029 8,934
Total assets 613,458 595,661
Current liabilities
Management fee payable 6 (511) (985)
Performance fee payable 6 (3,468) (2,873)
Other payables 17 (2,326) (1,830)
Interest bearing borrowings 18 (130,741) -
====================================== ===== =========== =============
(137,046) (5,688)
Total assets less current liabilities 476,412 589,973
Non-Current Liabilities
Interest bearing borrowings 18 (76,051) (189,263)
Net assets 400,361 400,710
====================================== ===== =========== =============
Shareholders' funds
Ordinary share capital 20 394 394
Share premium 299,599 299,599
Revenue reserves 5,270 4,934
Capital reserves (1,030) (965)
Special distributable reserves 21 96,128 96,748
====================================== ===== =========== =============
Total shareholders' funds 400,361 400,710
====================================== ===== =========== =============
Net asset value per share 24 1,014.9p 1,015.7p
====================================== ===== =========== =============
The notes below form an integral part of the financial
statements.
The financial statements were approved by the Board of Directors
of Honeycomb Investment Trust plc (a public limited company
incorporated in England and Wales with company number 09899024) and
authorised for issue on 27 May 2020.
They were signed on its behalf by:
Robert Sharpe, Chairman
Company Statement of Financial Position
As at 31 December 2019
Notes 31 December 31 December
2019 2018 GBP'000
GBP'000 (Restated)
====================================== ===== =========== =============
Non-current assets
Equity Investments held at fair
value through profit or loss 12 12,883 9,980
Credit Assets at amortised cost 11 580,998 576,530
Fixed assets 15 41 217
====================================== ===== =========== =============
593,922 586,727
Current assets
Cash and cash equivalents 13,251 5,559
Receivables 16 8,325 3,375
====================================== ===== =========== =============
21,576 8,934
Total assets 615,498 595,661
Current liabilities
Management fee payable 6 (511) (985)
Performance fee payable 6 (3,468) (2,873)
Other payables 17 (1,805) (1,830)
Interest bearing borrowings 18 (130,741) -
====================================== ===== =========== =============
(136,525) (5,688)
Total assets less current liabilities 478,973 589,973
Non-Current Liabilities
Deemed Loan 19 (78,612) -
Interest bearing borrowings 18 - (189,263)
Net assets 400,361 400,710
====================================== ===== =========== =============
Shareholders' funds
Ordinary share capital 20 394 394
Share premium 299,599 299,599
Revenue reserves 5,270 4,934
Capital reserves (1,030) (965)
Special distributable reserves 21 96,128 96,748
====================================== ===== =========== =============
Total shareholders' funds 400,361 400,710
====================================== ===== =========== =============
Net asset value per share 24 1,014.9p 1,015.7p
====================================== ===== =========== =============
Advantage has been taken of the exemption under section 408 of
the Companies Act 2006 and accordingly the Company has not
presented a Statement of Comprehensive Income for the Company
alone. The profit on ordinary activities after taxation of the
Company for the year ended 31 December 2019 was GBP31.2 million
(2018: GBP28.2 million).
The financial statements were approved by the Board of Directors
of Honeycomb Investment Trust plc (a public limited company
incorporated in England and Wales with company number 09899024) and
authorised for issue on 27 May 2020.
They were signed on its behalf by:
Robert Sharpe, Chairman
Consolidated Statement of Changes in Shareholders' Funds
For the year ended 31 December 2019
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
==================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 1 January
2019 394 299,599 4,934 (965) 96,748 400,710
==================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
issued
==================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
issue costs
==================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 31,276 (65) - 31,211
==================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (30,940) - (620) (31,560)
==================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 31
December 2019 394 299,599 5,270 (1,030) 96,128 400,361
==================== ======== ======== ========= ========= ============== ========
As at 31 December 2019 the Group had distributable reserves of
GBP100.37 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP5.27
million), realised capital reserves (-GBP1.03 million) and the
special distributable reserves (GBP96.13 million).
For the year ended 31 December 2018
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 1 January
2018 299 201,852 5,133 (125) 97,600 304,759
====================== ======== ======== ========= ========= ============== ========
Changes on initial
application of
IFRS 9 - - (2,338) - - (2,338)
====================== ======== ======== ========= ========= ============== ========
Restated balance
at 1 January 2018 299 201,852 2,795 (125) 97,600 302,421
====================== ======== ======== ========= ========= ============== ========
Ordinary shares
issued 95 99,905 - - - 100,000
====================== ======== ======== ========= ========= ============== ========
Ordinary shares
issue costs - (2,158) - - - (2,158)
====================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 29,037 (840) - 28,197
====================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (26,898) - (852) (27,750)
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 31 December
2018 394 299,599 4,934 (965) 96,748 400,710
====================== ======== ======== ========= ========= ============== ========
As at 31 December 2018 the Group had distributable reserves of
GBP100.72 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP4.93
million), realised capital reserves (-GBP0.97 million) and the
special distributable reserves (GBP96.75 million).
The notes below form an integral part of the financial
statements.
Company Statement of Changes in Shareholders' Funds
For the year ended 31 December 2019
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 1 January
2019 394 299,599 4,934 (965) 96,748 400,710
====================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
issued
====================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
issue costs
====================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 31,276 (65) - 31,211
====================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (30,940) - (620) (31,560)
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 31 December
2019 394 299,599 5,270 (1,030) 96,128 400,361
====================== ======== ======== ========= ========= ============== ========
As at 31 December 2019 the Company had distributable reserves of
GBP100.37 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP5.27
million), realised capital reserves (-GBP1.03 million) and the
special distributable reserves (GBP96.13 million).
For the year ended 31 December 2018
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 1 January
2018 299 201,852 5,133 (125) 97,600 304,759
====================== ======== ======== ========= ========= ============== ========
Changes on initial
application of
IFRS 9 - - (2,338) - - (2,338)
====================== ======== ======== ========= ========= ============== ========
Restated balance
at 1 January 2018 299 201,852 2,795 (125) 97,600 302,421
====================== ======== ======== ========= ========= ============== ========
Ordinary shares
issued 95 99,905 - - - 100,000
====================== ======== ======== ========= ========= ============== ========
Ordinary shares
issue costs - (2,158) - - - (2,158)
====================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 29,037 (840) - 28,197
====================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (26,898) - (852) (27,750)
====================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at 31 December
2018 394 299,599 4,934 (965) 96,748 400,710
====================== ======== ======== ========= ========= ============== ========
As at 31 December 2018 the Company had distributable reserves of
GBP100.72 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP4.93
million), realised capital reserves (-GBP0.97 million) and the
special distributable reserves (GBP96.75 million).
The notes below form an integral part of the financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2019
31 December 2019 31 December 2018
Notes GBP'000 GBP'000
================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 31,211 28,197
Adjustments for:
Changes on initial application
of IFRS 9 - (2,338)
Change in expected credit
loss 11 7,372 7,467
Net change in unrealised
(gains)/losses 12 (30) 750
Finance costs 8,418 5,429
Amortisation 15 176 275
(Increase) / Decrease in
receivables 16 (5,500) 102
Increase in payables 17 617 892
Net cash inflow from operating
activities 42,264 40,774
Cash flows from investing
activities:
Net (Purchase) of Investments
at amortised cost (11,840) (238,431)
(Purchase) of investments 12 (380) (3,000)
Sale of investments 12 2,000 3,497
Purchase of fixed assets 15 - (150)
Net cash (outflow) from investing
activities (10,220) (238,084)
Cash flows from financing
activities:
Proceeds from issue of ordinary
shares 19 - 100,000
Share issue costs - (2,158)
Interest bearing borrowings 18 272,463 366,900
Repayments of interest-bearing
borrowings 18 (255,517) (234,400)
Interest paid on financing
activities 18 (7,835) (5,453)
Dividends declared and paid 9 (31,560) (27,750)
Net cash (outflow) / inflow
from financing activities (22,449) 197,139
Net change in cash and cash
equivalents 9,595 (171)
Cash and cash equivalents
at the beginning of the year 5,559 5,730
================ ================
Net cash and cash equivalents 15,154 5,559
================================== ===== ================ ================
The notes below form an integral part of the financial
statements.
Company Statement of Cash Flows
For the year ended 31 December 2019
31 December 2019 31 December 2018
Notes GBP'000 GBP'000
================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 31,211 28,197
Adjustments for:
Changes on initial application
of IFRS 9 - (2,338)
Change in expected credit
loss 11 7,372 7,467
Net change in unrealised
(gains)/losses 12 (4,523) 750
Finance costs 7,449 5,429
Amortisation 15 176 275
(Increase) / Decrease in
receivables 16 (4,950) 102
Increase in payables 17 96 892
Net cash inflow from operating
activities 36,381 40,774
Cash flows from investing
activities:
Net (Purchase) of Investments
at amortised cost (11,840) (238,431)
(Purchase) of investments 12 (380) (3,000)
Sale of investments 12 2,000 3,497
Purchase of fixed assets 15 - (150)
(Purchase) / receipt from
deemed loans 78,613 -
Net cash (outflow) from investing
activities 68,393 (238,084)
Cash flows from financing
activities:
Proceeds from issue of ordinary
shares 19 - 100,000
Share issue costs - (2,158)
Interest bearing borrowings 18 191,500 366,900
Repayments of interest-bearing
borrowings 18 (250,500) (234,400)
Interest paid on financing
activities (6,972) (5,453)
Dividends declared and paid 9 (31,560) (27,750)
Net cash (outflow) / inflow
from financing activities (97,532) 197,139
Net change in cash and cash
equivalents 7,692 (171)
Cash and cash equivalents
at the beginning of the year 5,559 5,730
================ ================
Net cash and cash equivalents 13,251 5,559
================================== ===== ================ ================
The notes below form an integral part of the financial
statements.
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of accounting
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union ("EU"). They comprise standards and
interpretations approved by the International Accounting Standards
Board ("IASB") and International Financial Reporting Committee,
including interpretations issued by the IFRS Interpretations
Committee and interpretations issued by the International
Accounting Standard Committee ("IASC") that remain in effect, to
the extent they have been adopted by the EU.
The financial statements have been prepared in accordance with
the Companies Act 2006 as applicable to companies using IFRS.
The financial statements have been prepared on a going concern
basis and under the historic cost convention modified by the
revaluation of financial assets held at fair value through profit
and loss as applicable. The Directors consider that the Group has
adequate financial resources to enable it to continue operations
for a period of no less than 12 months from the reporting date.
Accordingly, the Directors believe that it is appropriate to
continue to adopt the going concern basis in preparing the
financial statements.
The principal accounting policies adopted by the Company and
Group are set out below. Where presentational guidance set out in
the Statement of Recommended Practice ("SORP") for investment
trusts issued by the Association of Investment Companies ("AIC") in
July 2018 is consistent with the requirements of IFRS, the
Directors have sought to prepare the financial statements on a
basis compliant with the recommendations of the SORP.
All values are rounded to the nearest thousand pounds unless
otherwise indicated.
Except for new accounting policies introduced by IFRS 9 the
accounting policies have been applied consistently year on
year.
Changes to Accounting Policies
At the date of authorisation of these financial statements, the
following standards and interpretations, which have not been
applied in these financial statements, were in issue but were not
yet effective (and in some cases, had not been adopted by the
European Union):
Accounting standards effective
IFRS 16 Leases
IFRS 16 establishes principles for the recognition, measurement,
presentation and disclosure of leases, with the objective of
ensuring that lessees and lessors provide relevant information that
faithfully represents those transactions. The standard provides a
single lessee accounting model, requiring lessees to recognise
assets and liabilities for all leases unless the lease term is 12
months or less or the underlying asset has a low value. Lessors
continue to classify leases as operating or finance, with IFRS 16's
approach to lessor accounting substantially unchanged from its
predecessor, IAS 17. IFRS 16 was issued in January 2016 and applies
to annual reporting periods beginning on or after 1 January
2019.
This standard and interpretations does not have a material
impact on the financial statements, given the nature of the Group's
business being that it has no leases.
Accounting standards issued but not yet effective
IFRS 17 Insurance Contract
IFRS 17 establishes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts.
The objective of IFRS 17 is to ensure that an entity provides
relevant information that faithfully represents those contracts.
This information gives a basis for users of financial statements to
assess the effect that insurance contracts have on the entity's
financial position, financial performance and cash flows. IFRS 17
was issued in May 2017 and applies to annual reporting periods
beginning on or after 1 January 2023.
The Directors do not anticipate that the adoption of this
standard and interpretations will have a material impact on the
financial statements, given the nature of the Group's business
being that it has no insurance contracts.
IFRS 3 Amendments regarding the definition of a business
The IASB has issued 'Definition of a Business (Amendments to
IFRS 3)' aimed at resolving the difficulties that arise when an
entity determines whether it has acquired a business or a group of
assets. The amendments are effective for business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 January
2020.
Other future developments include the IASB undertaking a
comprehensive review of existing IFRSs. The Group will consider the
financial impact of these new standards as they are finalised.
Accounting Policies
Consolidation
Subsidiaries are investees controlled by the Company. The
Company controls an investee if it is exposed to, or has the rights
to, variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the
investee. The Company reassesses whether it has control if there
are changes to one or more elements of control. Subsidiaries are
valued at fair value. The Company does not consider itself to be an
investment entity for the purposes of IFRS 10, as it does not hold
substantially all of its investments at fair value. Consequently,
it consolidates its subsidiaries rather than holding at fair value
through profit or loss. At the Company level, the Company's
investments in its subsidiaries are measured at fair value which is
determined with reference to the underlying net asset value of the
subsidiary.
On 20 June 2019 the Group incorporated Sting Funding Limited
("Sting"), a limited Company incorporated under the law of England
and Wales. Sting became active on 28 August 2019 when it drew down
on a debt facility backed by commercial and second charge
residential mortgages. The company is registered at 35 Great St.
Helen's, London, United Kingdom, EC3A 6AP. The Group is considered
to control Sting through holding 100 per cent of the issued shares.
As a result, the financial statements for the year ended 31
December 2019 are prepared on a consolidated basis.
Due to the nature of Sting, whereby the credit facility is
guaranteed by the investments within Sting this constitutes as a
restriction on the Group's ability to access or use the assets and
settle the liabilities of the Group. There is a restricted ability
on the Group to transfer cash or other assets from Sting to the
Group.
As at 31 December 2018 the Company did not control a
subsidiary.
In the consolidated financial statements, intra-group balances
and transactions, and any unrealised income and expenses arising
from intra-group transactions, are eliminated in preparing
consolidated financial statements.
All entities within the Group have co-terminus reporting
dates.
Foreign Currency
The financial statements are prepared in Pounds Sterling because
that is the currency of all of the transactions during the year, so
has been selected as the presentational currency.
The primary objective of the Group is to generate returns in
Pounds Sterling, its capital-raising currency. The liquidity of the
Group is managed on a day-to-day basis in Pounds Sterling as the
Group's performance is evaluated in that currency. Therefore, the
Directors consider Pounds Sterling as the currency that most
faithfully represents the economic effects of the underlying
transactions, events and conditions and is therefore the functional
currency.
Transactions involving foreign currencies are converted at the
exchange rate ruling at the date of the transaction. Foreign
currency monetary assets and liabilities are translated into Pounds
Sterling at the exchange rate ruling on the year-end date. Foreign
exchange differences arising on translation would be recognised in
the Statement of Comprehensive Income.
Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of
Comprehensive Income between items of a revenue and capital nature
has been presented alongside the Statement of Comprehensive
Income.
In respect of the analysis between revenue and capital items
presented within the Statement of Comprehensive Income, all
expenses and finance costs, which are accounted for on an accrual's
basis, have been presented as revenue items except those items
listed below:
-- Expenses are allocated to capital where a direct connection
with the maintenance or enhancement of the value of the investments
can be demonstrated; and
-- Expenses which are incidental to the disposal of an
investment are deducted from the disposal proceeds of the
investment.
The following are presented as capital items:
-- Gains and losses on the realisation of investments;
-- Increases and decreases in the valuation of investments held at the 31 December 2019;
-- Realised and unrealised gains and losses on transactions
undertaken to hedge an exposure of a capital nature;
-- Realised and unrealised exchange differences of a capital nature; and
-- Expenses, together with the related taxation effect,
allocated to capital in accordance with the above policies.
Income
Interest from loans are recognised in the Statement of
Comprehensive Income for all instruments measured at amortised cost
using the effective interest rate method ("EIRM").
The EIRM is a method of calculating the amortised cost of a
financial asset or financial liability and of allocating the
interest income or interest expense over the relevant period. The
effective interest rate ("EIR") is the rate that exactly discounts
estimated future cash flows through the expected life of the
financial instrument or, when appropriate, a shorter period to the
net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument, for
example prepayment options, but does not consider future credit
losses. The calculation includes all fees paid or received between
parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts.
Fees and commissions which are not considered integral to the
EIRM and deposit interest income are recognised on an accruals
basis when the service has been provided or received.
Dividend income from investments is recognised when the Group's
right to receive payment has been established, normally the
ex-dividend date.
Expenses
All expenses are accounted for on the accrual's basis. In
respect of the analysis between revenue and capital items presented
within the Statement of Comprehensive Income, all expenses have
been presented as revenue items except as follows:
-- Transaction costs which are incurred on the purchases or
sales of investments designated as fair value through profit or
loss are expensed to capital in the Statement of Comprehensive
Income; and
-- Expenses are split and presented partly as capital items
where a connection with the maintenance or enhancement of the value
of the investments held can be demonstrated and, accordingly, the
management fee for the financial year has been allocated 98.2 per
cent to revenue and 1.8 per cent to capital (being the ratio of
Credit Assets to Equity Assets at the financial year-end), in order
to reflect the Directors' long-term view of the nature of the
expected investment returns of the Group.
Finance costs
Finance costs are accrued on the effective interest rate basis.
Since these costs are considered to be an indirect cost of
maintaining the value of investments they are allocated in full to
revenue.
Shares
Ordinary and treasury shares are classified as equity. The costs
of issuing or acquiring equity are recognised in equity (net of any
related income tax benefit), as a reduction of equity on the
condition that these are incremental costs directly attributable to
the equity transaction that otherwise would have been avoided.
The costs of an equity transaction that is abandoned are
recognised as an expense. Those costs might include registration
and other regulatory fees, legal fees, accounting and other
professional advisers, printing costs and stamp duties.
Treasury shares have no entitlements to vote and are held
directly by the Company.
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax. The tax currently payable is based on the taxable
profit for the year. The taxable profit differs from profit before
tax as reported in the Statement of Comprehensive Income because it
excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable
or deductible. The Group's liability for current tax is calculated
using a blended rate as applicable throughout the year.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the Statement
of Comprehensive Income is the 'marginal basis'. Under this basis,
if taxable income is capable of being entirely offset by expenses
in the revenue column of the statement of comprehensive income,
then no tax relief is transferred to the capital return column.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit and is accounted for using the
Statement of Financial Position liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised. Deferred tax is charged or credited in the revenue return
column of the Statement of comprehensive income, except when it
relates to items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.
Investment trusts which have approval under Section 1158 of the
Corporation Tax Act 2010 are not liable for taxation on capital
gains. The Company has been approved as an Investment Trust by
HMRC.
Irrecoverable withholding tax is recognised on any overseas
dividends on an accruals basis using the applicable rate for the
country of origin.
Investments at amortised cost
Loans are initially recognised at a carrying value equivalent to
the funds advanced to the borrower plus the costs of acquisition
such as broker and packaging fees. After initial recognition loans
are subsequently measured at amortised cost using the effective
EIRM less impairment provisions (see Note 11 to the financial
statements).
Investments
All investments held by the Group have been designated at fair
value through profit or loss ("FVTPL") but are also described in
these financial statements as investments held at fair value and
are valued in accordance with the International Private Equity and
Venture Capital Valuation Guidelines ("IPEVCV") effective 1 January
2019 as recommended by the British Private Equity and Venture
Capital Association.
Purchases and sales of unquoted investments are recognised when
the contract for acquisition or sale becomes unconditional.
Fixed assets
Fixed assets are shown at cost less accumulated depreciation.
Depreciation is calculated by the Group on a straight-line basis by
reference to the original cost, estimated useful life and residual
value. Cost includes the original purchase price of the asset and
the costs attributable to bringing the asset to its working
condition for its intended use. The period of estimated useful life
for this purpose is one to three years. Residual values are assumed
to be nil.
Receivables
Receivables do not carry any interest and are short term in
nature. They are initially stated at their nominal value and
reduced by appropriate allowances for expected credit losses (if
any). Given their short-term nature a lifetime ECL is not deemed
necessary as expected life is less than a month.
Cash and cash equivalents
Cash and cash equivalents (which are presented as a single class
of asset on the Statement of Financial Position) comprise cash at
bank and in hand and deposits with an original maturity of three
months or less. The carrying value of these assets approximates
their fair value.
Financial liabilities
Financial liabilities are classified according to the substance
of the contractual arrangements entered into.
Payables
Payables are non-interest bearing. They are initially stated at
their nominal value.
Interest bearing borrowings
Interest bearing borrowings are initially recognised at a
carrying value equivalent to the proceeds received net of issue
costs associated with the borrowings. After initial recognition,
interest bearing borrowings are subsequently measured at amortised
cost using the effective interest rate method.
Dividends
Interim dividends to shareholders are recognised in the year of
the ex-dividend date.
Associates
Associates are entities over which the Company has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 per cent and 50 per cent of the voting
rights.
No associates are presented on the Statement of Financial
Position as the Group elects to hold such investments at fair value
through profit and loss. This treatment is permitted by IAS 28
Investment in Associates and Joint Ventures, which permits
investments held by entities that are venture capital
organisations, mutual funds or similar entities to be excluded from
its measurement methodology requirements where those investments
are designated, upon initial recognition, as at fair value through
profit or loss and accounted for in accordance with IFRS 9. Changes
in fair value of associates are recognised in the Statement of
Comprehensive Income in the period in which the change occurs.
The disclosures required by Section 409 of the Companies Act
2006 for associated undertakings are included in Note 23 to the
financial statements.
Classification and measurement
Financial assets and financial liabilities are recognised in the
Statement of Financial Position when the Group becomes a party to
the contractual provisions of the instrument. The Group shall
offset financial assets and financial liabilities if it has a
legally enforceable right to set off the recognised amounts and
interests and intends to settle on a net basis. Financial assets
and liabilities are derecognised when the Group settles its
obligations relating to the instrument.
IFRS 9 contains a classification and measurement approach for
debt instruments that reflects the business model in which assets
are managed and their cash flow characteristics. This is a
principle-based approach and applies one classification approach
for all types of debt instruments. For debt instruments two
criteria are used to determine how financial assets should be
classified and measured:
-- The entity's business model (i.e. how an entity manages its
debt Instruments in order to generate cash flows by collecting
contractual cash flows, selling financial assets or both); and
-- The contractual cash flow characteristics of the financial
asset (i.e. whether the contractual cash flows are solely payments
of principal and interest).
A debt instrument is measured at amortised cost if it meets both
of the following conditions and is not designated as at fair value
through profit and loss ("FVTPL"): (a) it is held within a business
model whose objective is to hold assets to collect contractual cash
flows; and (b) its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on
the principal amount outstanding.
A debt instrument is measured at fair value through other
comprehensive income ("FVOCI") if it meets both of the following
conditions and is not designated as at FVTPL:
(a) it is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets; and
(b) its contractual terms give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding.
Movements in the carrying amount are taken through the Other
Comprehensive Income ("OCI"), except for the recognition of
expected credit losses, interest revenue and foreign exchange gains
and losses on the investments at amortised cost which is recognised
in the Consolidated Statement of Comprehensive Income. When the
financial asset is derecognised, the cumulative gain or loss
previously recognised in OCI is reclassified from equity to the
Consolidated Statement of Comprehensive Income and recognised in
'Income'. Interest income from these financial assets in included
in 'Income' using the EIRM.
Equity instruments are measured at FVTPL, unless they are not
held for trading purposes, in which case an irrevocable election
can be made on initial recognition to measure them at FVOCI with no
subsequent reclassification to profit or loss. This election is
made on an investment by investment basis.
All financial assets not classified as measured at amortised
cost or FVOCI as described above are measured at FVTPL. All equity
positions are measured at FVTPL. Financial assets measured at FVTPL
are recognised in the balance sheet at their fair value. Fair value
gains and losses together with interest coupons and dividend income
are recognised in the income statement within net trading income in
the period in which they occur. The fair values of assets and
liabilities traded in active markets are based on current bid and
offer prices respectively. If the market is not active the Group
establishes a fair value by using valuation techniques. In
addition, on initial recognition the Group may irrevocably
designate a financial asset that otherwise meets the requirements
to be measured at amortised cost or at FVOCI as FVTPL if doing so
eliminates or significantly reduces an accounting mismatch that
would otherwise arise.
Business model assessment
The Group assesses the objective of the business model in which
a financial asset is held at a portfolio level in order to generate
cash flows because this best reflects the way the business is
managed, and information is provided to the Investment Manager.
That is, whether the Group's objective is solely to collect the
contractual cash flows from the assets or is to collect both the
contractual cash flows and cash flows arising from the sale of
assets. If neither of these are applicable, then the financial
assets are classified as part of the other business model and
measured at FVTPL.
The information that is considered includes:
-- The stated policies and objectives for the portfolio and the
operation of those policies in practice, including whether the
strategy focuses on earning contractual interest revenue,
maintaining a particular interest rate profile, matching duration
of the financial assets to the duration of the liabilities that are
funding those assets or realising cash flows through the sale of
assets;
-- Past experience on how the cash flows for these assets were collected;
-- How the performance of the portfolio is evaluated and reported to the Investment Manager;
-- The risks that affect the performance of the business model
(and the financial assets held within that business model) and how
those risks are managed; and
-- The frequency, volume and timing of sales in prior periods,
the reasons for such sales and expectations about future sales
activity. However, information about sales activity is not
considered in isolation, but as part of an overall assessment of
how the Investment Manager's stated objective for managing the
financial assets is achieved and how cashflows are realised.
Assessment whether contractual cash flows are solely payments of
principal and interest
For the purposes of this assessment, 'principal' is defined as
the fair value of the financial asset on initial recognition.
'Interest' is defined as consideration for the time value of money,
for the credit risk associated with the principal amount
outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely
payments of principal and interest, the contractual terms of the
instrument are considered. This includes assessing whether the
financial asset contains a contractual term that could change the
timing or amount of contractual cash flows such that it would not
meet this condition. In making the assessment the following
features are considered:
-- Contingent events that would change the amount and timing of cash flows;
-- Leverage features;
-- Prepayment and extension terms;
-- Terms that limit the Group's claim to cash flows from
specified assets, e.g. non-recourse asset arrangements; and
-- Features that modify consideration for the time value of
money, e.g. periodic reset of interest rates.
Deemed loans
The deemed loans are a non-derivative financial liability with
fixed or determinable repayments that are not quoted in an active
market. Deemed loans in relation to the Company relate to loans
originated by the Company and subsequently securitised in a special
purpose entity to reduce the cost of borrowing, in this case Sting
Funding Limited. Although the loans are no longer legally owned by
the Company, the Company maintains the economic risks and rewards
of the underlying assets and therefore does not meet the criteria
to derecognise. Derecognition cannot be achieved by merely
transferring the legal title of a financial asset to another party.
The substance of the arrangement must be assessed in order to
determine whether an entity has transferred the economic exposure
associated with the rights inherent in the asset.
Loans and related transaction costs are measured at initial
recognition at fair value and are subsequently measured at
amortised cost using the EIRM. International accounting standards
("IAS") makes it clear that assets should only appear on one
statement of financial position. IFRS require a reporting entity,
as part of the derecognition assessment, to consider whether the
transfer includes a transfer to a consolidated subsidiary.
Derecognition cannot be achieved by merely transferring the legal
title to a financial asset to another party. The substance of the
arrangement must be assessed in order to determine whether an
entity has transferred the economic exposure associated with the
rights inherent in the asset (i.e., its risks and rewards) and, in
some cases, control of those rights.
In the case of the Company, it has not met the requirements of
derecognition in relation to the deemed loans given the economic
exposure associated with the rights inherent in the assets (i.e.,
its risks and rewards), have been retained. As such the Company
fails to meet the requirements for derecognition and continues to
recognise the financial assets and as such has a deemed loans
liability to the to the relevant special purpose entity. At a
consolidated Group level, the deemed liability is eliminated.
Equity instruments
Equity instruments are instruments that meet the definition of
equity from the issuer's perspective; that is, instruments that do
not contain a contractual obligation to pay and that evidence a
residual interest in the issuer's net assets. Examples of equity
instruments include basic ordinary shares.
The Group subsequently measures all equity investments at FVTPL
Gains and losses on equity investments at FVTPL are included in the
'Income' line in the Statement of Comprehensive Income.
Expected Credit loss allowance for financial assets measured at
amortised cost
The impairment charge in the income statement includes the
change in expected credit losses which are recognised for loans and
advances to customers, other financial assets held at amortised
cost and certain loan commitments.
IFRS 9 applies a single impairment model to all financial
instruments subject to impairment testing. Impairment losses are
recognised on initial recognition, and at each subsequent reporting
period, even if the loss has not yet been incurred. In addition to
past events and current conditions, reasonable and supportable
forecasts affecting collectability are also considered when
determining the amount of impairment in accordance with IFRS 9.
Under IFRS 9 expected credit loss model expected credit losses are
recognised at each reporting period, even if no actual loss events
have taken place. In addition to past events and current
conditions, reasonable and supportable forward-looking information
that is available without undue cost or effort is considered in
determining impairment, with the model applied to all financial
instruments subject to impairment testing.
At initial recognition, allowance is made for expected credit
losses resulting from default events that are possible within the
next 12 months (12-month expected credit losses). In the event of a
significant increase in credit risk, allowance (or provision) is
made for expected credit losses resulting from all possible default
events over the expected life of the financial instrument (lifetime
expected credit losses). Financial assets where 12-month expected
credit losses are recognised are considered to be Stage 1;
financial assets which are considered to have experienced a
significant increase in credit risk are in Stage 2; and financial
assets which have defaulted or are otherwise considered to be
credit impaired are allocated to Stage 3. Stage 2 and Stage 3 are
based on lifetime expected credit losses.
The measurement of ECLs is primarily based on the product of the
instrument's probability of default ("PD"), loss given default
("LGD"), and exposure at default ("EAD"), taking into account the
value of any collateral held or other mitigants of loss and
including the impact of discounting using the effective interest
rate.
-- The PD represents the likelihood of a borrower defaulting on
its financial obligation, either over the next 12 months ("12M
PD"), or over the remaining lifetime ("Lifetime PD") of the
obligation.
-- EAD is based on the amounts the Group expects to be owed at
the time of default, over the next 12 months ("12M EAD") or over
the remaining lifetime ("Lifetime EAD"). For example, for a
revolving commitment, the Group includes the current drawn balance
plus any further amount that is expected to be drawn up to the
current contractual limit by the time of default, should it occur.
The EAD is discounted back to the reporting date using the
effective interest rate ("EIR") determined at initial
recognition.
-- LGD represents the Group's expectation of the extent of loss
on a defaulted exposure. LGD varies by type of counterparty, type
and seniority of claim and availability of collateral or other
credit support. LGD is expressed as a percentage loss per unit of
exposure at the time of default (EAD). LGD is calculated on a
12-month or lifetime basis, where 12-month LGD is the percentage of
loss expected to be made if the default occurs in the next 12
months and Lifetime LGD is the percentage of loss expected to be
made if the default occurs over the remaining expected lifetime of
the loan.
The estimated credit loss ("ECL") is determined by estimating
the PD, LGD, and EAD for each individual exposure or collective
segment. These three components are multiplied together and
adjusted for the likelihood of survival (i.e. the exposure has not
prepaid or defaulted in an earlier month). This effectively
calculates an ECL, which is then discounted back to the reporting
date and summed. The discount rate used in the ECL calculation is
the original EIR or an approximation thereof. The Lifetime PD is
developed by applying a maturity profile to the current 12M PD. The
maturity profile looks at how defaults develop on a portfolio from
the point of initial recognition throughout the lifetime of the
loans. The maturity profile is based on historical observed data
and is assumed to be the same across all assets within a portfolio
and credit grade band where supported by historical analysis. The
12-month and lifetime EADs are determined based on the expected
payment profile, which varies by product type.
-- For amortising products and bullet repayment loans, this is
based on the contractual repayments owed by the borrower over a 12
month or lifetime basis. This is also adjusted for any expected
overpayments made by a borrower. Early repayment/refinance
assumptions are also incorporated into the calculation.
-- For revolving products, the exposure at default is predicted
by taking current drawn balance and adding a "credit conversion
factor" which allows for the expected drawdown of the remaining
limit by the time of default. These assumptions vary by product
type and current limit utilisation band, based on analysis of the
Company's recent default data.
The 12-month and lifetime LGDs are determined based on the
factors which impact the recoveries made post default. These vary
by product type.
-- For secured products, this is primarily based on collateral
type and projected collateral values, historical discounts to
market/book values due to forced sales, time to repossession and
recovery costs observed.
-- For unsecured products, LGD's are typically set at product
level due to the limited differentiation in recoveries achieved
across different borrowers. These LGD's are influenced by
collection strategies, including contracted debt sales and
price.
The main difference between Stage 1 and Stage 2 is the
respective PD horizon. Stage 1 estimates use a maximum of a
12-month PD, while Stage 2 estimates use a lifetime PD. The main
difference between Stage 2 and Stage 3 is Stage 3 is effectively
the point at which there has been a default event. For financial
assets in stage 3, entities continue to recognise lifetime ECL but
now recognise interest income on a net basis. This means that
interest income is calculated based on the gross carrying amount of
the financial asset less ECL. Stage 3 estimates continue to
leverage existing processes for estimating losses on impaired
loans, however, these processes are updated to reflect the
requirements of IFRS 9, including the requirement to consider
multiple forward-looking scenarios using independent third-party
economic information.
Movements between Stage 1 and Stage 2 are based on whether an
instrument's credit risk as at the reporting date has increased
significantly relative to the date it was initially recognised.
Where the credit risk subsequently improves such that it no longer
represents a significant increase in credit risk since origination,
the asset is transferred back to Stage 1. Where the credit risk
subsequently improves such that it no longer represents a
significant increase in credit risk since origination, the asset is
transferred back to Stage 1.
In assessing whether a borrower has had a significant increase
in credit risk the following indicators are considered:
-- Consumer
- Short-term forbearance
- Extension of terms granted
-- Structured/SME/Property
- Significant increase in credit spread
- Significant adverse changes in business, financial and/or
economic conditions in which the borrower operates
- Actual or expected forbearance or restructuring
- Actual or expected significant adverse change in operating results of the borrower
- Significant change in collateral value (secured facilities
only) which is expected to increase the risk of default
- Early signs of cashflow/liquidity problems such as delay in servicing of trade creditors
However, as a backstop, unless identified at an earlier stage,
the credit risk of financial assets is deemed to have increased
significantly when repayments are more than 30 days past due.
Movements between Stage 2 and Stage 3 are based on whether
financial assets are credit impaired as at the reporting date. IFRS
9 contains a rebuttable presumption that default occurs no later
than when a payment is 90 days past due. The Group uses this 90-day
backstop for all its assets except for UK second mortgages, the
Group has assumed a backstop of 180 days past due as mortgage
exposures more than 90 days past due, but less than 180 days,
typically show high cure rates and this aligns to the Group's risk
management practices. Assets can move in both directions through
the stages of the impairment model.
In assessing whether a borrower is credit impaired the following
qualitative indicators are considered:
-- Consumer
- Long-term forbearance
- Borrower deceased
- Borrower insolvent
-- Structured/SME/Property
- Borrower in breach of financial covenants
- Concessions have been made by the lender relating to the borrower's financial difficulty
- Significant adverse changes in business, financial or economic
conditions on which the borrower operates
- Long term forbearance or restructuring.
The following quantitative indicators are also considered
- The remaining lifetime PD at the reporting date has increased,
compared to the residual lifetime PD
expected at the reporting date when the exposure was first recognised; and
- Based on data developed internally and obtained from external sources.
The criteria above have been applied to all financial
instruments held by the Group and are consistent with the
definition of default used for internal credit risk management
purposes. The default definition has been applied consistently to
model the PD, EAD and LGD throughout the Group's expected credit
loss calculations.
Inputs into the assessment of whether a financial instrument is
in default and their significance may vary over time to reflect
changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the
risk of default) on a financial instrument has increased
significantly since initial recognition, reasonable and supportable
information that is relevant and available without undue cost or
effort, including both quantitative and qualitative information and
analysis based on historical experience, credit assessment and
forward-looking information.
The measurement of expected credit losses for each stage and the
assessment of significant increases in credit risk considers
information about past events and current conditions as well as
reasonable and supportable forward-looking information. A 'Base
case' view of the future direction of relevant economic variables
and a representative range of other possible forecasts scenarios
have been developed. The process has involved developing two
additional economic scenarios and considering the relative
probabilities of each outcome.
The base case represents a most likely outcome and is aligned
with information used for other purposes, such as strategic
planning and budgeting. The number of scenarios and their
attributes are reassessed at each reporting date. At 31 December
2019 as well as 31 December 2018, all the portfolios of the Group
use one positive, more optimistic and one downside, more
pessimistic outcomes. The scenario weightings are determined by a
combination of statistical analysis and expert credit judgement,
taking account of the range of possible outcomes each chosen
scenario is representative of.
The estimation and application of forward-looking information
requires significant judgement. PD, LGD and EAD inputs used to
estimate Stage 1 and Stage 2 credit loss allowances, are modelled
and adjusted based on the macroeconomic variables (or changes in
macroeconomic variables) that are most closely correlated with
credit losses in the relevant portfolio. The Group has utilised
macroeconomic scenarios for each relevant jurisdiction prepared and
provided by Oxford Economics ("Oxford"). Oxford combines two
decades of forecast errors with the quantitative assessment of the
current risks facing the global and domestic economy to produce
robust forward-looking distributions for the economy. Oxford
construct 3 alternative scenarios at specific percentile points in
the distribution. In any distribution, the probability of a given
discrete scenario is close to zero. Therefore, scenario
probabilities represent the probability of that scenario or similar
scenarios occurring. In effect, a given scenario represents the
average of a broader bucket of similar severity scenarios and the
probability reflects the width of that bucket. Given that it is
known where the IFRS 9 scenarios sit in the distribution (the
percentiles), their probability (the width of the bucket of similar
scenarios) depends on how many scenarios are chosen. Scenario
probabilities must add up to 100 per cent so the more scenarios
chosen, the smaller the section of the distribution, or bucket,
each scenario represents and therefore the smaller the probability.
This allows the probabilities to be calculated according to
whichever subset of scenarios chosen to use in the ECL calculation.
The scenarios are generated at the year-end and are only updated
during the year if economic conditions change significantly. The
Base case is given a 40 per cent weighting and the downside and
upside a 30 per cent weighting each. These weightings were
introduced in the 2018 financial year and maintained in the current
financial year.
As with any economic forecasts, the projections and likelihoods
of occurrence are subject to a high degree of inherent uncertainty
and therefore the actual outcomes may be significantly different to
those projected. The Group considers these forecasts to represent
its best estimate of the possible outcomes and has analysed the
non-linearities and asymmetries within the Group's different
portfolios to establish that the chosen scenarios are appropriately
representative of the range of possible scenarios.
Other forward-looking considerations not otherwise incorporated
within the above scenarios, such as the impact of any regulatory,
legislative or political changes, have also been considered, but no
adjustment has been made to the ECL for such factors. This is
reviewed and monitored for appropriateness on an annual basis.
In March 2020, the World Health Organisation recognised COVID-19
as a pandemic. COVID-19 has caused disruption to businesses and
economic activity which has been reflected in recent fluctuations
in global stock markets. There are no comparable recent events
which may provide guidance as to the effect of the spread of
COVID-19 and a potential pandemic, and, as a result, the ultimate
impact of the COVID-19 outbreak or a similar health epidemic is
highly uncertain and subject to change. The Board considers the
emergence and spread of COVID-19 to be a non-adjusting post balance
sheet event. Given the Group's UK focus, its performance is linked
to the health of the UK economy. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably as we
expect the impact of the government's assistance to non-bank
lenders and the introduction of the furlough scheme to assist end
borrowers are yet unknown, but they are expected to reduce the
potential expected credit loss impact The
government has also launched a number of initiatives aimed at
providing finance to SMEs. Two of our largest borrowers are in the
process of lending under the CBIL government guarantee scheme which
will also refinance part of their exposure with the benefit of the
government guarantee.
Collateral and other credit enhancements
The Group employs a range of policies to mitigate credit risk.
The most common of these is accepting collateral for funds
advanced. The Group has internal policies of the acceptability of
specific classes of collateral or credit risk mitigation.
The Group prepares a valuation of the collateral obtained as
part of the loan origination process. This assessment is reviewed
periodically. The principal collateral types for loans and advances
are:
-- Mortgages over residential properties;
-- Margin agreement for derivatives, for which the Group has
also entered into master netting agreements;
-- Charges over business assets such as premises, inventory and accounts receivable; and
-- Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are
generally secured; revolving individual credit facilities are
generally unsecured.
Collateral held as security for financial assets other than
loans and advances depends on the nature of the instrument. Debt
securities, treasury and other eligible bills are generally
unsecured, with the exception of asset-backed securities and
similar instruments, which are secured by portfolios of financial
instruments. Derivatives are also collateralised.
The Group's policies regarding obtaining collateral have not
significantly changed during the reporting period and there has
been no significant change in the overall quality of the collateral
held by the Company since the prior period.
The Group closely monitors collateral held for financial assets
considered to be credit-impaired, as it becomes more likely that
the Group will take possession of collateral to mitigate potential
credit losses.
Modification of financial assets
The Group sometimes modifies the terms or loans provided to
customers due to commercial renegotiations, or for distressed
loans, with a view to maximising recovery.
Such restructuring activities include extended payment term
arrangements, payment holidays and payment forgiveness.
Restructuring policies and practice are based on indicators or
criteria which, in the judgement of management, indicate that
payment will most likely continue. These policies are kept under
continuous review. Restructuring is most commonly applied to term
loans.
The risk of default of such assets after modification is
assessed at the reporting date and compared with the risk under the
original terms at initial recognition, when the modification is not
substantial and so does not result in derecognition of the original
assets. The Group monitors the subsequent performance of modified
assets. The Group may determine that the credit risk has
significantly improved after restructuring, so that the assets are
moved from Stage 3 or Stage 2.
Modification of loans
The Company sometimes renegotiates or otherwise modifies the
contractual cash flows of loans to customers. When this happens,
the Group assesses whether or not the new terms are substantially
different to the original terms. The Group does this by
considering, among others, the following factors:
-- If the borrower is in financial difficulty, whether the
modification merely reduces the contractual cash flows to amounts
the borrower is expected to be able to pay;
-- Whether any substantial new terms are introduced, such as a
profit share/equity-based return that
substantially affects the risk profile of the loan;
-- Significant extension of the loan term when the borrower is not in financial difficulty;
-- Significant change in the interest rate;
-- Change in the currency the loan is denominated in; and
-- Insertion of collateral, other security or credit
enhancements that significantly affect the credit risk associated
with the loan.
If the terms are substantially different, the Group derecognises
the original financial asset and recognises a 'New' asset at fair
value and recalculates a new effective interest rate for the asset.
The date of renegotiation is consequently considered to be the date
of initial recognition for impairment calculation purposes,
including for the purpose of determining whether a significant
increase in credit risk has occurred. However, the Group also
assesses whether the new financial asset recognised is deemed to be
credit-impaired at initial recognition, especially in circumstances
where the renegotiation was driven by the debtor being unable to
make the originally agreed payments. Differences in the carrying
amounts are also recognised in the Consolidated Statement of
Comprehensive Income as a gain or loss on derecognition.
If the terms are not substantially different, the renegotiation
or modification does not result in derecognition, and the Group
recalculates the gross carrying amount based on the revised cash
flows of the financial asset and recognises a modification gain or
loss in the Consolidated Statement of Comprehensive Income. The new
gross carrying amount is recalculated by discounting the modified
cash flows at the original effective interest rate (or
credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets).
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Group transfers substantially all the risks and rewards of
ownership, or (ii) the Group neither transfers nor retains
substantially all the risks and rewards of ownership and the
Company has not retained control.
The Company enters into transactions where it retains the
contractual rights to receive cash flows from assets but assumes a
contractual obligation to pay those cash flows to other entities
and transfers substantially all of the risks and rewards. These
transactions are accounted for as 'pass through' transfers that
result in derecognition if the Group:
-- Has no obligation to make payments unless it collects equivalent amounts from the assets;
-- Is prohibited from selling or pledging the assets; and
-- Has an obligation to remit any cash it collects from the assets without material delay.
Collateral (shares and bonds) furnished by the Company under
standard repurchased agreements and securities lending and
borrowing transactions are not derecognised because the Group
retains substantially all the risks and rewards on the basis of the
predetermined repurchase price, and the criteria for derecognition
are therefore not met. This also applies to certain securitisation
transactions in which the Group retains a subordinated residual
interest.
Financial liabilities
Classification and subsequent measurement
In both the current period and prior year, financial liabilities
are classified and subsequently measured at amortised cost, except
for:
-- Financial liabilities at fair value through profit or loss:
this classification is applied to derivatives, financial
liabilities held for trading (e.g. short positions in the trading
booking) and other financial liabilities designated as such at
initial recognition. Gains or losses on financial liabilities
designated at fair value through profit or loss are presented
partially in other comprehensive income (the amount of change in
the fair value of the financial liability that is attributable to
changes in the credit risk of that liability, which is determined
as the amount that is not attributable to change in market
conditions that give rise to market risk) and partially profit or
loss (the remaining amount of change in the fair value of the
liability). This is unless such a presentation would create, or
enlarge, an accounting mismatch, in which case the gains and losses
attributable to changes in the credit risk of the liability are
also presented in the Consolidated Statement of Comprehensive
Income;
-- Financial liabilities arising from the transfer of financial
assets which did not qualify for derecognition, whereby a financial
liability is recognised for the consideration received for the
transfer. In subsequent periods, the Company recognises any expense
incurred on the financial liability; and
-- Financial guarantee contracts and loan commitments.
Derecognition
Financial liabilities are derecognised when they are
extinguished (i.e. when the obligation specified in the contract is
discharged, cancelled or expires).
Different terms, as well as substantial modifications of the
terms of existing financial liabilities, are accounted for as an
extinguishment of the original financial liability and the
recognition of a new financial liability. The terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective interest rate,
is at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability. In
addition, other qualitative factors, such as the currency that the
instrument is denominated in, changes in the type of interest rate,
new conversion features attached to the instrument and change in
covenants are also taken into consideration. If an exchange of debt
instruments or modification of terms is accounted for as an
extinguishment, any costs or fees incurred are recognised as part
of the gain or loss on the extinguishment. If the exchange or
modification is not accounted for as an extinguishment, any costs
or fees incurred adjust the carrying amount of the liability and
are amortised over the remaining term of the modified
liability.
2. Significant Accounting Judgements, Estimates and Assumptions
The preparation of financial statements in conformity with IFRS
adopted in the EU requires the Group to make judgements, estimates
and assumptions that affect the application of accounting policies
and the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and
expenses during the reporting period. UK company law and IFRS
require the Directors, in preparing the Group's financial
statements, to select suitable accounting policies, apply them
consistently and make judgements and estimates that are reasonable.
The Group's estimates and assumptions are based on historical
experience and expectations of future events and are reviewed on an
ongoing basis. Although these estimates are based on the Directors'
best knowledge of the amount, actual results may differ ultimately
from those estimates.
The estimates of most significance to the financial statements,
are in relation to EIR, expected credit losses and equity
investments at fair value through profit or loss. These are
detailed below.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
The critical judgements relate to the application of
consolidation accounting principles, and within the Company, the
treatment of asset derecognition and deemed loans. These have been
explained below as well as in the accounting policies section of
the Notes.
Expected Credit loss allowance for financial assets measured at
amortised cost (estimate)
The calculation of the Group's ECL allowances and provisions
against loan commitments and guarantees under IFRS 9 is highly
complex and involves the use of significant judgement and
estimation. Loan impairment provisions represent an estimate of the
losses incurred in the loan portfolios at the balance sheet date.
Individual impairment losses are determined as the difference
between the carrying value and the present value of estimated
future cash flows, discounted at the loans' original effective
interest rate. To calculate this involves the formulation and
incorporation of multiple forward-looking economic conditions into
ECL to meet the measurement objective of IFRS 9. Depending on a
range of factors such as changes in the economic environment in the
UK driven by COVID-19 pandemic, there could be a material
adjustment to the carrying amounts of assets and liabilities in the
next financial year. The most significant factors are set out
below.
Definition of default - The Probability of Default ("PD") of an
exposure, both over a 12-month period and over its lifetime, is a
key input to the measurement of the ECL allowance. Default has
occurred when there is evidence that the customer is experiencing
significant financial difficulty which is likely to affect the
ability to repay amounts due.
The definition of default adopted by the Company is described in
expected credit loss allowance for financial assets measured at
amortised cost above.
As noted above, the Group has rebutted the presumption in IFRS 9
that default occurs no later than when a payment is 90 days past
due on some of its portfolio. The impact on the Group's ECL
allowance of assuming a backstop of 180 days past due for mortgages
is not material.
The lifetime of an exposure - To derive the PDs necessary to
calculate the ECL allowance it is necessary to estimate the
expected life of each financial instrument. A range of approaches
has been adopted across different product groupings including the
full contractual life and taking into account behavioural factors
such as early repayments and refinancing. The Group has defined the
lifetime for each product by analysing the time taken for all
losses to be observed and for a material proportion of the assets
to fully resolve through either closure or write-off.
Significant increase in credit risk ("SICR") - Performing assets
are classified as either Stage 1 or Stage 2. An ECL allowance
equivalent to 12 months expected credit losses is established
against assets in Stage 1; assets classified as Stage 2 carry an
ECL allowance equivalent to lifetime expected credit losses. Assets
are transferred from Stage 1 to Stage 2 when there has been an SICR
since initial recognition. The Company uses a quantitative test
together with qualitative indicators and a backstop of 30 days past
due for determining whether there has been a SICR. The setting of
precise trigger points combined with risk indicators requires
judgement. The use of different trigger points may have a material
impact upon the size of the ECL allowance.
Forward looking information - IFRS 9 requires the incorporation
of forward-looking macroeconomic information that is reasonable and
supportable, but it provides limited guidance on how this should be
performed. The measurement of expected credit losses is required to
reflect an unbiased probability-weighted range of possible future
outcomes.
In order to do this the Group uses a model to project a number
of key variables to generate future economic scenarios. These are
ranked according to severity of loss and three economic scenarios
have been selected to represent an unbiased and full loss
distribution. They represent a 'most likely outcome' (the Base case
scenario) and two, less likely, 'outer' scenarios, referred to as
the 'Upside' and 'Downside' scenarios. These scenarios are used to
produce a weighted average PD for each product grouping which is
used to determine stage allocation and calculate the related ECL
allowance. This weighting scheme is deemed appropriate for the
computation of unbiased ECL. Key scenario assumptions are set using
the average of forecasts from external economists, helping to
ensure the IFRS 9 scenarios are unbiased and maximise the use of
independent information. Using externally available forecast
distributions helps ensure independence in scenario construction.
While key economic variables are set with reference to external
distributional forecasts, we also align the overall narrative of
the scenarios to the macroeconomic risks faced by the Group at the
31 December 2019.
The choice of alternative scenarios and probability weighting is
a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and
material non-linearity are captured. Paths for the two outer
scenarios are benchmarked to the Base scenario and reflect the
economic risk assessment. Scenario probabilities reflect management
judgement and are informed by data analysis of past recessions,
transitions in and out of recession, and the current economic
outlook. The key assumptions made, and the accompanying paths,
represent our 'best estimate' of a scenario at a specified
probability. Suitable narratives are developed for the Central
scenario and the paths of the two outer scenarios. Using three
scenarios, maybe insufficient in certain economic environments.
Additional analysis may be requested at management's discretion,
including the production of extra scenarios. We anticipate there
will be only limited instances when the standard approach will not
apply. The Base case, Upside and Downside scenarios are generated
annually and those described herein reflect the conditions in place
at the balance sheet date and are only updated during the year if
economic conditions change significantly.
The Group's UK mild Upside scenario can be seen as an
alternative base case in which the cyclical momentum in demand in
the UK and other economies is stronger than currently thought,
reflecting in part improved business, household and investor
sentiment and more buoyant global trade. The scenario sees UK GDP
growth rate rise to 2.3 per cent over the next five years. With a
key driver being a swift resolution of ongoing Brexit uncertainty,
especially should that entail a significant shift toward a "soft"
Brexit where the UK opts to remain a member of the single market.
Consequently, unemployment falls slightly to around 3.2 per
cent.
Against this backdrop, gearing in the economy remains at
comfortable levels and asset prices appreciate significantly. The
benign probability of default and loss given default mean that loan
losses are likely to remain well below long run averages.
The Group's UK Downside scenario sees UK GDP growth averaging
0.5 per cent per annum over the next five years. The UK enters
recession during 2020, but the 1.6 per cent contraction in output
is very mild by historical standards and the UK economy then
gradually recovers.
In the scenario, unemployment rises to just above 6 per cent by
2022 Q4, wage growth slows, and inflation falls well below target.
Despite lower interest rates, increased unemployment introduces
forced sellers into the residential property market. House prices
fall sharply, by over 16 per cent peak-to-trough. While commercial
property prices also fall, the peak to trough adjustment is around
one third of the size of that seen for residential house prices.
The relative magnitude of the falls in this scenario, reflect the
relative valuation positions of the two markets - whereas aggregate
UK house prices remain dear when compared to incomes, commercial
property prices are more in line with fair value having peaked in
end-2015.
Please see Note 11 for sensitivity analysis.
2019 Base Upside Down-side
================ ===== ====== =========
UK Real GDP
Growth 1.61% 2.85% (0.43)%
UK unemployment
rate 3.92% 3.78% 4.96%
UK HPI 0.15% 3.78% (7.13)%
UK Base Rate 1.86% 2.60% 0.52%
2018 Base Upside Down-side
================ ===== ====== =========
UK Real GDP
Growth 1.84% 2.54% 1.02%
UK unemployment
rate 4.02% 3.34% 5.30%
UK HPI 2.32% 5.08% (0.86)%
UK Base Rate 1.50% 1.77% 0.61%
Effective Interest Rate Model
Within the EIRM there are several areas of estimate that need to
be applied which impact the rate at which interest, fees and
expenses are recognised. These areas of judgement are required to
be updated on a periodic basis to ensure that they accurately
reflect management's best estimate of future cash flows. Key areas
of judgement within the policy include:
-- Estimated cash flow excluding expected credit losses;
-- Incurred losses at acquisition; and
-- Fees and expenses.
Equity Investments
The valuation of unquoted investments and investments for which
there is an inactive market is a key area of estimation and may
cause material adjustment to the carrying value of those assets and
liabilities. The unquoted equity assets are valued on a periodic
basis using techniques including a market approach, costs approach
and/or income approach. The valuation process is collaborative,
involving the finance and investment functions of the Investment
Manager with the final valuations being reviewed by the Investment
Manager's Valuation Committee. The techniques used include earnings
multiples, discounted cash flow analysis, the value of recent
transactions, and, where appropriate, industry rules of thumb. The
valuations often reflect a synthesis of a number of different
approaches in determining the final fair value estimate. The
individual approach for each investment will vary depending on
relevant factors that a market participant would take into account
in pricing the asset. These might include the specific industry
dynamics, the Investee's stage of development, profitability,
growth prospects or risk as well as the rights associated with the
particular security.
Shareholders should note that increases or decreases in any of
the inputs in isolation may result in higher or lower fair value
measurements. Changes in fair value of all investments held at fair
value are recognised in the Consolidated Statement of Comprehensive
Income as a capital item. On disposal, realised gains and losses
are also recognised in the Consolidated Statement of Comprehensive
Income. Transaction costs are included within gains or losses on
investments held at fair value, although any related interest
income, dividend income and finance costs are disclosed separately
in the financial statements.
Consolidation
Determining whether the Group has control of an entity is
generally straightforward when based on ownership of the majority
of the voting capital. However, in certain instances, this
determination will involve significant judgement, particularly in
the case of structured entities where voting rights are often not
the determining factor in decisions over the relevant activities.
This judgement may involve assessing the purpose and design of the
entity. It will also often be necessary to consider whether the
Group, or another involved party with power over the relevant
activities, is acting as a principal in its own right or as an
agent on behalf of others.
3. Segmental Reporting
The Board and Investment Manager consider investment activity in
Credit Assets and selected Equity Assets as the single operating
segment of the Group, being the sole purpose for its existence. No
other activities are performed.
Whilst visibility over originations, portfolios, structured
facilities and equity assets is afforded at an operational level,
all are considered 'routes to market' for acquiring interests in
credit assets, and thus act merely as indicators of the key drivers
of financial performance and position of the Group.
The four routes to market are not determinants of resource
allocations, rather each investment opportunity is considered on
its own merits. Additionally, there are no segment managers
directly accountable for the individual routes to market.
The Directors are of the opinion that the Company is engaged in
a single segment of business and operations of the Group are wholly
in the United Kingdom and Europe.
4. Business Combination
On 20 June 2019 the Group incorporated Sting Funding Limited
("Sting"), a limited Company incorporated under the law of England
and Wales. Sting became active on 28 August 2019 when it drew down
on a debt facility backed by commercial and second charge
residential mortgages. The Group is considered to control Sting
through holding 100 per cent of the issued shares. As a result, the
financial statements for the year ended 31 December 2019 are
prepared on a consolidated basis.
5. Income
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
================= =========== ===========
Investment
income
Interest
income 59,953 52,947
Commitment
fee income 1,326 534
Arrangement
fee income 1,416 962
Total investment
income 62,695 54,444
Other income
Deposit
interest 2 1
=========== ===========
Total income 62,697 54,445
================= =========== ===========
6. Management and Performance Fee
Management Fee
The management fee is calculated and payable monthly in arrears
at a rate equal to 1/12 of 1.0 per cent per month of Gross Asset
Value (the "Management Fee"). Gross Asset Value is the equivalent
of Total Assets on the Consolidated Statement of Financial
Position. The aggregate fee payable on this basis must not exceed
1.0 per cent of the gross assets of the Company and its group in
any year. The Management Fee is allocated between the revenue and
capital accounts based on the prospective split of the Gross Asset
Value between revenue and capital.
In respect of any issue of Ordinary Shares or C Shares, until
the date on which 80 per cent of the net proceeds of such issue
have been invested or committed to be invested in Credit Assets or
Equity Assets, the Net Asset Value attributable to such Ordinary
Shares or C Shares shall, for the purposes of the Management Fee,
exclude any portion of the issue proceeds in cash, or invested in
cash deposits or cash equivalent investments. Where there are C
Shares in issue, the Management Fee will be calculated separately
on the gross assets attributable to the Ordinary Shares and the C
Shares.
Management fees charged for the year ended 31 December 2019
totalled GBP6.1 million (2018: GBP5.0 million) of which GBP0.5
million was payable at the year-end (2018: GBP1.0 million).
Performance Fee
The Investment Manager is also entitled to a performance fee,
which is calculated in respect of each twelve-month period starting
on 1 January and ending on 31 December in each calendar year
("Calculation Period"), and the nal Calculation Period shall end on
the day on which the management agreement is terminated or, if
earlier, the business day immediately preceding the day on which
the Company goes into liquidation.
The performance fee will only be payable if the Adjusted Net
Asset Value at the end of a Calculation Period exceeds a hurdle
threshold, equal to the Adjusted Net Asset Value immediately
following admission to trading on the London Stock Exchange,
compounded at a rate equal to 5 per cent per annum (the
"Hurdle").
If, on the last day of a Calculation Period (each a "Calculation
Date"), the Adjusted Net Asset Value exceeds the Hurdle, the
Investment Manager shall be entitled to a performance fee equal to
the lower of:
a) the amount by which the Adjusted Net Asset Value exceeds the
Hurdle, in each case as at the Calculation Date; and
b) 10 per cent of the amount by which total growth in Adjusted
Net Asset Value since first admission (being the aggregate of the
growth in Adjusted Net Asset Value in the relevant Calculation
Period and in each previous Calculation Period), after adding back
any performance fees paid to the Investment Manager, exceeds the
aggregate of all performance fees payable to the Investment Manager
in respect of all previous Calculation Periods.
'Adjusted Net Asset Value' means the Net Asset Value after: (i)
excluding any increases or decreases in Net Asset Value
attributable to the issue or repurchase of any Ordinary Shares;
(ii) adding back the aggregate amount of any dividends paid or
distributions made in respect of any Ordinary Shares; (iii)
excluding the aggregate amount of any dividends or distributions
accrued but unpaid in respect of any Ordinary Shares; and (iv)
excluding the amount of any Performance Fees accrued but unpaid, in
each case without double counting.
In the event that C Shares are in issue, the Investment Manager
shall be entitled to a performance fee in respect of the net assets
referable to the C Shares on the same basis as summarised above,
except that a Calculation Period shall be deemed to end on the date
of the conversion of the relevant tranche of C Shares into Ordinary
Shares.
Performance fees for the year ended 31 December 2019 totalled
GBP3.5 million (2018: GBP2.9 million) of which GBP3.5 million was
payable at the year-end (2018: GBP2.9 million).
Fee payable to Origination Partner
The Origination Partner is entitled to be paid a fee calculated
on the purchase price for each Credit Asset acquired by the Company
from the Origination Partner. For so long as the Origination
Partner is part of the same group as the Investment Manager, the
amount of all fees payable by the Company to the Origination
Partner shall be deducted from the Management Fee payable to the
Investment Manager. For so long as the Origination Partner is part
of the same group as the Investment Manager, the amount of all fees
payable by the Group to the Origination Partner shall be deducted
from the Management Fee.
The Group reimburses the Origination Partner for the fees of
referral partners, and Servicers (to the extent paid by the
Origination Partner) in connection with Credit Assets in which the
Group acquires an interest. The amount of such fees are agreed
between the Origination Partner and the relevant counterparties on
arm's length commercial terms, taking account of the strength of
the relationship between the Origination Partner, the Investment
Manager and each relevant counterparty. There was GBPnil payable to
the Origination Partner at 31 December 2019 (2018: GBPnil).
7. Other Expenses
Group 31 December 2019 31 December
GBP'000 2018
GBP'000
========================== ================= ===========
Directors' fees 149 145
Administrator's fees 192 199
Auditors' remuneration 160 129
Amortisation 176 275
Capital raise and project
costs 671 -
Other expenses 1,106 461
================ ===========
Total other expenses 2,454 1,209
=========================== ================ ===========
All expenses where applicable are inclusive of VAT (except those
paid to the auditors which are net). Directors' fees above include
GBP131,834 (2018: GBP126,000) paid to Directors' and GBP16,910
(2018: GBP19,276) of employment taxes and valid business expenses.
Further details on Directors' fees can be found in the Directors'
remuneration report above.
The capital raise and project costs are in relation to the third
base prospectus that the Company released on 21 December 2018.
These costs were expensed in the financial year under review on the
expiration of this placement programme. This is a one-off cost
incurred in the year.
The auditors' remuneration net of VAT for the audit of the
Company was GBP160,000 (2018: GBP128,900). During 2019, the
auditors did not provide reporting accountant services to the
Group. During 2018 the auditors provided reporting accountant
services in relation to its further issuance of ordinary shares in
April 2018 and the release of its third base prospectus in December
2018. These non-audit fees amounted to 2019: GBPnil (2018:
GBP62,266). These costs were deducted from the proceeds from the
issuance of ordinary shares in line with IAS 32 where
applicable.
8. Taxation
It is the intention of the Directors to conduct the affairs of
the Company so as to satisfy the conditions for approval as an
investment trust. As an investment trust the Company is exempt from
corporation tax on capital gains. The Company's revenue income from
loans is subject to tax, but offset by any interest distribution
paid, which has the effect of reducing that corporation tax to nil.
This means the interest distribution may be taxable in the hands of
the Company's shareholders.
Any change in the Company's tax status or in taxation
legislation generally could affect the value of investments held by
the Company, affect the Company's ability to provide returns to
shareholders, lead the Company to lose its exemption from UK
Corporation tax on chargeable gains or alter the post-tax returns
to shareholders. It is not possible to guarantee that the Company
will remain a non-close company, which is a requirement to maintain
status as an investment trust, as the ordinary shares are freely
transferable. The Company, in the event that it becomes aware that
it is a close company, or otherwise fails to meet the criteria for
maintaining investment trust status, will as soon as reasonably
practicable, notify shareholders of this fact.
The Company may be subject to taxation under the tax rules of
the jurisdictions in which it invests, including by way of
withholding of tax from interest and other income receipts.
Although the Company will endeavour to minimise any such taxes this
may affect the level of returns to shareholders.
The following table presents the tax chargeable for the period
ended 31 December 2019.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
==================== ======== ======== ========
Corporation - - -
tax
==================== ======== ======== ========
Total current - - -
tax charge
Deferred tax - - -
movement
Deferred tax - - -
movement PYA
========
Total tax charge - - -
in income statement
==================== ======== ======== ========
The following table presents the tax chargeable for the year
ended 31 December 2018.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
==================================== ======== ======== ========
Corporation tax - - -
==================================== ======== ======== ========
Total current tax charge - - -
Deferred tax movement - - -
Deferred tax movement PYA - - -
========
Total tax charge in income statement - - -
==================================== ======== ======== ========
Factors affecting taxation charge for the year
The taxation charge for the year is lower than the standard rate
of UK corporation tax of 19.00 per cent (2018: 19.00 per cent). A
reconciliation of the 2019 taxation charge based on the standard
rate of UK corporation tax to the actual taxation charge is shown
below.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
============================== ======== ======== ========
Return on ordinary activities
before taxation 31,276 (65) 31,211
============================== ======== ======== ========
Return on ordinary activities
before taxation multiplied
by the standard rate
of UK corporation tax
of 19.00% 5,942 (12) 5,930
Effects of:
Excess management
expenses
not utilised 54 12 66
Interest
distributions
paid in respect
of
the year (5,996) - (5,996)
========
Total tax - - -
charge in
income statement
============================== ======== ======== ========
A reconciliation of the 2018 taxation charge based on the
standard rate of UK corporation tax to the actual taxation charge
is shown below.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
============================== ======== ======== ========
Return on ordinary activities
before taxation 29,037 (840) 28,197
============================== ======== ======== ========
Return on ordinary activities
before taxation multiplied
by the standard rate
of UK corporation tax
of 19.00% 5,517 (160) 5,357
Effects of:
Excess management
expenses
not utilised 162 160 322
Interest
distributions
paid in respect
of
the year (5,679) - (5,679)
========
Total tax - - -
charge in
income statement
============================== ======== ======== ========
9. Earnings per Share
Group 31 December 31 December
2019 2018
============== =========== ===========
Revenue 79.3p 79.6p
Capital (0.2)p (2.3)p
============== =========== ===========
Earnings
per ordinary
share 79.1p 77.3p
============== =========== ===========
The calculation for the year ended 31 December 2019 is based on
revenue returns of GBP31.3 million, capital returns of GBP(0.1)
million and total returns of GBP31.2 million and a weighted average
number of ordinary shares of 39,449,919.
The calculation for the year ended 31 December 2018 is based on
revenue returns of GBP29.0 million, capital returns of GBP(0.8)
million and total returns of GBP28.2 million and a weighted average
number of ordinary shares of 36,475,359.
10. Ordinary Dividends
31 December 31 December
2019 2018
GBP'000 GBP'000
================================ =========== ===========
20.00p Interim dividend for
the period ended 31 December
2017 (paid on 29 March 2018) - 5,985
================================ =========== ===========
20.00p Interim dividend for
the period to 31 March 2018
(paid on 30 April 2018) - 5,985
================================ =========== ===========
20.00p Interim dividend for
the period to 30 June 2018
(paid 28 September 2018) - 7,890
================================ =========== ===========
20.00p Interim dividend for
the period to 30 September
2018 (paid 28 December 2018) - 7,890
================================ =========== ===========
20.00p Interim dividend for
the period ended 31 December
2018 (paid on 29 March 2019) 7,890 -
================================ =========== ===========
20.00p Interim dividend for
the period to 31 March 2019
(paid on 28 June 2019) 7,890 -
================================ =========== ===========
20.00p Interim dividend for
the period to 30 June 2019
(paid on 30 September 2019) 7,890 -
================================ =========== ===========
20.00p Interim dividend for
the period to 30 September
2019 (paid 27 December 2019) 7,890 -
================================ =========== ===========
Total dividend paid in period 31,560 27,750
================================ =========== ===========
20.00p Interim dividend for
the period to 31 December 2018
(paid 29 March 2019) - 7,890
================================ =========== ===========
20.00p Interim dividend for
the period to 31 December 2019
(paid 27 March 2020) 7,890 -
================================ =========== ===========
20.00p Interim dividend for
the period to 31 March 2020
(to be paid 26 June 2020) 7,450 -
================================ =========== ===========
Total dividend paid in relation
to period 39,450 35,640
================================ =========== ===========
The 31 December 2019 interim dividend of 20.00 pence was
approved on 19 February 2020 and paid on 27 March 2020 before the
approval of the financial statements.
11. INVESTMENTS at Amortised Cost
(a) Credit Assets at amortised cost
The disclosure below presents the gross carrying value of
financial instruments to which the impairment requirements in IFRS
9 are applied and the associated allowance for ECL. Please see Note
1 for more detail on the allowance for ECL.
The following table analyses loans by industry sector and
represent the concentration of exposures on which credit risk is
managed for both the Group and Company as at 31 December 2019.
31 December 2019 1 January 2019
============= ======================================= =======================================
Group and Gross Carrying Allowance Net Carrying Gross Carrying Allowance Net Carrying
Company Amount for ECL Amount Amount for ECL Amount
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= ============== ========= ============ ============== ========= ============
Credit Assets at amortised
cost
Consumer 320,107 (19,844) 300,264 294,467 (12,724) 281,743
Property 246,846 (10,051) 236,795 237,310 (9,880) 227,430
SME 44,198 (259) 43,939 67,536 (179) 67,357
Total Assets 611,152 (30,154) 580,998 599,313 (22,783) 576,530
============= ============== ========= ============ ============== ========= ============
Group and Company Stage 1 Stage 2 Stage 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
============================== ========= ========= ========= =========
At 1 January 2019 3,526 2,927 16,330 22,783
Movement from stage 1
to stage 2 (66) 1,905 - 1,839
Movement from stage 1
to stage 3 (505) - 7,065 6,560
Movement from stage 2
to stage 1 5 (905) - (900)
Movement from stage 2
to stage 3 - (1,274) 2,028 754
Movement from stage 3
to stage 2 - 128 (465) (337)
Movement from stage 3
to stage 1 8 - (502) (494)
Remeasurements due to
modelling 640 332 (672) 300
Decreases due to repayments (2,208) (521) (673) (3,402)
Increases due to origination 1,189 - - 1,189
Increases within Stage 628 14 1,220 1,862
Carrying Value at 31
December 2019 3,217 2,606 24,331 30,154
============================== ========= ========= ========= =========
The following table analyses loans by industry sector and
represent the concentration of exposures on which credit risk is
managed for both the Group and Company as at 31 December 2018.
Please see Note 1 to the financial statements for more detail on
the allowance for ECL.
31 December 2018 1 January 2018
============= ======================================= =======================================
Group and Gross Carrying Allowance Net Carrying Gross Carrying Allowance Net Carrying
Company Amount for ECL Amount Amount for ECL Amount
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============= ============== ========= ============ ============== ========= ============
Credit Assets at amortised
cost
Consumer 294,467 (12,724) 281,743 233,644 (6,416) 227,228
Property 237,310 (9,880) 227,430 106,926 (5,665) 101,261
SME 67,536 (179) 67,357 14,739 - 14,739
Total Assets 599,313 (22,783) 576,530 355,309 (12,081) 343,228
============= ============== ========= ============ ============== ========= ============
Group and Stage 1 Stage 2 Stage 3 Total
Company GBP'000 GBP'000 GBP'000 GBP'000
================================ ========= ========= ========= =========
At 1 January 2018 2,855 2,166 7,060 12,081
Movement from stage 1
to stage 2 (61) 1,919 - 1,858
Movement from stage 1
to stage 3 (444) - 6,234 5,790
Movement from stage 2
to stage 1 6 (1,076) - (1,070)
Movement from stage 2
to stage 3 - (991) 1,969 978
Movement from stage 3
to stage 2 - 305 (524) (219)
Movement from stage 3
to stage 1 (1) - (361) (362)
Remeasurements within
existing stage 635 223 378 1,236
Decreases due to repayments (2,032) (367) (1,645) (4,044)
Increases due to origination 2,258 - - 2,258
Increases within Stage 289 67 597 953
Acquired Losses on Acquisition 21 681 2,622 3,324
Carrying Value at 31
December 2018 3,526 2,927 16,330 22,783
================================ ========= ========= ========= =========
(b) Expected Credit Loss allowance for IFRS 9
Under the expected credit loss model introduced by IFRS 9
impairment provisions are driven by changes in credit risk of
instruments, with a provision for lifetime expected credit losses
recognised where the risk of default of an instrument has increased
significantly since initial recognition.
The following table analyses Group and Company loans by stage
and sector for the year ended 31 December 2019:
Group Consumer Property SME Total
GBP'000 GBP'000 GBP'000 GBP'000
================= ========= ========= ========= =========
At 1 January
2019 12,724 9,880 179 22,783
Charge for the
period - Stage
1 (526) 181 36 (309)
Charge for the
period - Stage
2 278 (588) (11) (321)
Charge for the
period - Stage
3 7,368 578 55 8,001
Carrying Value
at 31 December
2019 19,844 10,051 259 30,154
================= ========= ========= ========= =========
The following table analyses Group and Company loans by stage
and sector for the year ended 31 December 2018:
Group and Company Consumer Property SME Total
GBP'000 GBP'000 GBP'000 GBP'000
==================== ========= ========= ========= =========
At 1 January
2018 4,675 5,068 - 9,743
Changes on initial
application of
IFRS 9 1,741 597 - 2,338
Revised opening
balance 1 January
2018 6,416 5,665 - 12,081
Charge for the
period - Stage
1 587 (43) 126 670
Charge for the
period - Stage
2 469 264 29 762
Charge for the
period - Stage
3 5,252 759 24 6,035
Total charge
for expected
credit losses 6,308 980 179 7,467
Acquired losses
on acquisition - 3,235 - 3,235
Amounts written - - - -
off during the
period
Amounts recovered - - - -
during the period
Carrying Value
at 31 December
2018 12,724 9,880 179 22,783
==================== ========= ========= ========= =========
Measurement uncertainty and sensitivity analysis of ECL
The recognition and measurement of expected credit losses
('ECL') is highly complex and involves the use of significant
judgement and estimation. This includes the formulation and
incorporation of multiple forward-looking economic conditions into
ECL to meet the measurement objective of IFRS 9.
For most portfolios, the Group has adopted the use of three
economic scenarios, representative of Oxford Economics view of
forecast economic conditions, sufficient to calculate unbiased ECL.
They represent a 'most likely outcome' (the Base scenario) and two,
less likely, 'outer' scenarios, referred to as the 'Upside' and
'Downside' scenarios. The Group has developed a shortlist of the
upside and downside economic and political risks most relevant to
the Group and the IFRS 9 measurement objective. These include
economic and political risks which together affect economies that
materially matter to the Group.
The ECL recognised in the financial statements reflect the
effect on expected credit losses of a range of possible outcomes,
calculated on a probability-weighted basis, based on the economic
scenarios described in Note 2 to the financial statement, including
management overlays where required. The probability-weighted amount
is typically a higher number than would result from using only the
Base (most likely) economic scenario. ECLs typically have a
non-linear relationship to the many factors which influence credit
losses, such that more favourable macroeconomic factors do not
reduce defaults as much as less favourable macroeconomic factors
increase defaults. The ECL calculated for each of the scenarios
represent a range of possible outcomes that have been evaluated to
estimate ECL. As a result, the ECL calculated for the Upside and
Downside scenarios should not be taken to represent the upper and
lower limits of possible actual ECL outcomes. There is a high
degree of estimation uncertainty in numbers representing tail risk
scenarios when assigned a 100 per cent. A wider range of possible
ECL outcomes reflects uncertainty about the distribution of
economic conditions and does not necessarily mean that credit risk
on the associated loans is higher than for loans where the
distribution of possible future economic conditions is
narrower.
For stage 3 impaired loans, LGD estimates consider independent
recovery valuations provided by external consultants where
available, or internal forecasts corresponding to anticipated
economic conditions.
The table below shows a sensitivity analysis for ECL based on
changing the weighting of the scenarios to allocate a 100 per cent
weight to the downside scenario. The scenarios are applicable to 31
December 2019 and subsequent to year end the outlook has materially
changed following the COVID-19 situation. The analysis shows that
the ECL would have been GBP2.1 million higher under this
sensitivity. The ultimate impact of COVID-19 is not yet clear
however the Group has used the 100% downside scenario to represent
the revised outlook in its NAV calculation for 31 March 2020
resulting in an impairment charge of GBP1.8 million.
2019 Weighted Year 100% Downside
end ECL Scenario
GBP'000 GBP'000
========= ============= =============
Consumer 19,844 20,749
Property 10,051 11,282
SME 259 260
Total 30,154 32,291
========= ============= =============
At 31 December 2018 if the weightings used represented a 100 per
cent downside scenario the ECL would have been GBP1.5 million
higher as split below:
2018 Weighted Year 100% Downside
end ECL Scenario
GBP'000 GBP'000
========= ============= =============
Consumer 12,724 13,921
Property 9,880 10,209
SME 179 182
Total 22,783 24,312
========= ============= =============
The ECL has been further sensitised by assessing the impact of
GBP10.0 million of credit assets at amortised cost moving from
Stage 1 to Stage 2. The analysis shows that the ECL would have been
GBP1.5 million higher under this sensitivity.
The amortised cost of the structured portfolio is GBP288.7
million, and the largest exposure is included in the Top Ten
Holdings above. We have stress tested each structured position as
at 31 December 2019 to analyse the sensitivity to impairment of the
underlying assets. The portfolio was able to withstand the stress
test without incurring a loss.
12. Equity investments at Fair Value Through Profit or Loss
(a) Movements in the year
The table below sets out the movement in Investments at fair
value through profit or loss for the Group for the year ended 31
December 2019.
Group 2019
GBP'000
========================== =========
Valued using transaction
price 3,000
Valued using an earnings
multiple 6,980
Opening fair value 9,980
Purchases at cost 380
Disposal at cost (2,000)
Net change in unrealised
(losses)/gains 30
Closing fair value
at
31 December 2019 8,390
Comprising:
Valued using sales
value 550
Valued using an earnings
multiple 7,840
Closing fair value
as at
31 December 2019 8,390
========================== =========
The table below sets out the movement in Investments at fair
value through profit or loss for the Company for the year ended 31
December 2019.
Company 2019
GBP'000
========================== =========
Valued using transaction
price 3,000
Valued using an earnings
multiple 6,980
Opening fair value 9,980
Purchases at cost 380
Disposal at cost (2,000)
Net change in unrealised
(losses)/gains 4,523
Closing fair value
at
31 December 2019 12,883
Comprising:
Valued using Net Asset
Value 4,493
Valued using sales
value 550
Valued using an earnings
multiple 7,840
Closing fair value
as at
31 December 2019 12,883
========================== =========
The table below sets out the movement in Investments at fair
value through profit or loss for the Group and Company for the year
ended 31 December 2018.
Group and Company 2018
GBP'000
========================== =========
Opening cost 11,227
Opening fair value 11,227
Purchases at cost 3,000
Disposal at cost (3,497)
Net change in unrealised
(losses)/gains (750)
Closing fair value
at
31 December 2018 9,980
Comprising:
Valued using transaction
price 3,000
Valued using an earnings
multiple 6,980
Closing fair value
as at
31 December 2018 9,980
========================== =========
(b) Fair value of financial instruments
IFRS 13 requires the Company to classify its financial
instruments held at fair value using a hierarchy that reflects the
significance of the inputs used in the valuation methodologies.
These are as follows:
Level 1 - quoted prices in active markets for identical
investments;
Level 2 - other significant observable inputs (including quoted
prices for similar investments, interest rates, prepayments, credit
risk, etc.); and
Level 3 - significant unobservable inputs (including the
Company's own assumptions in determining the fair value of
investments).
An investment is always categorised as Level 1, 2 or 3 in its
entirety. In certain cases, the fair value measurement for an
investment may use a number of different inputs that fall into
different levels of the fair value hierarchy. In such cases, an
investment's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement. The assessment of the significance of a particular
input to the fair value measurement requires judgement and is
specific to the investment.
The following sets out the classifications in valuing the
Group's investments:
Group Closing fair Closing fair
value as at value as at
31 Dec 2019 31 Dec 2018
GBP'000 GBP'000
======= ============= =============
Level - -
1
Level - -
2
Level
3 8,390 9,980
======= ============= =============
Total 8,390 9,980
======= ============= =============
The following sets out the classifications in valuing the
Company's investments:
Group Closing fair Closing fair
value as at value as at
31 Dec 2019 31 Dec 2018
GBP'000 GBP'000
======= ============= =============
Level - -
1
Level - -
2
Level
3 12,883 9,980
======= ============= =============
Total 12,883 9,980
======= ============= =============
The investments in unquoted equities are valued using several
different techniques, primarily recent transactions and recent
rounds of funding by the investee entities. Quantitative
information regarding the unobservable inputs for the Group's Level
3 positions as at 31 December 2019 is given below:
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2019 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
8,390 Multiple 1,948
8,390 1,948
============= =========== ==========
Earnings multiples range from 2x to 8x.
Quantitative information regarding the unobservable inputs for
the Company's Level 3 positions as at 31 December 2019 is given
below:
Closing fair Valuation Net Asset
value as at Technique Value
31 Dec 2019 increased
GBP'000 by 20%
GBP'000
============= =========== ===========
Net Asset
4,493 Value 899
4,493 899
============= =========== ===========
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2019 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
8,390 Multiple 1,843
8,390 1,948
============= =========== ==========
Earnings multiples range from 2x to 8x.
Quantitative information regarding the unobservable inputs for
the Group and Company's Level 3 positions as at 31 December 2018 is
given below:
Closing fair 20% Change
value as at in price
31 Dec 2018 Valuation GBP'000
GBP'000 Technique
============= ============= ===========
Recent
3,000 transaction 600
3,000 600
============= ============= ===========
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2018 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
6,980 Multiple 2,249
6,980 2,249
============= =========== ==========
Earnings multiples range from 2x to 12x.
13. Financial Risk Management
The Group's investing activities undertaken in pursuit of its
investment objective, as set out above, involve certain inherent
risks. The main financial risks arising from the Group's financial
instruments are market risk, credit risk and liquidity risk. The
Board reviews and agrees policies for managing each of these risks
as summarised below.
Market risk
The fair value or future cash flows of a financial instrument
held by the Group may fluctuate because of changes in market
prices. Market risk can be summarised as comprising three types of
risk:
-- Price risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk);
-- Interest rate risk - the risk that the fair value or future
cash flows of financial instruments will fluctuate because of
changes in market interest rates; and
-- Currency risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
foreign exchange rates.
The Group's exposure, sensitivity to and management of each of
these risks is described in further detail below. Management of
market risk is fundamental to the Group's investment objective. The
investment portfolio is continually monitored to ensure an
appropriate balance of risk and reward. The Board has also
established a series of investment parameters, which are reviewed
annually, designed to limit the risk inherent in managing a
portfolio of investments.
(a) Price risk
Price risk is the risk that the fair value of future cash flows
of a financial instrument will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or
factors affecting similar financial instruments traded in the
market. Local, regional or global events such as war, acts of
terrorism, the spread of infectious illness or other public health
issue, recessions, or other events could have a significant impact
on the Group and market prices of its investments.
The Group is exposed to price risk arising from its equity
investments. COVID-19 has caused disruption to businesses and
economic activity which has been reflected in recent fluctuations
in global stock markets. There are no comparable recent events
which may provide guidance as to the effect of the spread of
COVID-19 and a potential pandemic, and, as a result, the ultimate
impact of the COVID-19 outbreak or a similar health epidemic is
highly uncertain and subject to change. The Board considers the
emergence and spread of COVID-19 to be a non-adjusting post balance
sheet event and the pricing of the group's equity investments have
not been updated for this. Details of sensitivities to prices used
are shown in note 12.
(b) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair value of
financial instruments.
The Group invests in Credit Assets which may be subject to a
fixed rate of interest, or a floating rate of interest (which may
be linked to base rates or LIBOR). The Group's borrowings may be
subject to a floating rate of interest.
The Group intends to manage the mismatch it has in respect of
the income generated by its Credit Assets, on the one hand, with
the liabilities in respect of its borrowings, on the other hand, by
matching any floating rate borrowings with investments in Credit
Assets that are also subject to a floating rate of interest. To the
extent that the Group is unable to match its funding in this way,
it may use derivative instruments, including interest rate swaps,
to reduce its exposure to fluctuations in interest rates, however
some unmatched risk may remain. The Group has not used any derivate
instruments in the year.
The Group finances its operations through its share capital and
reserves, including realised gains on investments as well as the
Group's debt facilities. As at 31 December 2019 the Group had
GBP206.8 million drawn down under these facilities (2018: GBP189.3
million).
Exposure of the Group's financial assets and liabilities to
floating interest rates (giving cash flow interest rate risk when
rates are reset) and fixed interest rates (giving fair value risk)
as at 31 December 2019 is shown below:
Fixed or
Floating Administered
Group Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ========= ============= =========
Credit Assets
at amortised
cost 206,932 374,066 580,998
Cash and
cash equivalents 15,154 - 15,154
Interest
bearing
borrowings (205,946) - (205,946)
================== ========= ============= =========
Total exposure 16,140 374,066 390,206
================== ========= ============= =========
Exposure of the Company's financial assets and liabilities to
floating interest rates (giving cash flow interest rate risk when
rates are reset) and fixed interest rates (giving fair value risk)
as at 31 December 2019 is shown below:
Fixed or
Company Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ========= ============= =========
Credit Assets
at amortised
cost 206,932 374,066 580,998
Cash and
cash equivalents 13,251 - 13,251
Interest
bearing
borrowings (130,000) - (130,000)
================== ========= ============= =========
Total exposure 90,183 374,066 464,249
================== ========= ============= =========
Exposure of the Company and Group's financial assets and
liabilities to floating interest rates (giving cash flow interest
rate risk when rates are reset) and fixed interest rates (giving
fair value risk) as at 31 December 2018 is shown below:
Fixed or
Financial Floating Administered
instrument Rate Rate Total
Company GBP'000 GBP'000 GBP'000
================== ========= ============= =========
Investments
at amortised
cost 106,387 470,143 576,530
Cash and
cash equivalents 5,559 - 5,559
Interest
bearing
borrowings (189,000) - (189,000)
================== ========= ============= =========
Total exposure (77,054) 470,143 393,089
================== ========= ============= =========
An administered rate is not like a floating rate, movements in
which are directly linked to LIBOR. The administered rate can be
changed at the discretion of the lender.
A 1 per cent change in interest rates impacts income on the
assets with a floating rate by GBP1.6 million (2018: GBP0.6
million). A 1 per cent change in interest rates impacts debt
expense on the liabilities with a floating rate by GBP2.0 million
(2018: GBP0.5 million).
(c) Currency risk
Currency risk is the risk that the value of net assets will
fluctuate due to changes in foreign exchange rates. Relevant risk
variables are generally movements in the exchange rates of
non-functional currencies in which the Group holds financial assets
and liabilities. The assets of the Group are invested in Credit
Assets and other investments including unquoted equities which are
denominated in Pounds Sterling and Euros. Accordingly, the value of
such assets may be affected favourably or unfavourably by
fluctuations in currency rates. The Group hedges currency exposure
between Pounds Sterling and Euros.
Concentration of foreign currency exposure
The Investment Manager monitors the fluctuations in foreign
currency exchange rates and may use forward foreign exchange
contracts to hedge the currency exposure of the Group's non-GBP
denominated investments. The Investment Manager re-examines the
currency exposure on a regular basis in each currency and manages
the Group's currency exposure in accordance with market
expectations. The Group does not currently designate any
derivatives as hedges for hedge accounting purposes as described
under IFRS 9 and records its derivative activities on a fair value
basis.
The below table presents the net exposure to Euro's at 31
December 2019. The table includes forward foreign exchange
contracts at their notional exposure value and excludes all GBP
assets and liabilities recorded on the Consolidated Statement of
Financial Position.
Net Exposure
Total Total Forward after Forward
Assets Liabilities Contract Contract
(GBP'000) (GBP'000) (GBP'000) (GBP'000)
========== ============ ========== ==============
4,208 (171) (4,143) (106)
4,208 (171) (4,143) (106)
========== ============ ========== ==============
If the GBP exchange rate simultaneously increased/decreased by
10 per cent against the above currencies, the impact on profit
would be an increase/decrease of GBP11,000. 10 per cent is
considered to be a reasonably possible movement in foreign exchange
rates.
As at 31 December 2018 there were no foreign currency
exposures.
14. Credit risk
Credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to
discharge an obligation.
The Group's credit risks arise principally through exposures to
loans originated or acquired by the Group and cash deposited with
banks, both of which are subject to risk of borrower default.
The Investment Manager and the Origination Partner establishes
and adheres to stringent underwriting criteria as set out in the
appropriate credit policies. For consumer loans, underwriting
includes credit referencing, income verification and affordability
testing, identity verification and various forward-looking
indicators of a borrower's likely financial strength. The Group
invests in a granular portfolio of assets, diversified at the
underlying borrower level, with each loan being subject to a
maximum single loan exposure limit. This helps mitigate credit
concentrations in relation to an individual customer, a borrower
group or a collection of related borrowers.
The credit quality of loans is assessed through evaluation of
various factors, including credit scores, payment data, collateral
available from the borrower and other information.
The Group further mitigates its exposure to Credit Risk through
structuring facilities whereby the facilities are secured on a
granular pool of performing loans and structured so that the
Origination Platform and or borrower provides the first loss, and
the Group finances the senior risk.
Further risk is mitigated in the property sector as the Group
takes collateral in the form of property to mitigate the credit
risk arising from residential mortgage lending and commercial real
estate.
The outbreak of COVID-19 has caused major disruption across the
globe. At the time of writing the portfolio has seen requests for
payment holidays please see above for more detail. The impacts of
the government's assistance to non-bank lenders and the
introduction of the furlough scheme to assist end borrowers are yet
unknown, but they are expected to reduce the potential expected
credit loss impact. Depending on the evolution of the COVID-19
situation, this could result in a severe economic downturn and
potentially a material increase in credit risk. This is being
continually monitored.
Set out below is the analysis of the closing balances of the
Group and Company's credit assets split by the type of loan and the
credit risk band as at 31 December 2019:
Credit Unsecured Secured Total
Risk Band GBP'000 GBP'000 GBP'000
=========== ========= ======== ========
A & B 102,930 475,796 578,726
C 14,790 150 14,940
D & E 17,486 - 17,486
=========== ========= ======== ========
Total 135,206 475,946 611,152
=========== ========= ======== ========
Set out below is the analysis of the closing balances of the
Group and Company's credit assets split by the type of loan and the
credit risk band as at 31 December 2018:
Credit Unsecured Secured Total
Risk Band GBP'000 GBP'000 GBP'000
=========== ========= ======== ========
A & B 129,264 429,034 558,298
C 23,896 223 24,119
D & E 16,896 - 16,896
=========== ========= ======== ========
Total 170,056 429,257 599,313
=========== ========= ======== ========
Each credit risk band is defined below:
Credit
Risk Band Definition
========== =========================
A Highest quality with
minimal indicators of
credit risk
B High quality, with minor
adverse indicators
C Medium-grade, moderate
credit risk, may have
some adverse credit risk
indicators
D/E Elevated credit risk,
adverse indicators (e.g.
lower borrowing ability,
credit history, existing
debt)
========== =========================
The Group ensures that it only deposits cash balances with
institutions with appropriate financial standing or those deemed to
be systemically important.
Liquidity risk
Liquidity risk is the risk that the Group will be unable meet
its obligations in respect of financial liabilities as they fall
due.
The Group manages its liquid resources to ensure sufficient cash
is available to meet its expected contractual commitments. It
monitors the level of short-term funding and balances the need for
access to short-term funding, with the long-term funding needs of
the Group.
A substantial proportion of the Group 's net assets are in
loans, whose cash collections could be utilised to meet funding
requirements if necessary. The Group has the power, under its
Articles of Association, to take out both short and long-term
borrowings subject to a maximum value of one hundred percent of its
share capital and reserves.
At 31 December 2019 the Company had a committed debt facility
totalling GBP150.0 million with a maturity date of 20 Mach 2020, as
well as a 2-year term facility that is structured as run-off
financing in that the debt will paydown over the term of the
facility. In May 2020 the Company's main GBP150 million debt
facility was refinanced with a new lender with the maturity
extended to May 2021. This facility is a term and revolving
facility secured on a range of assets.
The repayment terms and the covenants have been stress tested
over the term of each of these facilities to ensure compliance
(details of which is disclosed in Note 18 to the financial
statements).
The outbreak of COVID-19 has seen the Investment Manager speak
to its clients daily and actively reviewing the impact on the
portfolio to ensure the correct actions are being taken to mitigate
the impact where possible. As part of this the Investment Manager
is not proposing to re-invest the cash generated by the portfolio
in new investments until there is more visibility on the impact of
the lockdown restrictions on performance and a return to some level
of normality in the economy. In the structured portfolio where the
Company provides finance to non-bank lenders, the Investment
Manager is working with the borrowers to help them navigate the
difficult environment whilst ensuring most of the cash generated by
their portfolio is utilised to repay our loan.
Assets and liabilities not carried at fair value but for which
fair value is disclosed
For the Group for the year ended 31 December 2019:
Group Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ======== ======== ========
Assets
Investments
at amortised
cost 14,492 - 565,820 580,312
Receivables - 8,875 - 8,875
Cash and
cash equivalents 15,154 - - 15,154
================== ======== ======== ======== ========
Total assets 29,646 8,875 565,820 604,341
================== ======== ======== ======== ========
Liabilities
Management
fee payable - 511 - 511
Performance
fee payable - 3,468 - 3,468
Other payables - 2,326 - 2,326
Interest
bearing
borrowings - 206,792 - 206,792
================== ======== ======== ======== ========
Total liabilities - 213,097 - 213,097
================== ======== ======== ======== ========
For the Company for the year ended 31 December 2019:
Company Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ======== ======== ========
Assets
Investments
at amortised
cost 14,492 - 565,820 580,312
Receivables - 8,325 - 8,325
Cash and
cash equivalents 13,251 - - 13,251
================== ======== ======== ======== ========
Total assets 27,743 8,325 565,820 601,888
================== ======== ======== ======== ========
Liabilities
Management
fee payable - 511 - 511
Performance
fee payable - 3,468 - 3,468
Other payables - 1,805 - 1,805
Deemed
Loan - 78,613 - 78,613
Interest
bearing
borrowings - 130,741 - 130,741
================== ======== ======== ======== ========
Total liabilities - 215,138 - 215,138
================== ======== ======== ======== ========
For the Group and Company for the year ended 31 December
2018:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ======== ======== ========
Assets
Investments
at amortised
cost 16,589 - 558,338 574,927
Receivables - 3,375 - 3,375
Cash and
cash equivalents 5,559 - - 5,559
================== ======== ======== ======== ========
Total assets 22,148 3,375 558,338 583,861
================== ======== ======== ======== ========
Liabilities
Management
fee payable - 985 - 985
Performance
fee payable - 2,873 - 2,873
Other payables - 1,830 - 1,830
Interest
bearing
borrowings - 189,263 - 189,263
================== ======== ======== ======== ========
Total liabilities - 194,951 - 194,951
================== ======== ======== ======== ========
Categorisation within the hierarchy has been determined based on
the lowest level input that is significant to the fair value
measurement of the relevant asset or liability (see Note 12
Investments at Fair Value Through Profit or Loss for details).
Further details of the loans at amortised cost held by the Group
can be found in Note 11 to the financial statements.
Capital Management
The Company's primary objectives in relation to the management
of capital are driven by strategic and organisational requirements
but are focused around:
-- ensuring its ability to continue as a going concern; and
-- maximising the long-term capital growth for its shareholders
through an appropriate balance of equity capital and gearing.
In the management of capital and in its definition, we include
equity (including revenue and capital reserves), debt (including
long-term credit facilities, commercial paper backstopped by
long-term credit facilities and any hedging assets or liabilities
associated with long-term debt items), cash and temporary
investments.
The Board manage the capital structure and make adjustments to
it considering changes in economic conditions and the risk
characteristics of the business. The Company has met the above
objectives through diversifying the leverage facilities through the
introduction of a new debt facility which was GBP81.0 million on
day one.
The Group monitors capital using a ratio of debt to equity. Debt
is calculated as total interest-bearing borrowings (as shown in the
Consolidated Statement of Financial Position). The Group's debt to
equity ratio which is a key performance indicator used for internal
management at Group level was 51.7 per cent at 31 December 2019 (31
December 2018: 47.2 per cent).
The Group is subject to externally imposed capital
requirements:
-- The Company's Articles of Association restrict borrowings to
the value of its share capital and reserves;
-- As a public company, the Company has a minimum share capital of GBP50,000;
-- To be able to pay dividends out of profits available for
distribution by way of dividends, the Company must be able to meet
one of the two capital restriction tests imposed on investment
companies by company law; and
-- The Company's borrowings are subject to covenants limiting
the total exposure based on interest cover ratios, a minimum total
net worth and a cap of borrowings as a percentage of the eligible
borrowing base.
The Company has complied with all the above requirements during
this financial year.
15. Fixed Assets
The tables below set out the movement in Fixed Assets for the
Group and Company.
Year ended 31 IT Development
December 2019 and Software Total
GBP'000 GBP'000
========================= ============== ========
Opening net book
amount 217 217
Additions - -
Amortisation
charge (176) (176)
Closing net book amount 41 41
As at 31 December
2019
Cost 830 830
Accumulated amortisation (789) (789)
========================= ============== ========
Net book amount 41 41
========================= ============== ========
Year ended 31 IT Development
December 2018 and Software Total
GBP'000 GBP'000
========================= ============== ========
Opening net book
amount 342 342
Additions 150 150
Amortisation
charge (275) (275)
Closing net book amount 217 217
As at 31 December
2018
Cost 830 830
Accumulated amortisation (613) (613)
========================= ============== ========
Net book amount 217 217
========================= ============== ========
16. Receivables
The table below set out a breakdown of the Group
receivables.
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
================== =========== ===========
Prepayments 2,656 2,145
Amounts
due from
platforms 5,889 776
Other receivables 330 454
================== =========== ===========
Total receivables 8,875 3,375
================== =========== ===========
The table below set out a breakdown of the Company
receivables.
Company 31 December 31 December
2019 2018
GBP'000 GBP'000
================== =========== ===========
Prepayments 2,106 2,145
Amounts
due from
platforms 5,889 776
Other receivables 330 454
================== =========== ===========
Total receivables 8,325 3,375
================== =========== ===========
The above receivables do not carry any interest and are short
term in nature. The Directors consider that the carrying values of
these receivables approximate their fair value.
Amounts due from platforms relate to cash that has been
collected by the platform but not yet remitted to the Group,
whereby the credit asset at amortised cost has been treated as if
this cash had been received.
17. Other Payables
The table below set out a breakdown of the Group payables.
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
============== =========== ===========
Accruals
and deferred
income 2,326 1,830
Total other
payables 2,326 1,830
============== =========== ===========
The table below set out a breakdown of the Company payables.
Company 31 December 31 December
2019 2018
GBP'000 GBP'000
============== =========== ===========
Accruals
and deferred
income 1,805 1,830
Total other
payables 1,805 1,830
============== =========== ===========
Withholding Taxation
The Company's revenue income from loans is subject to tax, but
offset by the interest distribution paid, which has the effect of
reducing that corporation tax to nil. This means the interest
distribution may be taxable in the hands of the Company's
shareholders. There is no withholding tax payable by the Company at
31 December 2019 (31 December 2018: GBPnil) due to the changes made
in 2017 Finance Act whereby all interest distributions will be paid
gross of tax, therefore withholding tax is retained by the Company
and paid directly to HMRC.
18. Interest Bearing Borrowings
The table below sets out a breakdown of the Group's
interest-bearing borrowings.
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
======================= =========== ===========
Current Liabilities
Credit facility 130,000 -
Interest
and commitment
fees payable 741 -
Non-Current Liabilities
Credit facility 75,946 189,000
Interest
and commitment
fees payable 105 263
======================= =========== ===========
Total interest-bearing
borrowings 206,792 189,263
======================= =========== ===========
The table below sets out a breakdown of the Company's
interest-bearing borrowings.
Company 31 December 31 December
2019 2018
GBP'000 GBP'000
======================= =========== ===========
Current Liabilities
Credit facility 130,000 -
Interest
and commitment
fees payable 741 -
Non-Current Liabilities
Credit facility - 189,000
Interest
and commitment
fees payable - 263
======================= =========== ===========
Total interest-bearing
borrowings 130,741 189,263
======================= =========== ===========
At 31 December 2019 the Company's main debt facility was GBP150
million with The Royal Bank of Scotland plc as agent. The facility
is secured upon the assets of the Company and had a maturity date
of 20 March 2020. Interest is charged at one, three or six-month
LIBOR plus a margin. The credit facility is syndicated, and other
lenders may in the future accede to the facility. This facility was
subsequently extended to 19 June 2020 and then further extended
from May 2020.
In May 2020 this facility was refinanced with the maturity
extended to May 2021. The Group retains the flexibility to
refinance the facility.
In August 2019, the Group entered a two-year debt facility to
finance three residential mortgage portfolios, two commercial
mortgage pools and a small unsecured consumer pool. These
portfolios were previously leveraged through the Company level debt
facility but getting assets specific leverage on these provides a
lower cost of funding at a higher advance rate. The total debt
raised on day one of this facility was GBP81.0 million and comes
with a Libor floating cost. The facility has a 2-year term with a
1-year extension option and is structured as a run-off financing in
that the debt will paydown over the term of the facility.
As at the 31 December 2019 the below related debt costs had been
incurred by the Group.
Group 31 December 31 December
2019 2018
GBP'000 GBP'000
================ =========== ===========
Interest
and commitment
fees payable 6,166 3,373
Other finance
charges 2,252 2,056
================ =========== ===========
Total finance
costs 8,418 5,429
================ =========== ===========
As at the 31 December 2019 the below related debt costs had been
incurred by the Company.
Company 31 December 31 December
2019 2018
GBP'000 GBP'000
================ =========== ===========
Interest
and commitment
fees payable 5,311 3,373
Other finance
charges 2,138 2,056
================ =========== ===========
Total finance
costs 7,449 5,429
================ =========== ===========
As part of IAS 7, "Statement of cash flows", an entity is
required to disclose changes in liabilities arising from financing
activities, including both changes arising from cash flows and
non-cash changes.
As at the 31 December 2019 the below changes occurred for the
Group:
Group Total
GBP'000
================================ ==========
At 1 January 2019 189,263
Interest bearing borrowings 272,463
Repayments of interest-bearing
borrowing (255,517)
Finance costs 8,418
Interest paid on financing
activities (7,835)
At 31 December 2019 206,792
================================ ==========
As at the 31 December 2019 the below changes occurred for the
Company:
Company Total
GBP'000
================================ ==========
At 1 January 2019 189,263
Interest bearing borrowings 191,500
Repayments of interest-bearing
borrowing (250,500)
Finance costs 7,450
Interest paid on financing
activities (6,972)
At 31 December 2019 130,741
================================ ==========
As at the 31 December 2018 the below changes occurred for the
Group and Company:
Group and Company Total
GBP'000
================================ ==========
At 1 January 2018 56,787
Interest bearing borrowings 366,900
Repayments of interest-bearing
borrowing (234,400)
Finance costs 5,429
Interest paid on financing
activities (5,453)
At 31 December 2018 189,263
================================ ==========
The below table analyses the Group's financial liabilities into
relevant maturity groupings as well as expected future interest and
commitment fee costs based on the remaining period at the
Consolidated Statement of Financial Position date to the final
scheduled maturity date.
2019
Group 1 - 5
Financial < 1 year years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ========
Credit facility 142,041 63,905 205,946
Interest
and commitment
fees payable 3,484 1,475 4,959
================ ======== ======== ========
Total exposure 145,525 65,380 210,905
================ ======== ======== ========
The below table analyses the Company's financial liabilities
into relevant maturity groupings as well as expected future
interest and commitment fee costs based on the remaining period at
the Statement of Financial Position date to the final scheduled
maturity date.
2019
Company 1 - 5
Financial < 1 year years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ========
Credit facility 130,000 - 130,000
Interest
and commitment
fees payable 1,272 - 1,272
================ ======== ======== ========
Total exposure 131,272 - 131,272
================ ======== ======== ========
The below table analyses the Group's and Company's financial
liabilities into relevant maturity groupings as well as expected
future interest costs based on the remaining period at the
Statement of Financial Position date to the final scheduled
maturity date.
2018 1 - 5
Financial < 1 year years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ========
Credit facility - 189,000 189,000
Interest
and commitment
fees payable 6,745 1,437 8,182
================ ======== ======== ========
Total exposure 6,745 190,437 197,182
================ ======== ======== ========
19. Deemed Loan
The Group has no deemed loans as at 31 December 2019 and 31
December 2018. Deemed loans can only relate to the Company as they
relate to loans originated by the Company and subsequently
securitised. Although the loans are no longer legally owned by the
Company, the Company maintains the economic benefit of the
underlying assets and therefore does not meet the criteria to
derecognise as the economic exposure associated with the rights
inherent in the asset are maintained. As the requirements of
derecognition have not been met the Company has a deemed loan
liability to the securitised special purpose entity. As at the 31
December 2019 the Company had the below deemed loan:
Opening as Novation's/ Closing as
at 1 January (Redemptions) at 31 December
2019 GBP'000 2019
GBP'000 GBP'000
============= ============== ===============
- 78,612 78,612
- 78,613 78,613
============= ============== ===============
The Company had no deemed loan as at 31 December 2018.
20. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the date of the Financial Statements.
31 December 31 December
2019 2018
================= =========== ===========
No. Issued,
allotted
and fully paid
ordinary shares
of GBP0.01 each 39,449,919 39,449,919
Cost GBP'000 394 394
================= =========== ===========
On incorporation, the issued share capital of the Company was
GBP50,000.01 represented by one ordinary share of 1p and 50,000
management shares of GBP1 each, all of which were held by Honeycomb
Holdings Limited as subscriber to the Company's memorandum of
association. The ordinary share and management shares were fully
paid up.
The management shares, which were issued to enable the Company
to obtain a certificate of entitlement to conduct business and to
borrow under Section 761 of the Companies Act 2006, were redeemed
immediately following admission of 23 December 2015 out of the
proceeds of the issue.
On 23 December 2015, 10,000,000 ordinary shares of 1p each were
issued to shareholders as part of the placing and offer for
subscription in accordance with the Company's prospectus dated 18
December 2015.
During 2016 a further 9,926,109 ordinary shares were issued. The
price paid per share ranged from 1,000 pence to 1,015 pence and the
total paid for the shares during the period amounted to GBP98.8
million.
On 31 May 2017 the Company announced the successful completion
of a placing of a further 10,000,000 ordinary shares. The price
paid per share was 1,050p and the total paid for the shares during
the year amounted to GBP103.3 million net of issue costs.
On 25 April 2018 the Company announced the successful completion
of a placing of a further 9,523,809 ordinary shares. The price paid
per share was 1,050p and the total paid for the shares during the
year amounted to GBP97.8 million net of issue costs.
21. Special Distributable Reserve
At a general meeting of the Company held on 14 December 2015,
special resolutions were passed approving the cancellation of the
amount standing to the credit of the Company's share premium
account as at 23 December 2015.
Following the approval of the Court and the subsequent
registration of the Court order with the Registrar of Companies on
21 March 2016, the reduction became effective. Accordingly, GBP98.1
million, previously held in the share premium account, has been
transferred to the special distributable reserve as disclosed in
the Statement of Financial Position.
During the year GBP0.62 million (2018: GBP0.85 million) of the
special distributable reserve was used to pay the Q4 2018 Dividend
which was paid on 28 March 2019.
22. Investments in SUBSIDIARIES
On 20 June 2019 the Group incorporated Sting Funding Limited
("Sting"), a limited Company incorporated under the law of England
and Wales. The company is registered at 35 Great St. Helen's,
London, United Kingdom, EC3A 6AP. The Group is considered to
control Sting through holding 100 per cent of the issued shares. As
a result, the financial statements for the year ended 31 December
2019 are prepared on a consolidated basis.
Sting became active on 28 August 2019 when it drew down on a
debt facility backed by commercial and second charge residential
mortgages.
As at the 31 December 2018 the Company had no structured
entities assessed for consolidation.
23. Investments in associates
As at 31 December 2019, the Company has a single associate,
being a 34.6 per cent investment in Allium Lending Group Limited
("Allium") (formally GDFC Group Limited, Hiber Limited and The
Green Deal Finance Company Limited). The company number is 10028311
its registered office is Imperial House, 15 - 19 Kingsway, London,
WC2B 6UN.
This is a UK platform responsible for setting-up, financing and
administering unsecured personal loans. As permitted by IAS 28
'Investment in Associates' and in accordance with the Group's
accounting policy the investment is accounted for at fair value
through profit or loss. No dividends were declared during the year
in respect of the investment. The Company holds Allium at a fair
value of GBP3.4 million.
The unaudited net assets / (liabilities) as at 31 December 2019
were (GBP0.8) million (2018: audited (GBP2.6) million), and the
loss after tax was GBP4.1 million (2018: audited loss GBP5.2
million).
Allium is incorporated in England and Wales.
The Group has also provided GBP8.7 million of debt funding to
the platform (2018: GBP8.3 million).
The Group has entered into an agreement which gives it the right
to participate in qualifying loans originated by the platform.
There are no significant restrictions on the ability of the
associate from repaying loans from, or distributing dividends to,
the Group.
24. Net Asset Value per Ordinary Share
31 December 31 December
2019 2018
============== =========== ===========
Net asset
value per
ordinary
share
pence 1,014.9p 1,015.7p
Net assets
attributable
GBP'000 400,361 400,710
============== =========== ===========
The net asset value per ordinary share as at 31 December 2019 is
based on net assets at the year-end of GBP400.4 million and on
39,449,919 ordinary shares in issue at the year-end.
The net asset value per ordinary share as at 31 December 2018 is
based on net assets at the year-end of GBP400.7 million and on
39,449,919 ordinary shares in issue at the year-end.
25. Contingent Liabilities and Capital Commitments
As at 31 December 2019 and 31 December 2018 there were no
contingent liabilities or capital commitments for the Group. The
Group did have GBP96.1 million (2018: GBP48.7 million) of undrawn
committed structured credit facilities at 31 December 2019 and
GBP4.5 million (2018: GBPnil) of undrawn commitments in relation to
secured real estate loans.
26. Related Party Transactions and Transactions with the
Investment Manager
IAS 24 'Related party disclosures' requires the disclosure of
the details of material transactions between the Company and any
related parties. Accordingly, the disclosures required are set out
below:
Associates - at 31 December 2019 outstanding loan balance from
structured facilities totalling GBP8.7 million (2018: GBP8.3
million) and accrued interest of GBP1.1 million (2018: GBP0.3
million) with Allium Lending Group Limited (formally GDFC Group
Limited, Hiber Limited and The Green Deal Finance Company Limited).
The structured facilities are secured on a granular pool of
consumer loans.
Directors - The remuneration of the Directors is set out in the
Directors' Remuneration Report above. There were no contracts
subsisting during or at the end of the year in which a Director of
the Company is or was interested and which are or were significant
in relation to the Company's business. There were no other
transactions during the year with the Directors of the Company. The
Directors do not hold any ordinary shares of the Company.
At 31 December 2019, there was GBPnil (2018: GBPnil) payable to
the Directors for fees and expenses.
Investment Manager - Pollen Street Capital Limited (the
'Investment Manager'), a UK-based company authorised and regulated
by the FCA, has been appointed the Company's investment manager and
AIFM for the purposes of the AIFMD. Details of the services
provided by the Investment Manager and the fees paid are given on
Note 6 to the financial statements.
During the year the Group paid GBP9.53 million (2018: GBP7.87
million) of fees and at 31 December 2019, there was GBP3.96 million
(2018: GBP3.86 million) payable to the Investment Manager.
The Group considers all transactions with the Manager or
companies that are controlled by the Manager as related party
transactions.
1st Stop Group Limited ("1st Stop") is an English based consumer
lender. During the year the Company provided a structured facility
to 1st Stop secured on a granular pool of consumer loans. 1st Stop
is owned by a fund that is managed by an affiliate of the
Investment Manager. As at 31 December 2019 the facility was GBP28.0
million drawn (31 December 2018: GBP14.9 million). The Group also
had a forward flow relationship in place with 1st Stop in which the
Group provided GBP11.1 million (31 December 2018: GBPnil million)
and these loans have an outstanding balance as at 31 December 2019
of GBP10.6 million (31 December 2018: GBPnil million).
CapitalFlow Group ("CapitalFlow") is an Irish based SME lender.
During the year the Group provided a short-term structured facility
to CapitalFlow secured on a granular pool of SME loans. The
facility was fully repaid during the year. CapitalFlow is owned by
a fund that is managed by an affiliate of the Investment
Manager.
The Company also carried out FX hedging with Infinity
International Limited ("Infinity") in relation to some Euro
development finance that it had entered during the year. Infinity
is owned by a fund that is managed by an affiliate of the
Investment Manager. There was no exposure at year end as a
different provider was utilised.
Origination Partner - Freedom Finance Limited
During the year that the Origination Partner was part of the
same group as the Investment Manager, the fees payable to the
Origination Partner by the Company were deducted from the
management fee payable to the Investment Manager and totalled
GBP38,574 (2018: GBP92,800), and at 31 December 2019, there was
GBPnil (2018: GBPnil) payable to the Origination Partner.
27. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
28. Subsequent Events
Save as noted below, there have been no events to disclose since
the year end under review.
On 27 January 2020 Honeycomb Investment Trust plc repurchased
into treasury 2,200,000 Ordinary Shares at a price of 850 pence per
Ordinary Share. Following completion of the Buyback, the Company
has 39,449,919 Ordinary Shares in issue, of which 2,200,000
Ordinary Shares are held in treasury. The total number of voting
rights in the Company is therefore 37,249,919 Ordinary Shares.
On 27 March 2020, a dividend of 20.0 pence per ordinary share
was paid.
In March 2020, the World Health Organisation recognised an
outbreak of a new virus that causes coronavirus disease 2019
("COVID-19") as a pandemic. COVID-19 has caused disruption to
businesses and economic activity which has been reflected in recent
fluctuations in global stock markets. There are no comparable
recent events which may provide guidance as to the effect of the
spread of COVID-19 and a potential pandemic, and, as a result, the
ultimate impact of the COVID-19 outbreak or a similar health
epidemic is highly uncertain and subject to change.
The Investment Manager continues to have faith in the strength
of the performance of the asset class despite the unprecedented
conditions. The Group is well diversified with the underlying loan
portfolios being highly granular with low concentration risk. It
has maintained a close and proactive engagement with all platform
partners and forbearance has been applied sensitively and
proportionately. The Investment Manager believes that the Group is
well positioned to perform well throughout the crisis.
However, given the Group's UK focus, its performance is linked
to the health of the UK economy. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. However,
the overall effect of this cannot be quantified reliably as we
expect the impact of the government's assistance to non-bank
lenders and the introduction of the furlough scheme to assist end
borrowers are yet unknown, but they are expected to reduce the
potential expected credit loss impact. The government has also
launched a number of initiatives aimed at providing finance to
SMEs. Two of our largest borrowers are in the process of lending
under the CBIL government guarantee scheme, which will also
refinance part of their exposure with the benefit of the government
guarantee. The Investment Manager has adopted a prudent approach
with the focus on the existing portfolio and ensuring cash
collections remain robust as the appropriate strategies are in
place.
The longer-term financial impact of coronavirus is not yet clear
and given the significant change in the operating environment and
economic expectations the Investment Manager is proposing to
re-invest the cash generated by the portfolio very selectively
during this period of uncertainty with the majority of cash going
to reduce net debt. Note 11 and 12 includes, for illustrative
purposes, sensitivities for expected credit losses and equity
valuations. This is not an estimate or forecast of the impact of
COVID-19. The analysis is designed solely to give an indication of
the impact of certain changes to the Group's net asset value.
The Board considers the emergence and spread of COVID-19 to be a
non-adjusting post balance sheet event.
In May 2020 the Company's main debt facility was refinanced with
a new lender with the maturity extended to May 2021. This facility
has a combination of a term loan and a revolving loan and is
secured on a range of the Company's assets.
29. RE-PRESENTATION OF FINANCIAL STATEMENTS
Following a review of the Consolidated Statement of
Comprehensive Income and Consolidated Statement of Financial
Position and the associated knock on effect on the Cashflow
Statement, the Directors have decided to re-present these
statements for 2018 and incorporate them in 2019. The changes made
to the face of these financial statements are to make them easier
to read and understand for the end user and to tie in with how the
Company monitors and reviews performance internally and externally
in other outputs. There have been no changes to the basis on which
the items are estimated or measured. A summary of changes to the
Statement of Comprehensive Income can be seen below. The key change
is splitting credit asset servicing costs to its own line item.
There has also be a renaming of several line items, so they better
reflect how these assets are reviewed.
Statement of Comprehensive 2018 Re-presentation 2018 Re-stated
Income GBP'000 GBP'000 GBP'000
=========================== ======== =============== ==============
Investment interest 50,921 3,524 54,445
Other income 1 (1) -
Third Party Servicing - (3,523) (3,523)
=========================== ======== =============== ==============
A summary of changes to the Statement of Financial Position can
be seen below. The change is adjusting the line item tittle, so
they better reflect the assets they represent.
Statement of Financial 2018 Re-presentation 2018 Re-stated
Position GBP'000 GBP'000 GBP'000
======================= ======== =============== ==============
Investments at
amortised cost 9,980 (9,980) -
Investments held
at fair value
through profit
or loss 576,530 (576,530) -
Equity Investments
held at fair value
through profit
or loss - 9,980 9,980
Credit Assets
at amortised cost - 576,530 576,530
======================= ======== =============== ==============
Shareholders' Information
Directors, Portfolio Manager and Advisers
Directors Administrator
Robert Sharpe Apex Fund Services (UK) Ltd
Jim Coyle 5th Floor, Bastion House
Richard Rowney 140 London Wall
London EC2Y 5DN
all at the registered office below England
Registered Office Depositary
6th Floor Indos Financial Limited
65 Gresham Street 5(th) Floor 54 Fenchurch Street
London EC2V 7NQ London EC3M 3JY
England England
Investment Manager and AIFM Registrar
Pollen Street Capital Limited Computershare Investor Services PLC
11 - 12 Hanover Square The Pavilions, Bridgewater Road
London W1S 1JJ Bristol BS99 6ZZ
England England
Financial Adviser and Broker Company Secretary
Liberum Capital Limited Link Company Matters Limited
Level 12, Ropemaker Place 6th Floor
25 Ropemaker Place 65 Gresham Street
London EC2Y 9LY London EC2V 7NQ
England England
Custodian Independent Auditors
Sparkasse Bank Malta PLC PricewaterhouseCoopers LLP
101 Townsquare 7 More London Riverside
Sliema SLM3112 London SE1 2RT
Malta England
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: G B 0 0 BYQDNR86
Sedol: BYZV3G2
Ticker: HONY
Website
The Company's website can be found at www.honeycombplc.com. The
site provides visitors with Company information and literature
downloads.
The Company's profile is also available on third-party sites
such as www.trustnet.com and www.morningstar.co.uk .
Annual and half-yearly reports
Copies of the annual and half-yearly reports may be obtained
from the Company Secretary by calling 0203 697 5368 or by visiting
www.honeycombplc.com .
Share prices and Net Asset Value information
The Company's ordinary shares of 1p each are quoted on the
London Stock Exchange:
-- SEDOL number: BYZV3G2
-- ISIN number: GB00BYQDNR86
-- EPIC code: HONY
--
The codes above may be required to access trading information
relating to the Company on the internet.
Electronic communications with the Company
The Group's Consolidated Annual Report & audited financial
statements, half-yearly reports and other formal communications are
available on the Company's website. To reduce costs the Company's
half-yearly financial statements are not posted to shareholders but
are instead made available on the Company's website.
Whistleblowing
As the Company has no employees, the Company does not have a
whistleblowing policy. The Audit Committee reviews the
whistleblowing procedures of the Investment Manager and
Administrator to ensure that the concerns of their staff may be
raised in a confidential manner.
Warning to shareholders - share fraud scams
Fraudsters use persuasive and high-pressure tactics to lure
investors into scams. They may offer to sell shares that turn out
to be worthless or non-existent, or to buy shares at an inflated
price in return for an upfront payment. While high profits are
promised, if you buy or sell shares in this way, you will probably
lose your money.
How to avoid share fraud
-- Keep in mind that firms authorised by the FCA are unlikely to
contact you out of the blue with an offer to buy or sell shares
-- Do not get into a conversation, note the name of the person
and firm contacting you and then end the call
-- Check the Financial Services Register from www.fca.org.uk to
see if the person and firm contacting you is authorised by the
FCA
-- Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details
-- Use the firm's contact details listed on the Register if you want to call it back
-- Call the FCA on 0800 111 6768 if the firm does not have
contact details on the Register or you are told they are out of
date
-- Search the list of unauthorised firms to avoid at www.fca.org.uk/scams
-- Consider that if you buy or sell shares from an unauthorised
firm you will not have access to the Financial Ombudsman Service or
Financial Services Compensation Scheme.
-- Think about getting independent financial and professional
advice before you hand over any money
-- Remember: if it sounds too good to be true, it probably is!
5,000 people contact the Financial Conduct Authority about share
fraud each year, with victims losing an average of GBP20,000.
Report a scam
If you are approached by fraudsters, please tell the FCA using
the share fraud reporting form at fca.org.uk /scams, where you can
find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111
6768.
If you have already paid money to share fraudsters, you should
contact Action Fraud on 0300 123 2040.
National Storage Mechanism
A copy of the Annual Report and audited financial statements
will be submitted shortly to the National Storage Mechanism ("NSM")
and will be available for inspection at the NSM, which is situated
at: www.morningstar.co.uk/nsm
Definitions and reconciliation to alternative performance
measures
Credit Assets Credit Assets are loans made to consumers and
small businesses as well as other counterparties,
together with related investments.
======================= =======================================================
Equity Assets Equity Assets are selected equity investments
that are aligned with the Company's strategy and
that present opportunities to enhance the Company's
returns from its investments.
======================= =======================================================
Net asset value Net asset value represents the total value of
("NAV") the Group's assets less the total value of its
liabilities. For valuation purposes, it is common
to express the NAV on a per share basis.
======================= =======================================================
Ongoing charges Ongoing charges is calculated as a percentage
of annualised ongoing charge over average reported
NAV. Ongoing charges are those expenses of a type
which are likely to recur in the foreseeable future.
======================= =======================================================
Premium If the share price of the Company is higher than
the NAV per share, the Company's shares are said
to be trading at a premium. The premium is shown
as a percentage of the NAV.
======================= =======================================================
Discount If the share price of the Company is lower than
the NAV per share, the Company's shares are said
to be trading at a discount. The discount is shown
as a percentage of the NAV.
======================= =======================================================
Fair Value The amount for which an asset could be exchanged,
or a liability settled, between willing parties
in an arm's length transaction.
======================= =======================================================
Registrar An entity that manages the Company's shareholder
register. The Company's registrar is Computershare
Investor Services PLC.
======================= =======================================================
Alternative Investment An AIF, as defined in the AIFM Directive 2011/61/EU
Fund ("AIF") on Alternative Investment Fund Managers.
======================= =======================================================
LIBOR ("London The interest rate participating banks offer to
Inter-Bank Offered other banks for loans on the London market.
Rate")
======================= =======================================================
Whole Loan Credit Assets whereby the Group is exposed to
the underlying risk and rewards of the loan
======================= =======================================================
Structured Loan Credit Asset whereby the Group typically has senior
secured loans to specialty finance companies,
whereby the security on our investment comprises
the assets originated by the specialty finance
company and the company provides the 'first loss'
in the form of 'real capital' whilst we are provide
the senior capital. Corporate guarantees also
typically taken
======================= =======================================================
AIFM An Alternative Investment Fund Manager, as defined
in the AIFM Directive. Pollen Street Capital Limited
undertakes this role on behalf of the Company.
======================= =======================================================
Consumer Loan An amount of money lent to an individual for personal,
family, or household purposes.
======================= =======================================================
Servicers Comprehensive loan servicing to support the full
loan lifecycle, from origination, through account
servicing to arrears management.
======================= =======================================================
Hedging An investment to reduce the risk of adverse price
movements in an asset.
======================= =======================================================
RECOnciliation to Alternative performance measures
Net Asset Value (Ex-Income)
31 December 2019 31 December 2018
GBP'000 GBP'000
============================ ================ ================
Net asset
value 400,361 400,710
Revenue Account (5,270) (4,934)
Capital Account 1,030 965
IFRS 9 Adoption (2,337) (2,337)
============================ ================ ================
Net Asset Value (ex-income) 393,784 394,404
============================ ================ ================
Net Asset Value (Ex Income) is calculated as NAV (Cum Income)
excluding net income (both revenue and capital income) that is yet
to be transferred to reserves as described below. For this purpose
net income will comprise all income not yet moved to reserves (both
revenue and capital income), less the value of (i) any dividends
paid in respect of that income and (ii) any dividends in respect of
that income which have been declared and marked ex dividend but not
yet paid. Any income in respect of a financial year, which is
intended to remain undistributed will be moved to reserves on the
first business day of the immediately following year, meaning that
each figure for NAV (Ex-Income) reported during a financial year
will equate to the NAV (Cum Income) less undistributed income which
has not been moved to reserves. NAV per share is calculated by
dividing the calculated figure by the total number of shares.
Number of shares at 31 December 2019 39,499,919 (31 December 2018:
39,499,919).
Premium / (Discount) to NAV per share
31 December 2019 31 December 2018
=========================== ================ ================
NAV per share (Cum income) 1,014,9p 1,015.7p
Share Price at Close 972.5p 1,130.0p
Premium / (Discount) (4.2)% 11.3%
=========================== ================ ================
The premium / (discount) to NAV per share is calculated by
taking the difference between the share price at close and the NAV
per share (Cum income) and dividing it by the NAV per share.
Annual NAV per Share Return
31 December 2019 31 December 2018
============================ ================ ================
NAV per share (Cum income)
at year end 1,014.9p 1,015.7p
Opening NAV per share (Cum 1,015.7p 1,010.6p*
income)
Dividends per share paid in
the year 80.0p 80.0p
Annual Nav per Share Return 7.8% 8.4%
============================ ================ ================
*Opening balance adjusted for initial adoption of IFRS 9
The annual NAV per share return is calculated by taking the
total of the closing NAV per share (cum income) at year end, adding
the dividend per share paid in the year and substituting the
opening NAV per share (Cum Income), divided by the opening NAV per
share (cum income).
Inception to Date ("ITD") NAV per Share Return
31 December 2019 31 December 2018
=============================== ================ ================
NAV per share (Cum income) 1,014.9p 1,015.7p
Opening NAV per share (Cum
income) at inception 982.0p 982.0p
Dividends per share paid since
inception 292.9p 212.9p
ITD NAV per Share Return 33.2% 25.1%
=============================== ================ ================
The ITD NAV per share return is calculated by taking the total
of the closing NAV per share (cum income) at year end and adding
the dividend per share paid since inception and substituting the
opening NAV per share (Cum Income) at inception, divided by the NAV
per share (cum income) at inception.
Debt to Equity
31 December 2019 31 December 2018
(GBP'000) (GBP'000)
============================ ================ ================
Net Asset Value 400,361 400,710
Interest Bearing Borrowings 206,792 189,263
Debt to Equity ratio 51.7% 47.2%
============================ ================ ================
Debt to equity ratio is calculated as the Group's
interest-bearing debt divided by the net asset value expressed as a
percentage.
Revenue Return
31 December 2019 31 December 2018
(GBP'000) (GBP'000)
================================= ================ ================
Profit after income from revenue 31,276 29,037
Average NAV 402,619 371,858
Revenue Return 7.8% 7.8%
================================= ================ ================
Revenue return is calculated as profit after tax related to
income from revenue divided by average NAV during the year. Average
NAV is calculated as the average of the previous 12 months
published monthly NAV's.
Dividend Return
31 December 2019 31 December 2018
============================= ================ ================
Dividend declared (pence per
share) 80.0 80.0
IPO issue price (pence per
share) 1,000.0 1,000.0
Dividend Return 8.0% 8.0%
============================= ================ ================
Dividend return is calculated as the total declared dividends
for the period divided by IPO issue price.
Ongoing Charges
31 December 2019 31 December 2018
(GBP'000) (GBP'000)
======================= ================ ================
Auditors' remuneration 160 129
Administrator's fees 192 199
Directors' fees 149 145
Management Fee 6,066 4,997
Other costs 673 420
Average NAV 402,619 371,858
Ongoing Charges 1.8% 1.6%
======================= ================ ================
Ongoing charges ratio: The Annualised Ongoing Charge is
calculated using the Association of Investment Companies
recommended methodology. It is calculated as a percentage of
annualised ongoing charge over average reported Net Asset Value.
Average NAV is calculated as the average of the previous 12 months
published monthly NAV's. Ongoing charges are those expenses of a
type which are likely to recur in the foreseeable future, whether
charged to capital or revenue, and which relate to the operation of
the investment company as a collective fund, excluding the costs of
acquisition/disposal of investments, financing charges and
gains/losses arising on investments. Ongoing charges are based on
costs incurred in the year as being the best estimate of future
costs. The AIC excludes performance fees from the Ongoing Charges
calculation.
[1] Bank of England, Ernst & Young, Financing & Leasing
Association and PSC Internal estimates
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR DBGDUSDDDGGR
(END) Dow Jones Newswires
May 28, 2020 02:00 ET (06:00 GMT)
Honeycomb Investment (LSE:HONY)
Historical Stock Chart
From Jun 2024 to Jul 2024
Honeycomb Investment (LSE:HONY)
Historical Stock Chart
From Jul 2023 to Jul 2024