TIDMHONY
RNS Number : 1498X
Honeycomb Investment Trust PLC
30 April 2021
HONEYCOMB INVESTMENT TRUST PLC
Annual Financial Report for the year ended to 31 December
2020
The Directors present the Annual Financial Report of Honeycomb
Investment Trust plc (the "Company") for the year ended 31 December
2020. 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 2020 but is
derived from those accounts. Statutory accounts for the year ended
31 December 2020 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 65.
The following text is copied from the Annual Report &
Accounts:
Strategic Report
The Company
Honeycomb Investment Trust plc ("the Company" or "Honeycomb") is
a UK-listed investment trust dedicated to providing investors with
access to asset backed lending opportunities that Pollen Street
Capital Limited ("Pollen Street" or the "Investment Manager")
believes have potential to generate high income returns together
with strong capital preservation.
Investment Objective
The investment objective of the Company and its subsidiaries
(together, the "Group") is to achieve an attractive level of
dividend income with capital preservation growth, primarily through
lending to non-bank lenders and selected equity investments that
are aligned with the Group's strategy.
Investment Manager
Pollen Street serves as the Company's investment manager. Pollen
Street is an independent, alternative investment management company
specialising in the financial services sector and has extensive
experience investing in both credit and private equity strategies
across both banks and non-bank lenders.
Performance Highlights
Dividend Yield
2019 8.0%
2020 8.0%
-----
Target 8.0%
-----
Dividend yield stable at 8.0 per cent of IPO issue price - in
line with the published target.
Note - target dividend is not a profit forecast
NAV Return
2019 7.8%
2020 7.7%
-----
NAV return stable at 7.7 per cent - broadly in line with 2019 -
demonstrates resilience to Covid-19 pandemic
NAV per share
31 December 2019 1,015p
31 December 2020 1,013p
-------
NAV per share stable.
Share Price
31 December 2019 972p
31 December 2020 943p
-----
Share price closed the year at 943p
Dividend Yield: calculated as the total declared dividends for
the period divided by IPO issue price. NAV Return: calculated as
Net Asset Value (Cum Income) at the end of the year, plus dividends
declared during the year, less NAV (Cum Income) at the end of the
year, divided by NAV (Cum Income) calculated on a per share basis.
NAV per Share: Net Asset Value (Cum Income) at the end of the year,
divided by the number of shares. Share Price: closing mid-market
share price at month end (excluding dividends reinvested).
Investment Characteristics
NON-Bank Lending
The non-bank lending sector has been an important provider of
finance for many decades and following the global financial crisis,
the role of non-bank lenders became increasingly critical to a
well-functioning lending market as the large traditional banks
fundamentally changed their approach to the lending markets that
they were focussed on. Faced with both internal and external
pressures, they retrenched from many products and services and
focused on only vanilla, commodity markets where scale and cost of
funding enable them to remain relevant and competitive.
Specialist players, able to tailor products to meet the needs of
target customer groups, often combining strong service standards
coupled together with deployment of data and technology to curate
highly attractive products in their selected fields provide a
critical role in ensuring important parts of the economy continue
to be serviced by high quality lending products.
The non-bank lending market is already large at an estimated
GBP330 billio n (Bank of England, Ernst & Young, Financing
& Leasing Association and Pollen Street Internal estimates) in
the UK alone, and these structural changes have been exacerbated by
Covid-19 disruption.
IMPACT
Impact investments are a key focus, specifically focused on
Financial Inclusion, Regional Growth, Energy Efficiency and
Affordable Housing.
As traditional banks retrench, they exclude an increasing number
of ordinary working people from their service levels. Some reports
suggest that 25% of all adults in UK do not meet the criteria for
mainstream banking offerings and therefore there is an important
role to play for non-bank lenders to offer tailored products to
ensure supportive and appropriate financial inclusion across the
economy.
As the population becomes more engaged in having a positive
impact and seeking to live their lives on a sustainable basis,
these focused lending products to finance energy efficient products
in the home and transportation, for example. They have an important
role to play in enabling ordinary people to finance life
improvements.
Finally, as a highly respected lender to these lending
businesses the Group through the Investment Manager can bring a
consistency of governance and ensure that ethical, sustainable, and
responsible practices are built into all investment processes.
Honeycomb Proposition
The Group provides predominantly senior lending to non-bank
lenders secured on their underlying loan portfolios.
This approach allows Honeycomb to benefit from the advanced
origination and underwriting capabilities of its partners secured
against their portfolios of loans primarily on a senior basis. The
lending partner is fully aligned with the Group and their return is
realised after the debt of the Group is serviced. Typically loans
are of short duration, with an average life of 2 to 3 years and an
amortising profile that removes refinancing and exit risk.
The investment objective is to deliver consistent returns and a
diversified portfolio with high quality partners, rigorous
investment process and robust downside protection. Sector
specialism, strong networks with partners and proprietary deal flow
are key facilitators in driving compelling returns, while
stringently monitoring and managing risk. The Company aims to be
the market-leading finance partner to the non-bank sector.
The combination of this asset backed strategy and the speed of
growth amongst non-bank lenders drives high and stable income
generation alongside a large and growing market opportunity for the
Company to be highly selective in the loans it provides. This means
the Company has a low volatility in NAV and dividend
resilience.
Impact
The Group's focus on Impact is built around 5 key areas where
Honeycomb makes a meaningful difference:
1 Lending to support SMEs and communities is ever more critical
in the current environment. We work with lenders who are close
to their customers and are able to offer tailored products
to support them in a prudent way.
2 Our real estate lending strategy is critical to improving
the quality of the property stock and the creation of affordable,
efficient and good value homes.
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3 Our lending supports financial inclusion at a time when mainstream
lenders are offering only vanilla automated products. Some
reports suggest that 25% of all adults in the UK do not meet
the criteria for mainstream banking offerings. There is an
important role to play for non-bank lenders to offer tailored
products to ensure supportive and appropriate financial inclusion
across the economy. Our partners are nimble and work closely
with customers to provide high-quality lending offerings to
people who are otherwise underserved by traditional providers.
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4 Reducing the carbon footprint and energy consumption of homes
is one of the key ways that individuals can have a real positive
impact on the environment. Our lenders help finance home improvements
that improve energy efficiency, and we are now also focused
on the electrification of transport.
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5 All our lending partners are required to demonstrate and embed
the highest quality of governance and their own three lines
of defence which we ensure is being complied with as part
of our on-going monitoring.
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Overall, there is a great opportunity for Honeycomb to support
specialist lenders with more nimble business models being able to
work closely with customers, react quickly to the changing
environment and to create tailored and responsible lending products
to support the economy and the environment.
Chairman's Statement
I am pleased to present the Annual Report for Honeycomb
Investment Trust plc which covers the year ended 31 December
2020.
The Company is a UK listed company dedicated to providing
investors with access to the non-bank lending market. Within this
market, the Investment Manager identifies lending opportunities
that it believes have potential to provide high income returns
together with strong capital preservation.
2020 has been an exceptional year. The Coronavirus pandemic
("Covid-19") is continuing to have far-reaching effects on society
and the economy with governments around the world providing
unprecedented levels of support.
Despite this hugely challenging environment, the Group has
performed very well throughout the year. This performance affirms
our confidence in the resilience of the investment strategy.
The recent progress made on national vaccination programmes is
encouraging, however uncertainty remains and the Board continues to
work closely with the Investment Manager to continue to position
the Company prudently while delivering consistent returns.
The underlying earnings for the year were strong at GBP26.2m.
One off costs in relation to securing long term debt facilities,
the potential merger with Pollen Street Secured Lending and the
change in listing totalled GBP5.5m resulting in reported earnings
for the year of GBP20.7million (2019: GBP31.2 million).
INVESTMENT PERFORMANCE
2020 has been another successful year for the Company with two
areas of performance to highlight.
Firstly, Honeycomb has delivered a NAV return of 7.7% over 2020.
This is broadly unchanged from the prior year (2019: 7.8%). The
stability of returns is particularly pleasing given the economic
backdrop. The stable returns are a result of the conservative
investment strategy that focuses on senior secured credit
investments. The bridge on page 14 of the Annual Report and
Accounts providers further details on the composition of the NAV
return.
Secondly, the impairment charge for the year has reduced by 24%
to GBP5.58 million in 2020, from GBP7.37 million in 2019. The
reduction in impairment charge is attributable to the focus on
senior secured credit that protects the Company from adverse credit
losses as well as the exit of a GBP45m unsecured consumer loan
portfolio in August 2020.
DIVIDS
The Company reaffirmed its dividend target in August 2020 and
continued to declare dividends at 20.00 pence per share each
quarter. This is in line with the target dividend yield of 8.0 per
cent annualised dividend on the issued share price at the Company's
initial public offering.
Shareholders
The composition of the share register changed in early 2020 with
several new global institutional investors welcomed onto the
register.
In October 2020 the Company was admitted to trading on the
Premium Segment of the London Stock Exchange's main market, a move
up from the Specialist Funds Segment. This is an important step to
make shares more accessible to a wider range of investors as the
Group looks to continue in its growth.
The Company is required to propose a discontinuation vote at the
upcoming annual general meeting ("AGM") given the shares have
traded at an average of more the 10% discount to NAV in the
period.
Share Price and Buybacks
Covid-19 brought volatility to the market as well as the
Company's share price. The Board responded by announcing on 10
August 2020 a buy back initiative with a clear commitment to
continue buybacks until the shares traded at less than a 5%
discount to NAV.
The Company bought back 4,190,178 shares throughout the course
of the year at an average price of 821p. The share price responded
well and closed the year at 943p (31 December 2019: 972p), which is
a 7.0% discount to NAV per share 1,013p (2019: 4.2% discount;
1,015p)
Governance
The Board plays a key role in supporting and challenging the
Company'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.
In January 2021, we were delighted to appoint Joanne Lake to the
Board. Joanne has a wealth of experience in financial services and
brings valuable expertise and diversity to the Board.
Following Joanne's appointment, we announced a revision to the
committee structure with effect from 1 March 2021 to establish
separate committees for audit, risk, remuneration and nomination
matters. In conjunction with this, Jim Coyle was appointed as
senior independent director. Further information on the board
appointments is provided below.
The Board has supported the Investment Manager's Environmental
Social and Governance ("ESG") programme over the course of the year
to ensure the Company has a positive ESG impact. This is ever more
critical in the current environment and the Board is excited about
continuing to build on early success so far.
These changes reflect the Board's ongoing commitment to the
highest standards of corporate governance.
Outlook
2020 has been a period of exceptional stress for businesses and
individuals. Honeycomb is emerging in a stronger position than it
was at the start of the year for three reasons.
Firstly, the stability of the NAV returns over 2020 and 2021
demonstrate the resilience of the investment strategy. The strategy
focuses on secured credit investment, which is a structure that
aligns interests between Honeycomb and its partners. The Board and
the Investment Manager are conscious that the potential impact of
the government support coming to an end is uncertain. However, we
believe the strategy will continue to deliver stable shareholder
returns.
Secondly, Covid-19 has broadened the market opportunities for
Honeycomb. Many non-bank lenders are seeing opportunities to grow
and take market share from traditional banks. The Company continues
to aim to be the market-leading finance partner to the non-bank
sector.
Finally, the Company is now benefitting from longer term debt
facilities with more surplus funding capacity and more diversified
funding providers than it did at the start of the year.
I look forward to working with Pollen Street throughout 2021 as
it continues to manage Honeycomb's investments to deliver the best
outcomes for shareholders.
Robert Sharpe
Chairman
29 April 2021
Investment Manager's Report
The Investment Manager, Pollen Street Capital, is an independent
asset manager working across private equity and credit strategies.
Pollen Street was formed in 2013 and possesses a strong and
consistent track record within the financial and business services
sectors.
Pollen Street has significant experience in lending markets. Its
strategy is focused on providing finance to the non-bank lending
sector enabling these businesses to grow and support their
customers with strong product propositions. The Investment Manager
believes there is a significant opportunity to earn attractive
returns from lending to a broad range of businesses focused on
different subsets of the lending market. Pollen Street has built
deep expertise in lending to non-bank lending business, including a
network of more than 50 high quality non-bank lenders, mainly in
the UK.
The Investment Manager provides the Group with access to an
established network of these specialist lenders. The relationship
with these partners extends beyond Pollen Street being simply
providers of capital. Pollen Street 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.
Financial REsults
The Group has maintained its track record of investment
performance with NAV return of 7.7 per cent (2019: 7.8 per cent)
and dividend yield of 8.0 per cent (2019: 8.0 per cent).
Average Credit Assets reduced to GBP551m in 2020 from GBP573m in
2019 as the Manager focused on cash generation following the onset
of Covid-19. The reduction in average Credit Assets together with
the repositioning of the portfolio to structurally secured loans
and reductions in benchmark interest rates reduced both interest
income and impairment charges. The offsetting impact of these two
factors was a net reduction in earnings of GBP6m.
Offsetting some of the strong performance in the asset portfolio
were one-off costs incurred in relation to the debt facilities and
costs incurred in relation to the potential merger. The existing
debt facilities matured in April 2020 and due to the Covid-19
pandemic the refinancing with a new bank was delayed. This created
additional cost in agreeing an extension to our existing debt
before refinancing onto a larger more flexible facility. In
September 2020, the Company completed a new GBP250 million
three-year facility with a global bank and in the same period
refinanced two of its special purpose vehicles. As a result,
Honeycomb ended the year with reported earnings of GBP20.7 million
(2019: GBP31.2 million) and increased and longer-term debt
facilities providing a strong liquidity position and the ability to
fund our plans for growth over the medium term.
Underlying earnings for the year were strong at GBP26.2m, driven
by the strong performance in the credit portfolio:
2019 2020
====================== ========= =========
Profit before one-offs GBP31.9m GBP26.2m
====================== ========= =========
One-off debt costs - (GBP4.3m)
Potential merger (GBP0.1m) (GBP0.6m)
costs
Other one-off costs (GBP0.6m) (GBP0.6m)
====================== ========= =========
Reported profit GBP31.2m GBP20.7m
====================== ========= =========
We reduced the borrowings during the summer and used cash
generation to return capital to shareholders through value
enhancing share buybacks, bringing net debt to equity to a low of
38.1 per cent. The new debt facilities have since been utilised to
fund assets, with the asset base now at the same level as before
Covid-19 and the Group ending the year with a net debt to equity of
59.1 per cent.
The Company has continued to meet its target dividend of 8.0 per
cent based on the IPO issue price over the period and has
maintained its NAV per share (cumulative of income) at the end of
the period of 1,013 pence per ordinary share (2019: 1,015 pence) at
31 December 2020.
As with the wider UK market, there was deterioration in the
share price during the Covid-19 crisis. In order to address this
discount, the Company repurchased 4,190,178 of its own shares
during the year. This buyback scheme, in combination with improved
market confidence, helped the share price to finish the year at
942.5 pence per share. (2019: 972.5 pence per share). Whilst we are
disappointed that the Company continues to trade below its net
asset position, we believe that it doesn't reflect the strong
underlying performance, and we are pleased to see this improvement
through a difficult period.
Other Highlights
In addition to the resilient financial performance, the Company
has:
-- Continued to reposition the portfolio into more structured
and secured loans and away from consumer whole loans. This reduces
the risk of underperformance in the portfolio.
-- Been admitted to trading on the Premium Segment of the London
Stock Exchange's main market as of 28 October 2020, a move up from
the Specialist Funds Segment.
Portfolio Overview
The portfolio is focused on secured Credit Assets. These are
loans to counterparties that benefit from two forms of
protection:
-- The Company has security over the underlying loan portfolios
for many deals meaning that it has the right to realise the
collateral to cover any shortfall on its loans
-- The Company has seniority over other creditors and equity
holders for many deals meaning that other counterparties bear the
first loss from any underperformance before the Company.
The resilience of the portfolio through this challenging year
demonstrates the strategy of selecting only the assets that meet
the strict risk adjusted returns criteria and maintaining strong
credit quality. The portfolio is composed of two types of deal:
-- Structured loans : Loans to non-bank lenders secured on their
underlying loan portfolios. As at 31 December 2020, the portfolio
of structured loans consists of GBP301 million across 22 facilities
with an average balance outstanding per facility of GBP13.7
million. The facilities have an average loan to value of 65 per
cent and benefit from robust covenants.
-- Direct portfolios: Portfolios of loans owned directly by the
Group, typically secured on property. As at 31 December 2020, this
was GBP253 million across 24 portfolios, 86 per cent or GBP218
million of this portfolio is secured on property, with an average
loan to value ("LTV") of 62 per cent.
Loan to value is defined as the Group's loan as a percentage of
the outstanding capital balance of the portfolio it is secured
against.
Covid-19 Impact
The Investment Manager maintained a close and proactive
engagement with all platform partners. This approach together with
the structural protection and asset backing of the portfolio is
expected to maintain the portfolio in a robust position.
The Investment Manager carefully tracked cash collections from
the onset of the crisis. This has demonstrated the resilience of
the speciality finance industry with cash collections returning to
pre-pandemic levels by Q3.
Forbearance was applied sensitively and proportionately with
forbearance statistics tracked on a daily basis. The significant
majority of customers who took payment holidays returned to full
contractual payments by 31 December 2020.
credit performance & Risk Management
The Company's financial statements have been prepared in
accordance with both international accounting standards in
conformity with the requirements of the Companies Act 2006 and
international financial reporting standards ("IFRS") adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union. Under IFRS 9, impairment losses are recognised on a
forward-looking basis, taking into account both the risk profile of
the Credit Assets and the macroeconomic outlook at the balance
sheet date.
The impairment charge for the year has reduced by 24% to GBP5.58
million in 2020 from GBP7.37 million in 2019. The reduction in
impairment charge is attributable to the Company's continued focus
on senior secured Credit Assets. At 31 December 2020, 91% of the
assets were senior secured (31 December 2019: 82%).
The total impairment charge for 2020 has reduced despite a
GBP2.3 million additional charge recognised in 2020 (2019: nil) to
cover credit losses forecast to arise as a result of the change to
the macro-economic outlook arising from Covid-19. The majority of
this, GBP2.0 million, is attributable to the worsening
macroeconomic outlook between 31 December 2019 and 31 December 2020
due to Covid-19. The remainder, GBP0.3 million, is a provision for
loans in Covid-19 forbearance. This is recognised as customers
enter forbearance in anticipation of a proportion of them missing
payments as they leave forbearance.
As at 31 December 2020 the Expected Credit Loss ("ECL",
"Impairment Provision") balance was GBP30.5 million (31 December
2019 GBP30.2 million). The consumer portfolio makes up 65.6 per
cent of the ECL at GBP20.0 million, property GBP10.3 million and
SME GBP0.2 million.
The risks arising from the investment assets are managed very
closely. The Group's performance is linked to the health of the
economy and the Group could experience further impairments and
consequently reduced profits if economic expectations deteriorate.
However, the risk of this has been mitigated by a focus on credit
investments secured on loan portfolios of non-bank lenders with
strong downside protection from senior ranking to the lender or
borrower equity as well as security over the cashflow generated by
the loan portfolio. This senior ranking provides insulation from
increasing defaults in the portfolio and provides stability of
returns.
Outlook
The strong financial performance has continued following the end
of the financial year with annualised NAV returns of 7.9% in
January, 8.3% in February and 8.9% in March.
The pipeline of new potential investments remains strong with
non-bank lenders seeing opportunities to grow and take market share
from traditional banks. The Covid-19 pandemic has further
accelerated this structural change and the Company continues to aim
to be the market-leading finance partner to the non-bank
sector.
Covid-19 continues to cause major disruption across the globe
but the Investment Manager continues to have confidence in the
strength of the performance of the asset class. The Group is well
diversified and the resilience exhibited by the speciality finance
industry throughout Covid-19 allowed cash collections from
investment portfolio to return to pre-pandemic levels by Q3.
In an evolving market and regulatory environment, we are
committed to maintaining the discipline and high standards of
governance of our established business model.
In the uncertain environment, we continue to adopt a proactive
and prudent approach and our deep relationships have helped our
partners to continue to maintain and develop their businesses
appropriately. Further partners have been on-boarded which have
supported this growth while the profile of risk and return remains
robust.
We are proud to continue to deliver strong returns for Honeycomb
shareholders though all environments since inception in 2015 and
especially over 2020. We look forward to working with the Board
over 2021 as we continue to manage the Company.
Pollen Street
29 April 2021
Top Ten Holdings
Country Deal Type Sector Value Percentage
of holding LTV of assets(2)
at year-end
(GBPm)(1)
UK Agriculture United Direct
1 Limited Kingdom Portfolio Property 51.0 49% 9.0%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
United Discounted
2 Creditfix Limited Kingdom Structured Fee Receivables 50.4 41% 8.9%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
Nucleus Cash
Flow Finance United
3 Limited Kingdom Structured SME CBILS 46.5 96% 8.2%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
Sancus Loans United
4 Limited Kingdom Structured Property 44.9 51% 7.9%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
United Direct Secured
5 GE Portfolio Kingdom Portfolio Consumer 40.0 61% 7.0%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
United Secured
6 Oplo Structured Kingdom Structured Consumer 35.3 95% 6.2%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
Oplo Direct United Direct Secured
7 Portfolio Kingdom Portfolio Consumer 31.1 68% 5.5%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
United
8 Propfin Limited Kingdom Structured Property 21.1 64% 3.7%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
Amicus Commercial United Direct
9 Mortgages Kingdom Portfolio Property 21.0 65% 3.7%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
Downing Development United Direct
10 Loans Kingdom Portfolio Property 17.9 81% 3.1%
-------------------- --------- ----------- ----------------- ------------- ------ --------------
(1) Direct portfolios have been aggregated by originator and
servicer
(2) Percentage of total investment assets of the Group
(investment assets calculated as the carrying balance of all credit
assets at amortised cost, credit assets held at fair value through
profit or loss and equity investments held at fair value through
profit or loss).
As at 31 December 2020 the value of the top 10 assets totalled
GBP359.2 million (2019: GBP231.5 million) which equated to 63.2 per
cent (2019: 39.3 per cent) of investment assets (investment assets
calculated as the carrying balance of all credit assets at
amortised cost and credit and equity investments held at fair value
through profit or loss).
ESG Programme
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
credit partners post-acquisition to embed this ESG framework, drive
value creation and monitor performance against key criteria - and
operates on a continuous-improvement basis.
Monitoring of ESG Pollen Street collects data across its credit
impacts portfolio, tracking impact against the 5 key
areas where we believe we can make a meaningful
difference. We aim to measure progress to support;
regional growth, affordable housing, financial
inclusion, reduction in carbon footprint of
homes and embedding the highest standards of
governance in lending.
For example, Pollen Street Capital's credit
facilities have supported:
-- 11,000+ households to install a new boiler
-- 9,000+ households to switch to renewable
energy
-- 5,000+ households in the provision of insulation
ESG in the investment Through upfront due diligence, Pollen Street
process identifies how strong the prospective credit
partner's ESG programme is, and where we can
support them as they develop ESG policies and
practices as they join the portfolio. The assessment
covers areas such as ESG risks, along with
the focus areas in our impact framework.
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Governance and oversight Since 2019, Pollen Street has extended the
use of the Pollen Street Hub to encompass the
ESG agenda. The Hub aims to drive the practical
application of ESG issues with a focus on core
areas of impact, along with reporting of activities
and sharing of best-practice. Pollen Street
have an ESG committee in place which is responsible
for setting the strategy, framework and processes
to ensure that effective ESG policies are implemented
and overseen.
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Engagement and embedding Pollen Street, led by its partners, has sought
ESG within Pollen to increase awareness of the impact it can
Street have, and increase the prominence of ESG considerations.
Pollen Street uses the UN Sustainable Development
Goals to seek to ensure all investments meet
minimum standards, while seeking to make the
most significant impact for its investors.
Pollen Street operates an ESG policy, which
seeks to make the most significant impacts
where opportunities arise.
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Creating partnerships Pollen Street has sought to make continued
for lasting impact improvements in embedding ESG. Two examples
include (i) the launch of a Firm-wide
philanthropy
programme which seeks to engage employees
across
the Firm to determine which charities it
should
support, and the most effective way to do
so;
and (ii) Pollen Street has engaged Ten
Years'
Time (part of the Social Investment
Consultancy)
to assist in identifying areas where Pollen
Street can have a greater impact on ESG
issues.
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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.
Pollen Street is proud to have published its inaugural ESG
Report and announced the selection of partners for its Ten Years'
Time program. Our program aims to connect our ESG impact with the
firm and its incredible people and expertise, and for our people to
go beyond our portfolio to make an impact. The selected partners
are detailed below.
Future First Future First is a charity that aims for every
state school and college in the UK to be supported
by a thriving and engaged alumni community,
which improves students' motivation, confidence
and life chances.
Big Issue Invest Founded in 2005, Big Issue Invest extends The
Big Issue's mission to dismantle poverty through
creating opportunity by financing the growth
of sustainable social enterprises and charities
across the UK.
Big Issue Invest offers social enterprises,
charities and profit-with- purpose businesses,
loans and investment from GBP20,000 to GBP3
million. Since 2005, Big Issue Invest have
invested in approximately 300 social enterprises
and charities, all of which have positively
influenced the lives of an estimated 1 million
people across the UK.
----------------------------------------------------
Blue Ventures Blue Ventures develops transformative approaches
for catalyzing and sustaining locally-led marine
conservation. They work in places where the
ocean is vital to cultures and economies, and
are committed to protecting marine biodiversity
in ways that benefit coastal people.
----------------------------------------------------
Council for The Council for Investing in Female Entrepreneurs
Investing (CfIFE) aims to support female entrepreneurs
in Female by tackling barriers to funding available and
Entrepreneurs accessible by them. The Council is a community
of firms and individuals who are passionate
about achieving long-term behavioural changes
to close the funding gender gap, and was created
as a result of the Alison Rose Review of Female
Entrepreneurship, published in March 2019.
----------------------------------------------------
Pollen Street CAPITAL's ESG FRAMEWORK
Guided by the UN's sustainable development goals
Marketplace Providing the best outcomes. We ensure the products
and services we provide benefit individuals, SMEs,
suppliers and investors.
Environment Creating a lasting environmental impact, recognising
our responsibility to do better. WE are committed
to identify and improve the environmental impact
of our operations.
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Workplace We strive to create a positive working environment
for our people at the Group and portfolio level,
and drive initiatives to engage our people and
promote diversity and inclusion.
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Governance & We ensure we are appropriately accountable for
leadership our decisions, implementing regulatory best practice
through all operational processes with the ability
to identify and manage all material risk factors,
including ESG risks.
------------------------------------------------------
Community We are strategic with our Social Investment efforts,
to best leverage the skills and resources Pollen
Street and the portfolio has available. We focus
on efforts that provide real benefits and which
address relevant issues.
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Business Review
The Strategic Report 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 09899024. 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 2020 the Expected Credit Loss ("ECL") balance
was GBP30.5 million (31 December 2019 GBP30.2 million). The
consumer portfolio makes up 65.6 per cent of this total split
GBP20.0 million, property GBP10.3 million and SME GBP0.2 million.
There has been little change in the balance due to an increase in
the ECL charge of GBP5.6m, offset by a release through a sale of a
portfolio of consumer loans. The increase in ECL charge is split
with the consumer portfolio contributing GBP5.4 million, property
GBP0.2 million and SME GBPnil. Assets moving to Stage 3 were the
key driver behind this. The consumer portfolio continues to see the
biggest ECL as it is unsecured and therefore does not benefit from
any structural protection or security that could reduce the impact
once a loan rolls into arrears.
The outbreak of Covid-19 is causing major disruption across the
globe. The principal effects of the outbreak in the UK began in
March 2020. At this time a GBP1.8m one-off increase in provisioning
was taken by changing the IFRS 9 economic weighting to 100%
downside, in the absence of reliable detailed economic forecasting
at the time. This was from the downside scenario set as part of the
December 2019 review of provisioning and was broadly consistent
with the initial views of the economic outlook indicated by
third-party economic advisers at the time. This charge related to
anticipated potential losses as opposed to realised losses. Full
updates for new economic scenario data were implemented in June
2020 and December 2020 with minimal impact against the initial
charge taken in March 2020.
In addition to the change in economic outlook we saw requests
for forbearance. Additional provision coverage was placed on these
loans, in line with the regulatory and Bank of England guidance. By
the end of 2020 a significant majority of borrowers had left
payment holidays and returned to paying and so the impact of this
coverage is minimal.
The downside protection built into the majority of the portfolio
has limited the impact of Covid-19 on the ECL charge and the
Investment Manager continues to have faith in the strength of the
performance despite these unprecedented conditions. However, given
the Group's activities, its performance is linked to the health of
the economy and consequently if economic expectations deteriorate
against current expectations the Group would experience further
impairments.
Strategic and investment policy
The Group's investment objective is to provide shareholders with
an attractive level of dividend income 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 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). 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. Structured Loans. The Group identifies top performing
non-bank lenders that provide finance to a tightly defined target
audience. Senior financing is provided with security over real
assets;
2. Direct Portfolios. These portfolios of directly owned loans
are typically sourced from established relationships with non-banks
and are typically secured on underlying assets i.e. property;
and
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 2020, or the year ended 31 December 2019.
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
2020 or the year ended 31 December 2019.
Borrowing
Borrowings may be employed at the level of the Group and at the
level of any investee entity. Further, 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.
The Group may borrow, whether directly or indirectly through a
subsidiary or an SPV, up to a maximum of 100 per cent of Net Asset
Value in aggregate. The limit is 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 net borrowings in the range
of 50 per cent to 75 per cent of Net Asset Value.
These restrictions were not breached in year ended 31 December
2020 or the year ended 31 December 2019.
In May 2020 and September 2020, the Company's main debt facility
was refinanced. The new facility is GBP250m and has a maturity date
of September 2023. During 2020 an increase was also agreed in the
amortising term loan held in Sting Funding Limited from GBP62
million to GBP75 million and new funding of GBP35 million was
agreed in a new SPV, Bud Funding Limited. Further detail on these
facilities can be found in Note 19.
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 other benchmarks). 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 deem it appropriate to enter into any
interest rate hedges for the period ending 31 December 2020 or the
period ending 31 December 2019.
The Group intends to hedge currency exposure between Sterling
and any other currency in which the Group's assets may be
denominated, including US Dollars and Euros.
The Group will, to the extent it is able to do so on terms that
the Investment Manager considers to be commercially acceptable,
seek to arrange suitable hedging contracts, such as currency swap
agreements, futures contracts, options and forward currency
exchange and other derivative contracts (including, but not limited
to, interest rate swaps and credit default swaps) in a timely
manner and on terms acceptable to the Company. Details of hedging
arrangements in place at 31 December 2020 and 2019 can be found
below.
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 GBP62.5 million of assets held in cash at 31 December 2020 (31
December 2019: GBP15.2 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, such as share buyback programmes.
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 2024. 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 above 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 discount to
its underlying Net Asset Value.
The Board is of the view that an increase of the Company's
ordinary shares in issue may provide 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. At
the Company's AGM in 2020, the Board was authorised to allot
7,449,984 ordinary shares, such authority lasting until the
conclusion of the 2021 Annual General Meeting ("AGM") of the
Company (or, if earlier, until close of business on 31 August
2021). Of this, up to 7,449,984 ordinary shares could be allotted
on a non-pre-emptive basis, provided that the issue price is no
lower than the latest published NAV per ordinary share. No shares
were issued by the Company pursuant to these authorities.
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. Due to the discount the Directors were given the authority
to purchase ordinary shares in the market, with 4,190,178 being
purchased during the year under review at an average price of 821
pence. This, in addition to other factors, reduced the discount to
7.0 per cent at 31 December 2020, from a high of 28.1 per cent at
31 May 2020. The last published NAV statement at the date of
signing these accounts was the NAV for 31 March 2021. At this point
the share price was at a discount of 8.9 per cent to the NAV.
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.
The Board of Directors confirm
that during the year under review,
it has acted to promote the long-term
success of the Company for the
benefit of shareholders, whilst
having due regard to the matters
set out in section 172(1)(a)
to (f) of the Companies Act 2006,
being:
(a) the likely consequences of
any decision in the long term
(b) the interests of the Company's
employees
(c) the need to foster the Company's
business relationships with suppliers,
customers and others
(d) the impact of the Company's
operations on the community and
the environment
(e) the desirability of the Company
maintaining a reputation for
high standards of business conduct;
and
(f) the need to act fairly between
members of the Company.
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 company 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.
We set out some of the principal decisions made by the Board in
2020, the ways in which stakeholder considerations were factored in
and addressed during the decision making process:
Covid-19
The Covid-19 pandemic has presented
unprecedented challenges. A focal
area for the Board over 2020
has been on engaging with stakeholders
to ensure that these challenges
have been managed as effectively
as possible.
How were stakeholders considered
The Board met regularly with
the Manager to discuss the evolving
situation, the performance of
the portfolio and the funding
arrangements of the Group. The
Board also received regular updates
on regulatory changes, shareholder
views and on how to manage potential
issues for creditors.
What was the outcome of such
engagement
The Board supported the actions
taken by the Investment Manager
to steer the portfolio through
events of the year. The Board
approved the new debt facilities
throughout the year. These ensured
that the Group could benefit
from an increased funding capacity
and more diversified funding
providers than it did at the
start of the year.
=========================================
Dividend and Share Buyback Programme
In light of the ongoing Covid-19
pandemic and reduction in the
Company's share price, the Board
reviewed its dividend policy
and introduced a share buyback
programme, commencing in August
2020.
How were stakeholders considered
The Board met with the Manager
and the Company's brokers to
review the financial outlook
for the Group and to consider
the range of actions that are
possible to support the share
price. The Board received updates
on investor views based on equity
and debt market opinions and
investor engagements.
What was the outcome of such
engagement
The Board considered the long-term
interests of the Company and
its shareholders and decided
that these could be best served
by reaffirming its dividend target
and continuing to declare dividends
at 20.00 pence per share each
quarter.
Further, the Board decided to
introduce a share buyback programme
during the year. The programme
enabled some shareholders to
sell their shares at the same
time as the remaining shareholders
benefitting from NAV appreciation
arising from repurchase of shares
at a discount to NAV.
The combined effect of the above
actions are considered to have
supported the share price.
=========================================
Operational Resilience
The Covid-19 pandemic presented
intense challenges to the operations
of all companies. The Audit and
Risk Committee maintained oversight
of the operational risks and
the corresponding business continuity
plans put in place by the manager
and third-party service providers.
How were stakeholders considered
The Board met with the Investment
Manager and third-party service
providers regularly throughout
the year to ensure that all critical
services continued to be delivered
to a high standard.
What was the outcome of such
engagement
The Company successfully managed
through the crisis with all critical
services maintained despite the
work from home environment
=========================================
How we engage with 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 above and 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 defines the Group's key
stakeholders as individuals or groups who have an interest in, or
are affected by, the activities of our business; accordingly, the
Board has considered its key stakeholders to be as follows:
Shareholders
Continued shareholder support and engagement are critical to
existence of the business and the delivery of the long-term
strategy of the business.
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 2021 AGM without shareholders being
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 8 June 2021.
Further details are included in the Notice of AGM which will be
posted to shareholders along with this Annual Report.
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
2020 AGM, which was also held as a closed meeting due to the
Covid-19 pandemic. 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. 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 Group's corporate brokers 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
periodic 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. We also take action to ensure compliance with our
regulatory obligations as a premium-listed company, as set out
elsewhere in this report.
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 2020 and 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.
The Company also controls Bud Funding Limited ("Bud"), a limited
company incorporated under the law of England and Wales. The
Company is considered to control Bud through its exposure to the
variable returns of the vehicle through holding of a junior note
issued by it. Bud was incorporated on 2 November 2020.
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 "Company 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 and Cenkos Securities plc have been
appointed to act as the Group's joint corporate broker and
financial adviser.
-- Slaughters and May have been appointed to provide legal services to the Group.
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.
Further detail on this is included in the ESG section above.
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 recognises the benefits of greater diversity,
including gender and ethnic 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 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 2020 the Board of Directors
consisted of three non-executive Directors, none of whom were
female. On 1 January 2021, Joanne Lake was appointed to the Board
to bring the total to four non-executive Directors. 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. With the appointment of Joanne, the Board is
pleased to note that it has achieved its aim within the Board
Diversity and Inclusion Policy to secure at least 25% female
representation on the Board; the Board and the Nomination Committee
will continue to review whether this 25% target remains appropriate
or should be increased in going forward, along with other potential
initiatives to further support and encourage diversity and
inclusion.
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
maintains a risk register that 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 Risk Committee and Board on 21 April 2021. It was
previously reviewed by the Audit and Risk Committee. The main
changes to the assessment since the prior year are related to the
potential impact of Covid-19 and the anticipated discontinuation of
LIBOR. The presentation of the risks has also been changed to show
investment related risks first, given these are generally
considered to be more material. The day-to-day risk management
functions of the Group have been delegated to the Investment
Manager, which reports to the Risk Committee.
Investment Risks
Achievement of the Investment Objective
There can be no assurance that the Investment Manager will
continue to be successful in implementing the Company'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. 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.
Fluctuations in the market price of Issue Shares
The market price of the Group's shares may fluctuate widely in
response to different factors and there can be no assurance that
the Group's shares will be repurchased by the Group 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 Group'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 2020 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 2021. At this point the share
price was at a discount of 8.9 per cent to the NAV.
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 outbreak of Covid-19 has caused major disruption across the
globe. At the time of writing the portfolio has seen some impact in
payment performance as customers requested and were granted
forbearance plans. The majority of customers have now ended their
forbearance plans and are returning to full payments across all
sectors. Given the Group's strategy, its performance is linked to
the health of the economy. The Group could experience further
impairments and consequently reduced profits, particularly if
economic expectations deteriorate further from the base case. The
overall effect of this cannot be quantified reliably because of
uncertainty surrounding a third wave, the impact of the various
government initiatives and the behaviour of customers. The
government has also launched a number of initiatives aimed at
providing finance to SMEs.
Mitigation
The Group will invest in a granular portfolio of assets,
diversified by the number of borrowers, the type, and the credit
risk 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 15 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 Manager has access to a diversified range of
sources from which to select attractive assets. 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 managed closely by
the Manager, through detailed ongoing monitoring and working with
all platform partners to mitigate the impact on the portfolio.
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.
In September 2020 the Company's main topco debt facility was
refinanced with a 3-year term revolving facility with a year of
amortisation before final termination. There was also an increase
in the Sting Funding Limited debt facility and the introduction of
a new facility in the Bud Funding Limited SPV. Further detail on
these facilities can be found in Note 19.
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 other benchmarks) 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.
Following the recommendations of the Financial Stability Board,
a 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.
For GBP LIBOR, the transition date is now set as being 31 December
2021 at the latest and SONIA as the preferred RFR. A credit
adjustment spread is required to ensure that neither party is
adversely impacted by the switch. The Investment Manager is
actively managing the transition and determining the most
appropriate transition process.
Liquidity
The Group may invest in assets that are aligned with the Group's
strategy and that present opportunities to enhance the Group's
return on its investments. Such assets are likely to be illiquid
and therefore may be more difficult to realise.
Mitigation
The Group actively manages its liquidity position to ensure
there is sufficient liquidity to meet liabilities as they fall due.
Other mitigants include long term debt facilities with amortisation
periods rather than bullet repayments; amortising assets that are
highly cash generative; strong covenant packages that gives the
Group ability to influence the borrower's behaviours in times of
stress.
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 .
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.
Regulatory Risks
Tax
Any changes in the Group's tax status or in taxation legislation
could 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 Investment Manager
and performance of the same shall be reported to the Board on a
quarterly basis. Where new SPVs are created or acquired these are
done in such a way to not impact the potential tax liability of the
Group.
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 monitors its 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 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 Risk Committee and the Board.
Emerging risks are monitored by the Risk Committee on an ongoing
basis, with agreed actions tracked to ensure the Group's
preparedness should an emerging risk crystallise.
Over the period, the committee has focused on the potential
impact of Covid-19, risks associated with ESG, operational
resilience and cyber risks. All these risks are considered to be
within the Group's risk appetite, however the Group is 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
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 with
commentary included throughout the Strategic Report:
31 December 2020 31 December 2019
================================= ================= =================
NET ASSET VALUE
NET ASSET VALUE (CUM INCOME)
(GBP'000) (1) 357,232 400,361
MARKET CAPITALISATION (GBP'000)
(2) (3) 332,323 383,650
================================= ================= =================
PER SHARE METRICS
SHARE PRICE (AT CLOSE) (4) 942.5p 972.5p
NAV PER SHARE (CUM INCOME)
(1) 1,013.1p 1,014.9p
SHARES IN ISSUE 35,259,741 39,449,919
================================= ================= =================
PERFORMANCE INDICATORS AND
KEY RATIOS
PREMIUM / (DISCOUNT) (2) (5) (7.0)% (4.2)%
ANNUAL NAV RETURN (2) (6) 7.7% 7.8%
PROFIT (GBP'000) (7) 20,701 31,211
ITD TOTAL NAV RETURN (2) (8)
(9) 41.1% 33.2%
DEBT TO EQUITY (2) (10) 76.6% 51.7%
NET DEBT TO EQUITY (2) (11) 59.1% 47.8%
DIVID RETURN (2) (12) 8.0% 8.0%
ONGOING CHARGES (2) (13) 2.0% 1.8%
================================= ================= =================
(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) 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.
( 3) MARKET CAPITALISATION: the closing mid-market share price
multiplied by the number of shares outstanding at month end.
( 4) SHARE PRICE (AT CLOSE): closing mid-market share price at
month end (excluding dividends reinvested).
( 5) 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.
(6) ANNUAL NAV 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.
(7) PROFIT: is calculated as profit after taxation
(8) ITD: inception to date - excludes issue costs.
(10) TOTAL NAV 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.
(11) DEBT TO EQUITY: is calculated as the Group's interest
bearing debt divided by the net asset value, expressed as a
percentage.
(12) NET DEBT TO EQUITY: is calculated as the Group's interest
bearing debt, less cash and cash equivalents divided by the net
asset value, expressed as a percentage..
(13) DIVID RETURN: is calculated as the total declared dividends
for the period divided by IPO issue price.
(14) 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
Approval
The Strategic Report was approved by the Board of Directors on
29 April 2021 and signed on its behalf by:
Robert Sharpe
Chairman
29 April 2021
Directors' Report
Bo a rd of Di r e c t o rs
Robert Sharpe (1)
Chairman of the Board, the Nomination Committee and the
Management Evaluation Committee.
Member of the Audit Committee, the Risk Committee and the
Remuneration Committee.
Robert has over 45 years' experience in retail banking. He is
currently chairman at MetroBank plc, Hampshire Trust Bank plc and
Aspinall Financial Services Limited. 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)
Senior Independent Director to the Board.
Chairman of the Audit Committee.
Member of the Risk Committee, the Nomination Committee, the
Remuneration Committee and the Management Evaluation Committee.
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 Company (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 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)
Chairman of the Risk Committee.
Member of the Audit Committee, the Nomination Committee, the
Remuneration Committee and the Management Evaluation Committee.
Richard is currently Group CEO of James Hay Partnership a
leading retirement and wealth management specialist managing over
GBP27bn of assets. backed by Private Equity specialist Epiris JHP
is a consolidator in the platform market and in 2021 announced the
acquisition of Nucleus creating the largest independent retirement
specialist in the UK. Prior to this Richard was 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 chief executive officer 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
chief operating officer and risk 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.
Joanne Lake (3)
Chairman of the Remuneration Committee.
Member of the Audit Committee, the Risk Committee, the
Nomination Committee and the Management Evaluation Committee.
Joanne has over 30 years' experience in financial and
professional services. She is currently independent non-executive
chairman of Mattioli Woods Plc, the AIM-listed wealth management
and employee benefits specialist, independent non-executive deputy
chairman of Main Market-listed land promotion, property development
and investment, and construction group, Henry Boot PLC, and is an
independent non-executive director at AIM-listed Gateley Holdings
plc, the legal and professional services group, and Morses Club
Plc, a leading provider of non-standard finance. Joanne is a
Chartered Accountant and has previously held senior roles at UK
investment banks including Panmure Gordon, Evolution Securities and
Williams de Broe and in audit and business advisory services with
PwC. Joanne is a Fellow of the ICAEW and a member of its Corporate
Finance Faculty and is a Fellow of the Chartered Institute for
Securities and Investment.
(1) Appointed 14 December 2015
(2) Appointed 1 July 2019
(3) Appointed 1 January 2021
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 2020. The shares are listed on the Main
Market 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 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 directors'
and officers' liability insurance has been renewed and will remain
in place under the current renewal until February 2022.
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 (2019: 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. The Board has
carried out a robust assessment of its principal and emerging risks
and the controls to help mitigate these. 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 2020, the Company had 39,449,919 ordinary
shares in issue, of which 4,190,178 Ordinary Shares were held by
the Company as treasury shares. (31 December 2019: 39,449,919
ordinary shares in issue, with no shares held in treasury). As at
the date of this report, the Company had 39,449,919 ordinary shares
in issue, of which 4,190,178 ordinary shares are held in Treasury.
As at the date of this report, the total number of voting rights in
the Company is 35,259,741.
On 26 June 2020, 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
an aggregate nominal amount of GBP37,249.92 representing 3,724,992
ordinary shares. The authority will expire (unless previously
renewed, varied or revoked) on the conclusion of the 2021 AGM of
the Company (or, if earlier, at the close of business on 31 August
2021).
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 2020 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.
At the AGM held on 26 June 2020, the Directors were granted the
authority to purchase in the market up to 5,583,762 ordinary
shares, such authority expiring at the conclusion of the 2021 AGM
of the Company (or, if earlier, until close of business on 31
August 2021). The Company intends to seek approval from the
shareholders, by special resolution, to renew this authority at the
next AGM.
During the reporting period, and further to the authority
granted by shareholders at the 2020 AGM, the Company commenced a
share buyback programme on 10 August 2020. All ordinary shares
purchased by the Company pursuant to the buyback programme were
held in treasury.
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). This requirement has been triggered
for 2020 and a discontinuation vote will be held at the 2021 AGM.
The vote is a special resolution and requires 75% of the per cent
of the voting members to be in favour of the discontinuation .
On a winding up or a return of capital by the Company, the
ordinary shareholders are entitled to the capital of the
Company.
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"). As such, the
dividends are declared as interim dividends rather than final
dividends. The dividends paid or payable in respect of the year
ended 31 December 2020 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 2020, 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 shares Percentage of total voting rights
=================================== ================ ==================================
Quilter Investors Limited 10,160,645 28.81%
C C Beekeeper Limited 4,012,006 11.38%
Weiss Asset Management LP 3,000,000 8.05%
The Phoenix Holdings Limited 2,935,306 7.88%
The Thameside 1979 Settlement 2,467,000 6.97%
Close Asset Management Limited 2,003,000 5.38%
M&G Investment Management Limited 2,000,000 5.36%
Aberdeen Asset Management PLC 1,782,049 5.05%
Independent auditors
The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC"), were re-appointed at the Company's AGM in 2020 and have
expressed willingness to continue to act as the Group's auditors
for the forthcoming financial year.
As detailed in the Audit and Risk Committee report for 2020,
Richard McGuire may not be re-appointed as audit partner given he
has served for five years. The Audit Committee has liaised with PwC
and intends to appoint Claire Sandford as the replacement audit
partner. The Audit Committee is satisfied that appropriate
arrangements are in place to secure an orderly and effective change
of audit partner over the course of this financial year.
The Audit 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 2021 AGM. At the 2021 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 recommendation, the
Audit Committee considered the points detailed below in the Audit
and Risk Committee's report.
Audit information
As r equi r e d b y section 4 1 8 o f t h e C om p ani e s A c t
2 0 06, t h e Director s wh o he l d offi ce a t t h e d a te o f t
hi s repor t each confir m that , s o far as the y are awar e ,
there is no rele vant aud i t information o f w hich the Group 's
au d itor are un aware a n d e ac h Director ha s t a k e n al l t
h e s t ep s r e qui r e d o f a Director to ma k e t h e m s elve
s a w a r e o f a n y r e l ev a n t a u d i t i n f o r m a t io n
a n d t o e s t ablish tha t t h e Group ' s audi t o r are awa re
of that info r ma t ion.
Articles of Association
An y amendmen t s to t h e C om p an y ' s Ar t icle s of A s so
cia t io n mus t b e mad e b y spe cia l r e s ol u t ion.
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. These financial projections have been
performed under various origination volumes and stressed scenarios
and in all cases the Group is able to meet its liabilities as they
fall due. The stressed scenarios considered included halting future
originations, late repayments of the largest structured facilities
and individual exposures experiencing ongoing performance at the
worst monthly impact experienced throughout 2020; which
incorporated one-off macro-economic charges for Covid-19. As part
of these projections the Directors have also reviewed any financial
and non-financial covenants in place under all debt facilities in
place with no breaches anticipated, even in the most stressed
scenario.
The Group has performed these prudent financial scenarios to
ensure that it has sufficient cash resources to weather any
remaining impact of Covid-19, as it continues to cause disruption
across the globe. The conclusion of the stress testing is that the
business has more than adequate cash resources to meet its
liabilities as they fall due.
Although there is a requirement to put a special resolution for
the discontinuation of the Company at the 2021 AGM, based on the
current position, performance and prospects of the Company the
Directors have no reason to believe that shareholders will vote for
discontinuation. As a special resolution, 75% of shareholders would
be required to vote for discontinuation and the Directors do not
believe this high threshold will be met. The Directors also note
that, even if there was to be a vote for discontinuation at the
2021 AGM, the Company would be likely to continue to operate for a
period thereafter, due to the Company's investments not comprising
readily realisable securities.
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 31 of the UK Corporate Governance
Code, published by the Financial Reporting Council in 2018 (the
"Code"), the Directors have assessed the prospects of the Group
over the three-year period to the AGM in 2024. The Board believes
this period to be appropriate taking into account the current
trading position and the potential impact of the principal risks
that could affect the viability of the Group.
The Board believes this period to be appropriate taking into
account the current trading position and the potential impact of
the principal risks that could affect the viability of the Company.
At the year-end, the Group had cash balances of GBP62.5 million,
and has GBP41.3 million excess of current receivables over current
liabilities. The Company also has GBP315.9 million excess of
non-current assets to non-current liabilities. There are therefore
limited risks to the viability of the Company.
To prepare the viability statement the Board have considered the
prospects of the Company in light of its current position and have
considered each of the Company's principal risks and uncertainties
and mitigating factors are detailed above. Taking the current
performance as a base, the projection considers the Company's
income, underlying Net Asset Value and the cash flows over the
three-year period selected. The projection is not a business plan
in itself, but rather is a prudent view of how the Company may
evolve, based principally upon its growth to date, in order to
demonstrate its viability. Analysis to assess viability has focused
on the risks in delivery of the growth of the business and a series
of projections have been considered changing origination volumes
and the performance of the assets acquired.
The experience of Covid-19 over 2020 has been considered in
these projections, with analysis of the impact for the Group if any
credit deterioration felt in 2020 were to continue. In this case
the Group continues to be viable, though with the prospect of the
continued vaccine rollout in the UK, and around the globe, the
Directors expect the actual impact to be below the levels
projected. The ongoing uncertainty around the consequences of
Brexit are not expected to have a significant effect on the
Company, with a largely UK focus and strong collateralisation in
the predominantly structurally secured portfolio minimising any
impact.
All the analysis indicates that due to the stability and cash
generating nature of the portfolios and structured agreements, as
well as the debt facilities in place, the Company would be able to
withstand the impact of the risks identified. Based on the robust
assessment of the principal risks, prospects and viability of the
Company, the Board confirms that they have reasonable expectation
that the Company will be able to continue operation and meet its
liabilities as they fall due over the three-year period to the AGM
in 2024. The Board also continuously monitors the financial
performance of the Company against key financial ratios ensuring a
strict discipline in the financial management of the business.
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.
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
Link Company Matters Limited 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 GBP56,146 (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 were invested the management fee payable was 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 2020 and 2019.
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") and Cenkos Securities plc,
companies authorised and regulated in the United Kingdom by the
FCA, have been appointed as the Group's joint corporate broker and
financial advisers.
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
On 25 March 2021, a dividend of 20.0 pence per ordinary share
was paid.
On 29 April 2021, a dividend of 20.0 pence per ordinary share
was approved for payment on 25 June 2021.
Donations
The Group made no political or charitable donations during the
year under review to organisations either within or outside the EU
(2019: 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 are
discussed in more detail in the Chairman's Statement above 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 also published its interim report
and unaudited financial statements for the
period from 1 January 2020 to 30 June 2020.
======================== =====================================================
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.
======================== =====================================================
9.8.4 (8) and 9.8.4 Not applicable
(9) - relate to
companies that are
part of a group
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.
======================== =====================================================
9.8.14 Not applicable
======================== =====================================================
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.
On 28 October 2020, the Company's entire share capital (being
39,449,919 ordinary shares) was admitted to the premium listing
segment of the Official List of the FCA and to the London Stock
Exchange for the ordinary shares to be admitted to trading on the
premium segment of the Main Market. The Board believes that the
move to a premium listing will benefit the Company, including
improving liquidity and broadening the appeal of the Company's
ordinary shares to a wider range of shareholders.
Prior to admittance to trading on the premium segment of the
Main Market, as set out in the Prospectus, the Company voluntarily
adopted certain key provisions of the UK Listing Rules. Following
admittance as a premium-listed company, the UK Listing Rules
applicable to closed-ended investment companies that are listed on
the premium listing segment of the UK Listing Authority now apply
in full to the Company.
The Board remains fully committed to high standards of corporate
governance and has, following year-end, taken steps to revise its
committee structure and membership to be in line with developing
good practice. This is set out in fuller detail in subsequent
sections of this report.
The Listing Rules and the Disclosure Guidance and Transparency
Rules ("DTR") require the Board to disclose how it has applied the
principles of the 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. For the purposes of this Statement,
the Board considers that reporting against the principles and
recommendations of the AIC Code will provide more relevant and
insightful information to shareholders. The AIC Code is available
from the AIC's website at www.theaic.co.uk.
Statement of compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the Code, except as set out
below.
For the reasons set out in the AIC Code, the Board considers the
role of the Chief Executive and Executive Directors' remuneration
as being not relevant to the 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 in-house internal audit
function. Updates on the work carried out by the Investment
Manager's outsourced internal audit function are presented to the
Board on a quarterly basis. An internal audit function specific to
the Company is therefore not considered necessary at this time. The
need for an internal audit function will be considered on an annual
basis.
The Board reported in the Company's 2019 Annual Report and
Financial Statements that it did not comply with the AIC Code in
respect of the:
-- Appointment of a Senior Independent Director;
-- The Chairman's position as Chairman of the Remuneration Committee; and
-- The requirement for a separate Nomination Committee.
The Board explained in the 2019 Annual Report and Financial
Statements the reasons for non-compliance with those provisions of
the Code; however, the Board's position has been to keep all areas
of non-compliance with the AIC Code under periodic review. For the
financial year ending 31 December 2020, the Company continued to
not comply with the above provisions for the following reasons:
-- In respect of the Senior Independent Director position, the
Board considered that, being a small board with only three members,
the SID position was not required.
-- In respect of the recommendation that the Chairman of the
Board not be appointed as Chair of the Remuneration Committee, the
Board considered that Robert Sharpe was most suited to the role of
Chairman of the remuneration and Nomination Committee due to the
dual responsibilities of the Committee in remuneration and
nomination matters, and his independence not being compromised as a
result;
-- In respect of the recommendation that the Board constitute a
separate Nomination Committee, the Board considered that this would
not be appropriate at that stage of the Company's life and in view
of the Board comprising of only three members.
In 2020, the Board determined to appoint a further Non-Executive
Director, who would bring further skills and experience to the
Board. This appointment exercise concluded with the appointment of
Joanne Lake, who was appointed as a Director of the Company with
effect from 1 January 2021. Further details on Joanne's appointment
can be found above.
Following Joanne's appointment, and with regard to the increased
size of the Board and the Company's life cycle as well as the
provisions in the AIC Code, the Board determined to:
-- appoint Jim Coyle as Senior Independent Director with effect from 1 March 2021;
-- split the functions of the Audit and Risk Committee into two
separate committees, an Audit Committee and a Risk Committee; and
to split the functions of the Remuneration and Nomination Committee
into two separate committees, a Remuneration Committee and
Nomination Committee; and
-- appoint Joanne Lake as Chairman of the Remuneration
Committee, with Robert Sharpe remaining as a member of the
committee.
The Board is of the view that, following these changes, the
Company now complies with the relevant provisions of the AIC Code
in respect of the SID position and constitution and membership of
the Remuneration Committee and Nomination Committee.
The Board and committee structure and membership during the year
under review was:
Board Robert Sharpe (Chairman)
Jim Coyle
Richard Rowney
================= ==========================
Audit and Jim Coyle (Chairman)
Risk Committee Robert Sharpe
Richard Rowney
================= ==========================
Remuneration Robert Sharpe (Chairman)
and Nomination Jim Coyle
Committee Richard Rowney
================= ==========================
Management Robert Sharpe (Chairman)
Evaluation Jim Coyle
Committee Richard Rowney
================= ==========================
As at the date of this report the current Board and Committee
structure, and membership, is as follows:
Board Robert Sharpe (Chairman)
Jim Coyle
Richard Rowney
Joanne Lake
================= ===========================
Audit Committee Jim Coyle (Chairman)
Robert Sharpe
Richard Rowney
Joanne Lake
================= ===========================
Risk Committee Richard Rowney (Chairman)
Robert Sharpe
Jim Coyle
Joanne Lake
================= ===========================
Remuneration Joanne Lake (Chairman)
Committee Robert Sharpe
Jim Coyle
Richard Rowney
================= ===========================
Nomination Robert Sharpe (Chairman)
Committee Jim Coyle
Richard Rowney
Joanne Lake
================= ===========================
Management Robert Sharpe (Chairman)
Evaluation Jim Coyle
Committee Richard Rowney
Joanne Lake
================= ===========================
The Board of Directors
The Board consists of four 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.
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
2021 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 appointed Jim Coyle as Senior Independent
Director, with effect from 1 March 2021, and will, amongst his
other duties in that role, 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(1) Audit Remuneration Management
and Risk and Engagement
Committee Nomination Committee
Committee
========= ======== ========== ============ ===========
Robert
Sharpe 6 4 2 1
Jim
Coyle 6 4 2 1
Richard
Rowney 6 4 2 1
========= ======== ========== ============ ===========
Total 6 4 2 1
========= ======== ========== ============ ===========
(1) A number of additional ad-hoc meetings of the Board were
held throughout the year to discuss transactional matters .
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.
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
The Directors have 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 set out 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
speciality 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. The Board is of the view that there are no relationships
or circumstances relating to the Company that are likely to affect
the judgement of any of the Directors.
The Board notes that Joanne Lake is a Director of Morses Club
plc, an entity for which the Company provides a facility, and this
was considered by the Board upon her appointment. The Board has
determined that, in view of the size of the current facility
provided to Morses Club plc, her directorship of Morses Club plc
does not impinge upon Joanne's independence. The Board has
nonetheless agreed that, should any matters need to be considered
by the Board in the future in the context of the Morses Club plc
exposure, Ms Lake could be excluded from voting or discussions as
appropriate.
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.
Board evaluation
The performance of the Board, its committees and Directors and
the independence of the Directors during 2020 was evaluated by
means of a Director self-assessment questionnaire. The results of
the evaluation process were reviewed by the Board in November 2020
and actions arising from the evaluation process were agreed.
Maintaining business performance, looking for further opportunities
for sustainable growth and to fully utilise the benefits of the
Company's premium listed status were identified as focal areas for
2021 through the evaluation.
In terms of Director training, 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 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 2021.
Management agreement and continuing appointment
Details of the Investment Manager's agreement and fees are set
out in Note 6 to the financial statements.
Directors' Interests
No Director holds shares in the Company. 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
25 February 2021.
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 continued 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.
COMMITTEES
As set out above, the Committee structure was reviewed by the
Board in late 2020 and early 2021. As at the date of this report,
the Board now constitutes the following Committees:
-- Audit Committee
-- Risk Committee
-- Remuneration Committee
-- Nomination Committee
-- Management Evaluation Committee
All four Board members are members of each Committee. The Terms
of Reference of each Committee is available from the office and the
Company's website at www.honeycombplc.com .
Each Committee reports to the Board on its proceedings after
each meeting.
Audit Committee
The Board has delegated certain responsibilities to its Audit
Committee. An outline of the remit of the Audit Committee (as
constituted for the reporting period) and its activities during the
year are set out below.
The Audit Committee is chaired by Jim Coyle and meets at least
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. The Audit Committee reviews and
recommends to the Board the annual and half-yearly reports and
financial statements, and financial announcements.
Following the reorganisation of the Board committee structure
post-year end, the Audit Committee has retained responsibility
for:
-- monitoring the integrity of the Company's financial reporting
and any formal announcements relating to financial performance (as
detailed below);
-- reviewing significant financial reporting judgements;
-- ensuring the adequacy of the financial controls in place across the Company;
-- overseeing the work of the external auditor and making
recommendations to the Board on the appointment of the external
auditor (as detailed below);
-- reviewing the need for an internal audit function and
receiving reports as required on any internal audit findings
relating to the Investment Manager.
Further details on the work of the Audit Committee can be found
in the report of the Audit and Risk Committee below.
Risk Committee
The Risk Committee is chaired by Richard Rowney and meets at
least once a year. The Risk Committee is responsible for
reviewing:
-- the Group's internal control and risk management systems; and
-- key policies and processes for identifying and assessing both
financial and non-financial business risks, (including compliance,
fraud detection and whistleblowing arrangements), the management of
these risks (including quality, ethics and independence) along with
an assessment of their robustness, appropriateness and
effectiveness.
The Risk Committee reviews and approves statements to be
included in the annual report concerning internal controls and risk
management; assessment of the adequacy of the levels of
professional indemnity insurance and other insurance cover
maintained for the Company. The Risk Committee also reviews and
considers on an annual basis whether there is a need for an
internal audit function.
Remuneration Committee
The Remuneration Committee is chaired by Joanne Lake and meets
at least once a year.
The primary responsibility of the Committee is to consider and
make recommendations to the Board on Directors' remuneration.
Nomination Committee
The Nomination Committee is chaired by Robert Sharpe and meets
at least once a year. The responsibilities of the Nomination
Committee include:
-- To review the structure, size and composition of the Board;
-- To ensure plans are in place for orderly succession to the
board and oversee the development of a diverse pipeline for
succession;
-- To evaluate the balance of skills, knowledge, experience and diversity of the Board;
-- Responsibility for nominating for the approval by the board
candidates to fill board vacancies as they arise;
-- To consider additional external appointments of Directors;
-- To consider the membership of any other Board committees as
appropriate, in consultation with the Chairman of those
committees;
-- To consider the re-appointment of any non-executive director
and to provide an explanation as to why the Committee recommends
that the Board member be re-appointed for shareholder
consideration. All Board Members to be subject to annual
re-election; and
-- To determine and disclose a policy on the tenure of the
chair. A clear rationale for the expected tenure should be
provided, and the policy should explain how this is consistent with
the need for regular refreshment and diversity.
Management Evaluation Committee
The Management Evaluation Committee is chaired by Robert Sharpe
and meets at least once a year. Its principle duties are:
-- On an annual basis, to formally review the contractual
relationships with, and scrutinize and hold to account the
performance of, the Investment Manager and report on the review in
the Annual Report.
-- To review and consider, at least annually, the Investment
Manager fees and services as set out in the Management Agreement;
and
-- In conjunction with the Investment Manager, monitor and evaluate other service providers.
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 will ordinarily have the opportunity to attend
and vote, in person or by proxy, at the AGM and any general
meetings of shareholders. While shareholders were unable to attend
and vote in person at the 2020 AGM due to the restrictions
introduced in response to the Covid-19 pandemic, alternative
arrangements were provided to shareholders to facilitate engagement
with the Board prior to, and at, the AGM.
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 Committee and Risk Committee
consider annually whether there is any need for an internal audit
function, and they have 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 in the Strategic
Report, together with an explanation of the controls that have been
established to mitigate each risk. The risk matrix provides a basis
for the 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 GBP16.1 million, split GBP7.2 million into variable
and GBP8.9 million in fixed remuneration. During the year, the
average number of beneficiaries at the Group which includes the
AIFM were 75 and the aggregate amount of remuneration paid in
relation to the Senior Management of the firm was GBP4.1 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 14 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 76.6 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 2020, and are as follows:
As a percentage Gross Commitment
of net asset method method
value
================ ======= ==========
Maximum level
of leverage 200% 200%
Leverage as at
31 December
2020 162% 179%
================ ======= ==========
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
29 April 2021.
On behalf of the Board
Robert Sharpe
Chairman
29 April 2021
Report of the Audit and Risk Committee
As Chairman of the Audit and Risk Committee during 2020, I am
pleased to present the Audit and Risk Committee report for the year
ended 31 December 2020. Full details of the number of committee
meetings and attendance by individual committee members can be
found above.
Following the end of the reporting period, the Board made the
decision in February 2021 to split the functions of the Audit and
Risk Committee into two separately constituted committees of the
Board - the Audit Committee and the Risk Committee. For this
reason, this report details the activities of the Audit and Risk
Committee for the year ended 31 December 2020. Future annual
reporting to shareholders will reflect the activities of each
Committee separately.
Membership of the Audit and Risk Committee
For the reporting period, the Audit and Risk Committee comprised
of all Directors and was chaired by Jim Coyle. Please see above for
the members' biographies. 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 was considered appropriate during the reporting
period that Mr Sharpe be a member of the Audit and Risk Committee.
Mr Sharpe remains a member of both the Audit Committee and Risk
Committee, following the Board's decision to split the Audit and
Risk Committee's functions (as described below), and the Board
considers the same reasons as above apply for his continued
membership of the Audit Committee and the 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.
For the year ended 31 December 2020, the roles and
responsibilities of the Audit and Risk Committee include the
following:
Financial
and narrative * To monitor the financial reporting process;
reporting
* 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
================ ==============================================================
Internal
controls * To review the adequacy and effectiveness of the
and risk Group's internal financial and internal control and
management risk managements systems;
================ ==============================================================
External
audit * To make recommendations to the Board on the
reappointment 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;
================ ==============================================================
Internal
audit * To review and consider on an annual basis the need
for an internal audit function.
================ ==============================================================
THe Committee's CHallenge of INFORMATION
The Committee recognises the importance of its role, on behalf
of shareholders and wider stakeholders, to ensure the integrity of
the Group ' s financial reporting and risk management processes. We
rely on a number of sources to ensure this integrity, including the
views of the external auditor.
The Committee has worked with the Investment Manager and other
service providers over the course of 2020 to continue to improve
the quality and timeliness of written and verbal reporting to the
Committee and we are pleased with progress to date. These continued
improvements have enriched the debate and discussion at the
meetings of the Committee and supported the Committee to fulfil its
responsibilities, which are set out below.
Matters considered during the year
The Audit and Risk Committee 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 2020 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 Company's 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;
-- The Investment Manager's whistleblowing policy; and
-- The potential impact and risks associated with the Covid crisis.
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.
Fair BalanceD and Understandable Reporting
Following the year end, the Audit Committee has reviewed the
2020 Annual Report to consider whether it provided a true and fair
view of the Group's affairs at the end of the year and provided
shareholders with the necessary information in a fair, balanced and
understandable way in order to enable them to assess the Group's
position, performance, business model and strategy.
There was a rigorous review process and challenge at different
levels within the Group to ensure balance and consistency. The
Committee also reviewed copies of the 2020 Annual Report and
Financial Statements during the drafting process to ensure key
messages and themes being followed throughout the Annual Report
were aligned with the Company's position, performance and strategy
intentions, and that the Annual Report's narrative reporting was
consistent with the Financial Statements.
When forming its opinion, the Committee considered the following
questions in order to encourage challenge and assess whether the
Annual Report and Financial Statements was fair, balanced and
understandable:
Is the Report
fair? * Is the whole story presented?
* Have any sensitive material areas been omitted?
* Are the KPIs disclosed at an appropriate level based
on the financial reporting?
================ ==============================================================
Is the Report
balanced? * Is there a good level of consistency between the
front and back sections of the Annual Report and
Financial Statements?
* Is the Annual Report a document for shareholders and
other stakeholders?
================ ==============================================================
Is the Report
understandable? * Is there a clear and understandable framework to the
Annual Report?
* Is the Annual Report presented in straightforward
language and a user-friendly and easy to understand
manner?
================ ==============================================================
Conclusion
After completion of its detailed review, the Committee was
satisfied, when taken as a whole, the Company's Annual Report and
Financial Statements were fair, balanced and understandable, and
provides the information necessary for shareholders to assess the
Company's performance, business model and strategy.
Significant accounting matters
The Audit Committee met on 21 April 2021 to review the report
and financial statements for the year ended 31 December 2020. The
Audit 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 Committee gained assurance
======================== ============================================================
Risk of misappropriation T h e Audit and Risk Com mit t e e has reviewed
of assets and ownership r e p o r t s fr o m it s s e r v i ce p r o v
of investments id ers on k e y cont rols ove r the as sets o f
the Group over the course of 2020, a role that
will be performed by the Audit Committee in 2021.
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.
======================== ==========================================================
Risk on valuations The Audit and Risk Committee received presentations
of unlisted equities in 2020 and 2021 from the Investment Manager including
at fair value valuations of equity assets held at fair value
and justification for these. After challenging
the Investment Manager, the Committees concluded
that the valuations held were reasonable.
======================== ==========================================================
The risk of material The Audit and Risk Committee view credit provisioning
misstatement of as the key accounting estimate area for the Group.
expected credit As in previous years, the Audit Committee and Risk
losses under IFRS Committee received presentations in 2020 from the
9 Financial instruments Investment Manager explaining key judgement areas,
such as, consistency of approach and the Group's
business mix. After challenging the Investment
Manager, the Committees 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.
A particular focal area for the Committees in 2020
has been on the actual and forecasted impact of
Covid-19 on expected credit losses. The Committees
have carefully challenged a number of the assumptions
underpinning our reporting under IFRS 9. The impact
of Covid-19 more widely is described in the Strategic
Report above; and the Board's role in managing
this impact over the course of 2020 is set out
in the s172 statement above.
======================== ==========================================================
Going concern and The Audit Committee reviewed a paper from the Investment
viability statement Manager in support of the going concern 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, the assessment
of the required discontinuation vote and the results
of internal stress testing in relation to Covid-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 Covid-19 on the profitability of the business
as the longer-term effects on the UK economy continue
to be seen.
======================== ==========================================================
Fair, balanced The approach taken by the Committee in determining
and understandable whether the Annual Report is, when taken as a whole,
fair, balanced and understandable is described
in greater detail in this Audit Committee report
above.
======================== ==========================================================
Retention of Investment The Audit Committee received a report from the
Trust Status Investment Manager in April 2021 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 26
June 2020 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 the Financial
Reporting Council's Revised Ethical Standard 2019, the audit
partner must rotate at least every five years. As this is Mr.
McGuire's fifth year as audit partner, he will rotate out of this
role during 2021. The Committee discussed succession planning
arrangements during 2020 & 2021 and noted the expected
appointment of Claire Sandford as audit partner for the
Company.
The audit and non-audit fees for the year under review can be
found in Note 7 to the financial statements.
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 Audit and Risk
Committee will review the scope and size of any such services
provided and any consequent impact upon the auditors'
independence.
The Group's policy follows the requirements of the Financial
Reporting Council's Revised Ethical Standard for Auditors published
in December 2019. 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 any non-audit services to the
Company in 2020 (2019: nil).
External Audit Independence
The Committee has undertaken a formal assessment of PwC's
independence, which included a review of:
a report from PwC describing
their arrangements to identify,
report and manage any conflicts
of interest;
================================
their policies and procedures
for maintaining independence
and monitoring compliance with
relevant requirements; and
================================
the value of non-audit services
provided by PwC (as described
above).
================================
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.
External Audit Effectiveness
The Audit 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. Over the reporting period,
the Audit and Risk Committee 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 Committee recommended to the Board that
it proposes to shareholders via an ordinary resolution that PwC be
reappointed as auditors at the AGM. PwC has confirmed its
willingness to continue in office.
The Audit 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 Audit Committee meetings at
least twice annually.
Internal Audit
The Audit 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 via the Audit Committee on a quarterly basis.
Approval
This Report was approved by the Audit Committee on 29 April
2021.
Jim Coyle
C hai r m a n of t he Au d it C om m i ttee
29 April 2021
Directors' Remuneration Report
Statement from the Chairman
As Chairman of the Remuneration Committee, I am pleased to
present the Directors' remuneration report for the year ended 31
December 2020, 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.
Following the end of the reporting period, the Board made the
decision in February 2021 to split the functions of the
Remuneration and Nomination Committee into two separately
constituted Committees of the Board - the Remuneration Committee
and the Nomination Committee. For this reason, this report details
the activities of the Remuneration and Nomination Committee for the
year ended 31 December 2020. Future annual reporting to
shareholders will reflect the activities of each Committee
separately.
As at 31 December 2020, the Remuneration and Nomination
Committee comprised all Directors and was chaired by Robert
Sharpe.
As at the date of this report, the Remuneration Committee
comprises all Directors and is chaired by Joanne Lake. The
Nomination Committee comprises all Directors and is chaired by
Robert Sharpe. Please see above for the member's biographies, and
full details of the number of committee meetings and attendance by
individual committee members can be found above.
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
will require shareholder approval. An ordinary resolution was
passed to approve the Directors' remuneration policy at the
Company's 2020 AGM held on 26 June 2020. This policy was adopted at
that meeting with effect from the date of the AGM and remained in
force for the year ended 31 December 2020 and will remain in force
for the two subsequent years. An ordinary resolution to approve the
Directors' remuneration policy will be put to shareholders at least
once every three years. At the 2021 AGM, shareholders will also be
asked to consider an advisory resolution on the contents of the
Directors' remuneration report.
As at 31 December 2020, the Board comprised three non-executive
Directors, all of whom are independent of the Investment Manager.
Joanne Lake was appointed to the Committee on 1 January 2021.
Given the size of the Board, and as the Company has no
employees, it was not considered appropriate for the Company to
establish a separate Nomination Committee. This position has been
kept under continual review and, in February 2021, the Board
determined that, in view of the Board's increased size to four
members, and developing good practice and expectations from
investors and regulators, it would be appropriate to constitute a
separate Nomination Committee, with effect from 1 March 2021.
For the year ended 31 December 2020, the responsibilities of the
Remuneration and Nomination Committee were 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 2020, the Directors' remuneration was 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 was
payable to the Chairman of the Audit and Risk Committee. This rate
of remuneration applied throughout the financial year ended 31
December 2020.
In line with the Board's remuneration policy, and Directors'
entitlement to additional fees in respect of any additional
services performed by them, the Remuneration and Nomination
Committee reviewed a proposal for additional variable fees to be
payable to Directors in respect of the corporate action that took
place over the course of the financial year, which required
Directors to dedicate additional time to review associated
documents and to attend additional meetings.
Following such discussion, and upon the advice of the
Remuneration and Nomination Committee, the Board agreed an
additional variable payment to all Directors of GBP15,000 in
connection with their additional duties relating to a potential
corporate action. Such fees were set with regard to other
comparable investment companies who have undertaken equivalent
activities.
The Committee met on 25 February 2021 and considered the
continued time commitment required to carry out their duties. In
that discussion, the Committee noted the additional duties and
responsibilities to be placed upon directors of the Company
following the Company's move to a premium listing. The Committee
also had regard to market trends in remuneration in comparable
UK-listed companies. Following that discussion, the Board approved,
following the recommendation of the Committee, the following fee
structure for Directors with effect from 1 March 2021:
Chairman GBP60,000 per
annum
========================== =======================
Senior Independent GBP50,000 per
Director annum
========================== =======================
Non-Executive Director GBP45,000 per
annum
========================== =======================
Chair of Audit Committee Additional supplement
of GBP5,000
per annum
========================== =======================
Chair of Risk Committee Additional supplement
of GBP5,000
per annum
========================== =======================
As noted subsequently in this Report, 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
two years.
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") 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.
Taking the AIC recommendations into account, the Board has
adopted a policy on Directors' Succession. In accordance with the
policy, the Company has put into effect an orderly rotation of the
Board which commenced at the 2019 AGM and will subsequently occur
every other year. In view of the uncertainties created by the
Covid-19 pandemic, the Board has been of the view that continuity
on the Board has been beneficial to the effectiveness of the Board
and to the Company as a whole over the course of 2020. The Board
will continue to review succession arrangements at Board level and
determine the most appropriate time for the next phase of the
succession policy to be implemented.
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.
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.
Following shareholder approval, this policy took effect from the
2020 Annual General Meeting and is next scheduled for approval by
shareholders by the Company's 2023 Annual General Meeting.
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
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 2019 and the Directors' Remuneration Policy were approved
by shareholders at the Annual General Meeting held on 26 June 2020
were as follows:
Directors' Directors'
Remuneration Report Remuneration Policy
========================= ======================= =======================
Number % of Number % of
of Votes Votes Cast of Votes Votes Cast
========================= ========== =========== ========== ===========
For 26,934,019 99.99 26,934,019 99.99
Against 2,875 0.01 2,875 0.01
Total votes cast 26,936,894 100 26,936,894 100
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 2021 AGM on the
advisory resolutions will be disclosed in the remuneration report
for the year to 31 December 2021.
Directors' fees (audited)
Single total aggregate Directors' remuneration for the year
under review was GBP178,000 (2019: GBP131,834). The Directors who
served during the year under review received the following
emoluments:
Variable
Fixed Fees Fees
paid during paid during
the year the year Taxable Non-taxable 31 December 31 December
Director (1) (1) benefits benefits 2020 2019
=============== ============= ============= ========== ============ ============ ============
Robert Sharpe GBP48,000 GBP15,000 - - GBP63,000 GBP47,500
(Chair)
=============== ============= ============= ========== ============ ============ ============
Jim Coyle GBP45,000 GBP15,000 - - GBP60,000 GBP44,667
=============== ============= ============= ========== ============ ============ ============
Richard Rowney GBP40,000 GBP15,000 - - GBP55,000 GBP20,000
(2)
=============== ============= ============= ========== ============ ============ ============
Ravi Takhar - - - - - GBP19,667
(3)
=============== ============= ============= ========== ============ ============ ============
Total GBP133,000 GBP45,000 - - GBP178,000 GBP131,834
=============== ============= ============= ========== ============ ============ ============
(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
above and Investment Manager's Report 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 2020. The
table shows the remuneration paid to Directors for the year under
review, compared to the distribution payments to shareholders.
31 December 31 December
2020 2019
GBP'000 GBP'000
========================== =========== ===========
Total remuneration
paid to Directors 178 132
Shareholder distributions
- dividends
or share buybacks 63,830 31,560
========================== =========== ===========
Directors' interests (audited)
The Company does not have any requirement for any Director to
own shares in the Company.
As at 31 December 2020, the Directors do not hold shares in the
Company (31 December 2019: None). On 1 January 2021, Joanne Lake
was appointed to the Board. She had acquired 2,659 shares in the
Company prior to entering discussions with the Company about the
role as non-executive director.
There have been no changes to any holdings between 31 December
2020 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
29 April 2021 and signed on behalf of the Board by:
Robert Sharpe
Chairman of the Remuneration and Nomination Committee
29 April 2021
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 in the Chairman's
Statement, the Investment Manager's Report, Top Ten Holdings,
Portfolio composition, the Business Review and the Directors'
Report. 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
both international accounting standards in conformity with the
requirements of the Companies Act 2006 and international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in 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 issued by the IASB in conformity with the
requirements of the Companies Act 2006, 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,
Investment Manager's Report, top ten largest Holdings, Analysis of
Investment Portfolio by Sector and Business Model and Strategy) and
the Directors' Report 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 Financial Statements were approved by the
Board and the above responsibility statement was signed on its
behalf by:
Robert Sharpe
Chairman
29 April 2021
Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2020
For the year ended 31 For the year ended 31
December 2020 December 2019
Notes Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
====================== ===== ======== ======== ======== ======== ======== ========
Net Income
Interest Income
on credit assets
at amortised cost 5 54,970 - 54,970 62,697 - 62,697
Income / (Loss)
on equity assets
at fair value
through profit
and loss 12 - (375) (375) - 30 30
Income/(Loss)
on credit assets
at fair value
through profit
and loss 13 - 775 775 - - -
Credit impairment
losses 11 (5,581) - (5,581) (7,372) - (7,372)
Third party servicing (3,918) - (3,918) (3,739) - (3,739)
====================== ===== ======== ======== ======== ======== ======== ========
Net operating
income/expense
before financing
and fund costs 45,471 400 45,871 51,586 30 51,616
Finance costs 19 (14,323) - (14,323) (8,417) - (8,417)
====================== ===== ======== ======== ======== ======== ======== ========
Net operating
income/expense
before fund costs 31,148 400 31,548 43,169 30 43,199
Management fee 6 (5,823) (119) (5,942) (5,971) (95) (6,066)
Performance fee 6 (2,300) - (2,300) (3,468) - (3,468)
Fund expenses 7 (2,605) - (2,605) (2,454) - (2,454)
Total operating
expenses (10,728) (119) (10,847) (11,893) (95) (11,988)
Profit / (loss)
before taxation 20,420 281 20,701 31,276 (65) 31,211
Tax expense 8 - - - - - -
Profit / (loss)
after taxation 20,420 281 20,701 31,276 (65) 31,211
====================== ===== ======== ======== ======== ======== ======== ========
Earnings per share
(basic and diluted) 9 55.7p 0.8p 56.5p 79.3p (0.2)p 79.1p
====================== ===== ======== ======== ======== ======== ======== ========
The total column of this statement represents the Statement of
comprehensive income prepared in accordance with both international
accounting standards in conformity with the requirements of the
Companies Act 2006 and international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
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 2020
Notes 31 December 31 December
2020 2019 GBP'000
GBP'000
====================================== ===== =========== =============
Non-current assets
Equity assets held at fair value
through profit or loss 12 14,959 8,390
Credit assets at amortised cost 11 547,737 580,998
Credit assets held at fair value
through profit or loss 13 5,905 -
Derivative assets held at fair
value through profit or loss 14 21 -
Fixed assets 16 - 41
====================================== ===== =========== =============
568,622 589,429
Current assets
Cash and cash equivalents 62,548 15,154
Receivables 17 6,773 8,875
====================================== ===== =========== =============
69,321 24,029
Total assets 637,943 613,458
Current liabilities
Management fee payable 6 (1,040) (511)
Performance fee payable 6 (2,300) (3,468)
Other payables 18 (3,832) (2,326)
Interest bearing borrowings 19 (20,865) (130,741)
====================================== ===== =========== =============
(28,037) (137,046)
Total assets less current liabilities 609,906 476,412
Non-current liabilities
Interest bearing borrowings 19 (252,674) (76,051)
Net assets 357,232 400,361
====================================== ===== =========== =============
Shareholders' funds
Ordinary share capital 21 352 394
Share premium 299,599 299,599
Revenue reserves 1,185 5,270
Capital reserves (749) (1,030)
Special distributable reserves 22 56,845 96,128
====================================== ===== =========== =============
Total shareholders' funds 357,232 400,361
====================================== ===== =========== =============
Net asset value per share 25 1,013.1p 1,014.9p
====================================== ===== =========== =============
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 29 April 2021. They were signed on its
behalf by:
Robert Sharpe, Chairman
Company Statement of Financial Position
As at 31 December 2020
Notes 31 December 31 December
2020 2019 GBP'000
GBP'000
====================================== ===== =========== =============
Non-current assets
Equity assets held at fair value
through profit or loss 12 14,959 12,883
Credit assets at amortised cost 11 547,737 580,998
Credit assets held at fair value
through profit or loss 13 5,905 -
Derivative assets held at fair
value through profit or loss 14 21 -
Fixed assets 16 - 41
====================================== ===== =========== =============
568,622 593,922
Current assets
Cash and cash equivalents 59,673 13,251
Receivables 17 6,773 8,325
====================================== ===== =========== =============
66,446 21,576
Total assets 635,068 615,498
Current liabilities
Management fee payable 6 (1,040) (511)
Performance fee payable 6 (2,300) (3,468)
Other payables 18 (3,429) (1,805)
Interest bearing borrowings 19 (73) (130,741)
====================================== ===== =========== =============
(6,842) (136,525)
Total assets less current liabilities 628,226 478,973
Non-current liabilities
Deemed loan 20 (103,719) (78,612)
Interest bearing borrowings 19 (167,275) -
Net assets 357,232 400,361
====================================== ===== =========== =============
Shareholders' funds
Ordinary share capital 21 352 394
Share premium 299,599 299,599
Revenue reserves 1,185 5,270
Capital reserves (749) (1,030)
Special distributable reserves 22 56,845 96,128
====================================== ===== =========== =============
Total shareholders' funds 357,232 400,361
====================================== ===== =========== =============
Net asset value per share 25 1,013.1p 1,014.9p
====================================== ===== =========== =============
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 2020 was GBP20.7 million
(2019: GBP31.2 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 29 April 2021. They were signed on its
behalf by:
Robert Sharpe, Chairman
Consolidated Statement of Changes in Shareholders' Funds
For the year ended 31 December 2020
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 2020 394 299,599 5,270 (1,030) 96,128 400,361
================== ======== ======== ========= ========= ============== ========
Ordinary shares
bought back (42) - - - (34,783) (34,825)
================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 20,420 281 - 20,701
================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (24,505) - (4,500) (29,005)
================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at
31 December 2020 352 299,599 1,185 (749) 56,845 357,232
================== ======== ======== ========= ========= ============== ========
The Group's capital reserve arising on investments sold and
revenue reserve may be distributed by way of a dividend. The
portion of capital reserve arising on investments held is wholly
non-distributable. There may be factors that restrict the value of
the reserves that can be distributed and these factors may be
complex to determine. Amounts fully distributable may therefore not
be the total of the revenue reserve and the portion of the capital
reserve arising on investments sold.
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
================== ======== ======== ========= ========= ============== ========
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
================== ======== ======== ========= ========= ============== ========
The Group's capital reserve arising on investments sold and
revenue reserve may be distributed by way of a dividend. The
portion of capital reserve arising on investments held is wholly
non-distributable. There may be factors that restrict the value of
the reserves that can be distributed and these factors may be
complex to determine. Amounts fully distributable may therefore not
be the total of the revenue reserve and the portion of the capital
reserve arising on investments sold.
The notes below form an integral part of the financial
statements.
Company Statement of Changes in Shareholders' Funds
For the year ended 31 December 2020
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 2020 394 299,599 5,270 (1,030) 96,128 400,361
================== ======== ======== ========= ========= ============== ========
Ordinary shares
bought back (42) - - - (34,783) (34,825)
================== ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 20,420 281 - 20,701
================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (24,505) - (4,500) (29,005)
================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at
31 December 2020 352 299,599 1,185 (749) 56,845 357,232
================== ======== ======== ========= ========= ============== ========
The Company's capital reserve arising on investments sold and
revenue reserve may be distributed by way of a dividend. The
portion of capital reserve arising on investments held is wholly
non-distributable. There may be factors that restrict the value of
the reserves that can be distributed and these factors may be
complex to determine. Amounts fully distributable may therefore not
be the total of the revenue reserve and the portion of the capital
reserve arising on investments sold.
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
================== ======== ======== ========= ========= ============== ========
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
================== ======== ======== ========= ========= ============== ========
The Company's capital reserve arising on investments sold and
revenue reserve may be distributed by way of a dividend. The
portion of capital reserve arising on investments held is wholly
non-distributable. There may be factors that restrict the value of
the reserves that can be distributed and these factors may be
complex to determine. Amounts fully distributable may therefore not
be the total of the revenue reserve and the portion of the capital
reserve arising on investments sold.
The notes below form an integral part of the financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2020
31 December 2020 31 December 2019
Notes GBP'000 GBP'000
=================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 20,701 31,211
Adjustments for:
Change in expected credit
loss 11 5,581 7,372
Net change in unrealised 12,
(gains)/losses 13 (1,155) (30)
Finance costs 14,323 8,418
Amortisation 16 41 176
(Increase) / decrease in
receivables 17 2,102 (5,500)
(Increase) / decrease in
derivatives 14 (21) -
Increase in payables 18 867 617
Net cash inflow from operating
activities 42,439 42,264
Cash flows from investing
activities:
Net sale/(purchase) of investments
at amortised cost 18,982 (11,840)
Purchase of equity investments 12 - (380)
Sale of equity investments 12 - 2,000
Purchase of fair value credit
investments 13 (2,621) -
Net cash inflow / (outflow)
from investing activities 16,361 (10,220)
Cash flows from financing
activities:
Redemption of shares 22 (34,825) -
Drawdown of interest bearing
borrowings 19 359,648 272,463
Repayments of interest-bearing
borrowings 19 (289,013) (255,517)
Interest paid on financing
activities 19 (18,211) (7,835)
Dividends declared and paid 10 (29,005) (31,560)
Net cash (outflow) from financing
activities (11,406) (22,449)
Net change in cash and cash
equivalents 47,394 9,595
Cash and cash equivalents
at the beginning of the year 15,154 5,559
================ ================
Cash and cash equivalents 62,548 15,154
=================================== ===== ================ ================
The notes below form an integral part of the financial
statements.
Company Statement of Cash Flows
For the year ended 31 December 2020
31 December 2020 31 December 2019
Notes GBP'000 GBP'000
=================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 20,701 31,211
Adjustments for:
Change in expected credit
loss 11 5,581 7,372
Net change in unrealised 12,
(gains)/losses 13 3,338 (4,523)
Finance costs 12,042 7,449
Amortisation 16 41 176
(Increase) / Decrease in
receivables 17 1,552 (4,950)
(Increase) / Decrease in
derivatives 14 (21) -
Increase in payables 18 985 96
Net cash inflow from operating
activities 44,219 36,831
Cash flows from investing
activities:
Net Sale/(Purchase) of Investments
at amortised cost 18,982 (11,840)
Purchase of equity investments 12 - (380)
Sale of equity investments 12 - 2,000
Purchase of fair value credit
investments 13 (2,621)
(Purchase) / receipt from
deemed loans 20 25,107 78,613
Net cash inflow / (outflow)
from investing activities 41,468 68,393
Cash flows from financing
activities:
Redemption of shares 22 (34,825) -
Drawdown of interest bearing
borrowings 19 312,500 191,500
Repayments of interest-bearing
borrowings 19 (272,752) (250,500)
Interest paid on financing
activities 19 (15,183) (6,972)
Dividends declared and paid 10 (29,005) (31,560)
Net cash (outflow) from financing
activities (39,265) (97,532)
Net change in cash and cash
equivalents 46,422 7,692
Cash and cash equivalents
at the beginning of the year 13,251 5,559
================ ================
Cash and cash equivalents 59,673 13,251
=================================== ===== ================ ================
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
both international accounting standards in conformity
with the requirements of the Companies Act 2006 and
international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union. .
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.
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. In
order to reach this conclusion 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. These
financial projections have been performed under various origination
volumes and stressed scenarios and in all cases the Group is able
to meet its liabilities as they fall due. The stressed scenarios
considered included no future originations by the Group, late
repayments of significant structured facilities and individual
exposures experiencing ongoing performance at the worst monthly
impact noted throughout 2020; which incorporated one-off
macro-economic charges for Covid-19. As part of these projections
the Directors have also reviewed any financial and non-financial
covenants in place under all debt facilities in place with no
breaches anticipated, even in our most stressed scenario. Although
there is a requirement to put a special resolution for the
discontinuation of the Company at the 2021 AGM, based on the
current position, performance and prospects of the Company the
Directors have no reason to believe that shareholders will vote for
discontinuation. As a special resolution, 75% of shareholders would
be required to vote for discontinuation and the Directors do not
believe this high threshold will be met. The Directors also note
that, even if there was to be a vote for discontinuation at the
2021 AGM, the Company would be likely to continue to operate for a
period thereafter, due to the Company's investments not comprising
readily realisable securities. 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.
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:
Accounting standards effective
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.
The amendments and interpretations do not have a material impact
on the financial statements as the Company has not acquired any
groups of assets open to such interpretation. The subsidiary
entities consolidated in the Group's financial statements are
through 100% share ownership or exposure to the variable returns of
the vehicle through the holding of a junior note issued by it.
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.
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 1 Bartholomew
Lane, London, United Kingdom, EC2N 2AX. 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 and 31 December 2020 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.
The Company also controls Bud Funding Limited ("Bud"), a private
limited company incorporated with limited liability under the Law
of England and Wales. The Company is considered to control the
entity since 2 December 2020, by virtue of having exposure to the
variable returns of the vehicle through the holding of a junior
note issued by it and because the Company exercises control over
Bud through its involvement in the initial creation of Bud and in
the absence of another entity now having control over Bud.
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 the majority 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 accruals
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 capital investments;
-- Increases and decreases in the valuation of capital
investments held at the 31 December 2019 and 31 December 2020;
-- 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 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 Equity Assets 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 equity investments held can be demonstrated and,
accordingly, the management fee for the financial year has been
allocated 98.0 per cent to revenue and 2.0 per cent to capital
(being the management fee percentage applied to the Equity Assets
throughout the financial year), 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.
Capital reserves
Capital reserves arise from:
-- Gains or losses on disposal of equity investments during the year
-- Increases and decreases in the valuation of equity investments held at the year end
-- Other capital charges and credits charged to this account in
accordance with the accounting policies above or as applied to the
capital column of the Consolidated Statement of Comprehensive
Income, prepared under guidance issued by the Associated of
Investment Companies.
All of the above are accounted for in the Consolidated Statement
of Comprehensive Income. Any other gains or losses, charges or
credits from investments still held or otherwise are included in
the revenue reserves.
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
and continues to monitor itself against the conditions required to
satisfy the investment trust criteria, including but not limited to
making sufficient interest distributions.
Where additional SPVs are created these are structured in such a
way that they either make no profit and as such pay no tax or that
they are exempt from taxation.
Irrecoverable withholding tax is recognised on any overseas
dividends on an accruals basis using the applicable rate for the
country of origin.
Credit assets 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 expected credit losses (see Note 11 to the financial
statements).
Investments held at fair value through profit or loss
All investments held by the Group which 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 and updated in March 2020 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 in
which they are paid.
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. All
associate investments held by the Company are for capital
appreciation where such an opportunity has arisen, as opposed to
being extensions of the Company's business, and have been
designated as at fair value through profit or loss upon initial
recognition. 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 24 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. No assets have been classified at FVOCI
as at 31 December 2019 or 31 December 2020.
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 arise from loans
originated by the Company and subsequently sold to in a special
purpose entity to reduce the cost of borrowing, in this case Sting
Funding Limited and Bud 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, LGDs are typically set at product
level due to the limited differentiation in recoveries achieved
across different borrowers. These LGDs 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, where this information is available
- 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
2020 as well as 31 December 2019, 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 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 major disruption to businesses
and economic activity with corresponding volatility in global stock
markets. There are no comparable recent events which may provide
guidance as to the effect of the spread of the 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. Given the Group's strategy, its performance
is linked to the health of the economy. We expect the Group could
experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate. The government
has also launched a number of initiatives aimed at providing
finance to SMEs and support to consumers. 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 recent market
improvements and progress made on national vaccination programmes
are encouraging, however uncertainty remains.
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;
-- Security over our borrowers receivables;
-- 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.
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 deal type and sector 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 financial performance. There are no segment managers
directly accountable for the individual routes to market and the
routes to market are not determinants of resource allocations,
rather each investment opportunity is considered on its own
merits.
The Directors are of the opinion that the Company is engaged in
a single segment of business and operations of the Group are mainly
in the United Kingdom.
2. Significant Accounting Judgements, Estimates and Assumptions
The preparation of financial statements in conformity with IFRS
as issued by the IASB in conformity with the Companies Act 2006
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 above as well as in the accounting policies section of
the Notes.
Expected Credit loss allowance for financial assets measured at
amortised cost
The calculation of the Group's ECL allowances and provisions
against loan commitments and guarantees under IFRS 9 is 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 calculate the related ECL allowance. This weighting scheme
is deemed appropriate for the computation of unbiased ECL. Key
scenario assumptions are set using external economist forecasts,
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 31 December 2020.
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 usually
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 a more
positive base case where the economy sees a more rapid recovery out
of the recent economic downturn brought by the global Covid-19
pandemic. This mild-upside case scenario sees UK unemployment drop
by 2.3 per cent in 2021. With a key driver being a quick recovery
to a return to a post-pandemic economy with disruptions seen in
2020 resolving through 2021. Consequently, for the mild upside
scenario the Bank of England base rate is forecast to rise to
around 0.8 per cent by the end of 2021. The one-year forecast
changes in these key economic drivers are shown in the table
below.
Longer term forecasting sees the UK economy returning to a
pre-pandemic state within five years in the mild upside and base
case scenarios. The base case forecasts unemployment reducing to 4%
by the end of 2025; returning to match unemployment seen in March
2020. The downside scenario however forecasts a much slower
recovery, with unemployment remaining at 6.1% and December 2025 HPI
still 19.6% lower than at the end of 2020.
Please see Note 11 for sensitivity analysis. Please note that in
2020 gross domestic product (GDP) has been removed as a linear
variable for the IFRS9 models. In prior years GDP was used to
reflect the general position of the economy on the assumption that
this was generally reflective of the borrowers' ability to pay.
However in 2020 this link has been decoupled due to the economy
receiving unprecedented levels of government support schemes. As
such, removing GDP improves the fit of the model.
2020 Base Upside Down-side
============================ ======= ======= =========
UK unemployment rate yearly
change (0.11%) (1.60%) 2.01%
UK HPI yearly change (5.50%) (1.32%) (14.32%)
UK Base Rate 0.1% 0.4% (0.3%)
============================ ======= ======= =========
2019 Base Upside Down-side
============================ ===== ====== =========
UK unemployment rate yearly
change 3.92% 3.78% 4.96%
UK HPI yearly change 0.15% 3.78% (7.13%)
UK Base Rate 1.86% 2.60% 0.52%
============================ ===== ====== =========
The majority of customers have now ended their forbearance plans
granted as part of Covid-19 and are returning to full payments,
however a minority remain at 31 December 2020. For loans still in
forbearance which were in stage 1 or stage 2 prior to the payment
holiday, an overlay has been applied to take additional provisions
to account for those not expected to return to full repayment. At
31 December, the overlay was GBP0.3 million. If the assumed return
to full repayment was reduced by 10%, the additional provision
would increase to GBP0.4 million.
Loss given default ("LGD") - LGD represents the 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. 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 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, LGDs are typically set at product
level due to the limited differentiation in recoveries achieved
across different borrowers. These LGDs are influenced by collection
strategies, including contracted debt sales and price.
Exposure at default ("EAD") - EAD is based on the amounts
expected to be owed at the time of default, over the next 12 months
("12M EAD") or over the remaining lifetime ("Lifetime EAD"). IFRS 9
requires an assumed draw down profile for committed amounts.
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 multiple 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. 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. Sensitivity analysis has been
performed on the equity investment valuations in Note 12.
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.
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 treating its subsidiaries as investments
at fair value through profit or loss.
The Company controls Bud Funding Limited ("Bud"), a limited
company incorporated under the law of England and Wales, though it
does not own the majority of the voting capital the Company is
considered to control Bud through its exposure to the variable
returns of the vehicle through hold of a junior note issued by it
and the controls it exerts over Bud. Bud was incorporated on 2
November 2020 and the junior note was funded on 2 December 2020, at
which point the control began. The Company exercises control over
Bud through its involvement in the initial creation of Bud and in
the absence of another entity now having control over Bud.
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.
The Company also controls Bud Funding Limited ("Bud"), a limited
company incorporated under the law of England and Wales. The
Company is considered to control Bud through its exposure to the
variable returns of the vehicle through holding of a junior note
issued by it and the control it exerts over Bud. Bud was
incorporated on 2 November 2020 and the junior note was funded on 2
December 2020, at which point the control began.
As a result, the financial statements for the year ended 31
December 2020 and 31 December 2019 are prepared on a consolidated
basis.
5. InTEREST INCOME ON CREDIT ASSETS AT AMORTISED COST
Group 31 December 2020 31 December 2019
GBP'000 GBP'000
============================== ================ ================
Investment income
Interest income 50,948 59,953
Commitment fee income 2,154 1,326
Arrangement fee income 1,844 1,416
Net gain on foreign exchange* 21 -
Total investment income 54,967 62,695
Other income
Deposit interest 3 2
================ ================
Total income 54,970 62,697
============================== ================ ================
*Gain on foreign exchange also includes fair value movements on
derivatives taken out to economically hedge fair value
exposures
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 2020
totalled GBP5.9 million (2019: GBP6.1 million) of which GBP1.0
million was payable at the year-end (2019: GBP0.5 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 2020 totalled
GBP2.3 million (2019: GBP3.5 million) of which GBP2.3 million was
payable at the year-end (2019: GBP3.5 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.
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 2020 (2019: GBPnil).
7. Fund Expenses
Group 31 December 2020 31 December 2019
GBP'000 GBP'000
========================== ================ ==================
Directors' fees 200 149
Administrator's fees 148 192
Auditors' remuneration 287 160
Amortisation 41 176
Capital raise costs - 569
Potential merger costs 585 102
LSE market listing costs 280 -
Other expenses 1,064 1,106
Total fund expenses 2,605 2,454
========================== ================ ==================
All expenses where applicable are inclusive of VAT (except those
paid to the auditors which are net). Directors' fees above include
GBP178,000 (2019: GBP131,834) paid to Directors' and GBP21,538
(2019: GBP16,910) 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 2019 on the expiration of this
placement programme. This was a one-off cost incurred in the
year.
The auditors' remuneration net of VAT for the audit of the
Company was GBP220,000 for the year ended 31 December 2020 (2019:
GBP160,000) with additional costs of GBP29,000 relating to the
audit of the Annual Report and Financial Statements for the year
ended 31 December 2019. Remuneration includes the audit of
subsidiaries during the year was GBP37,500 (2019: nil). Non-audit
fees amounted to 2020: GBPnil (2019: GBPnil).
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 2020.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
========================== ======== ======== ========
Corporation tax - - -
========================== ======== ======== ========
Total current tax charge - - -
Deferred tax movement - - -
Total tax charge in income - - -
statement
========================== ======== ======== ========
The following table presents the tax chargeable for the year
ended 31 December 2019.
Group Revenue Capital Total
GBP'000 GBP'000 GBP'000
==================================== ======== ======== ========
Corporation tax - - -
==================================== ======== ======== ========
Total current tax charge - - -
Deferred tax movement - - -
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 (2019: 19.00 per cent). A
reconciliation of the 2020 taxation charge based on the standard
rate of UK corporation tax to the actual taxation charge is shown
below.
G roup Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================== ======== ======== ========
Profit before taxation 20,420 281 20,701
================================== ======== ======== ========
Profit before taxation multiplied
by the standard rate of UK
corporation tax of 19.00% 3,880 53 3,933
Effects of:
Excess management expenses
not utilised / (not utilised) 855 (53) 802
Interest distributions paid
in respect of
the year (4,735) - (4,735)
================================== ======== ======== ========
Total tax charge in income - - -
statement
================================== ======== ======== ========
A reconciliation of the 2019 taxation charge based on the
standard rate of UK corporation tax to the actual taxation charge
is shown below.
G roup Revenue Capital Total
GBP'000 GBP'000 GBP'000
============================== ======== ======== ========
Profit/(loss) before taxation 31,276 (65) 31,211
============================== ======== ======== ========
Profit/(loss) 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
============================== ======== ======== ========
9. Earnings per Share
Group 31 December 31 December
2020 2019
====================== =========== ===========
Revenue 55.7p 79.3p
Capital 0.8p (0.2)p
====================== =========== ===========
Earnings per ordinary
share 56.5p 79.1p
====================== =========== ===========
The calculation for the year ended 31 December 2020 is based on
revenue returns of GBP20.4 million, capital returns of GBP0.3
million and total returns of GBP20.7 million and a weighted average
number of ordinary shares of 36,657,807.
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.
10. Ordinary Dividends
31 December 2020 31 December 2019
GBP'000 GBP'000
===================================== ================ ================
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
===================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2019
(paid 27 March 2020) 7,450 -
===================================== ================ ================
20.00p Interim dividend for the
period to 31 March 2020
(paid on 23 June 2020) 7,303 -
===================================== ================ ================
20.00p Interim dividend for the
period to 30 June 2020
(paid on 22 September 2020) 7,201 -
===================================== ================ ================
20.00p Interim dividend for the
period to 30 September 2020
(paid 27 December 2020) 7,051 -
===================================== ================ ================
Total dividend paid in period 29,005 31,560
===================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2019
(paid 27 March 2020) - 7,450
===================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2020
(paid 26 March 2021) 7,051 -
===================================== ================ ================
Total dividend paid in relation
to period 28,606 31,120
===================================== ================ ================
The 31 December 2020 interim dividend of 20.00 pence was
approved on 25 February 2021 and paid on 26 March 2021 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 2020.
31 December 2020 1 January 2020
============= ======================================= =======================================
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 211,636 (20,000) 191,636 320,107 (19,844) 300,264
Property 343,219 (10,269) 332,950 246,846 (10,051) 236,795
SME 23,359 (208) 23,151 44,198 (259) 43,939
Total Assets 578,214 (30,477) 547,737 611,152 (30,154) 580,998
============= ============== ========= ============ ============== ========= ============
Group and Company Stage 1 Stage 2 Stage 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
============================== ========= ========= ========= =========
At 1 January 2020 3,217 2,606 24,331 30,154
Movement from stage 1
to stage 2 (102) 3,170 - 3,068
Movement from stage 1
to stage 3 (270) - 7,379 7,109
Movement from stage 2
to stage 1 11 (515) - (504)
Movement from stage 2
to stage 3 - (1,180) 3,206 2,026
Movement from stage 3
to stage 1 4 - (343) (339)
Movement from stage 3
to stage 2 - 75 (213) (138)
Decreases due to repayments (794) (2,607) (4,870) (8,271)
Increases due to origination 381 - - 381
Remeasurements due to
modelling 490 796 963 2,249
Loans sold (1,473) (418) (3,367) (5,258)
Allowance for ECL at
31 December 2020 1,464 1,927 27,086 30,477
============================== ========= ========= ========= =========
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.
Please see Note 1 to the financial statements for more detail on
the allowance for ECL.
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
Allowance for ECL at
31 December 2019 3,217 2,606 24,331 30,154
============================== ========= ========= ========= =========
(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 2020:
Group Consumer Property SME Total
GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========= =========
At 1 January 2020 19,844 10,051 259 30,154
Charge for the period
- Stage 1 (344) 149 (91) (286)
Charge for the period
- Stage 2 61 (320) (17) (276)
Charge for the period
- Stage 3 5,697 389 57 6,143
Charge for the period
- total 5,414 218 (51) 5,581
Loans sold (5,258) - - (5,258)
Allowance for ECL at
31 December 2020 20,000 10,269 208 30,477
======================= ========= ========= ========= =========
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
Charge for the period
- total 7,120 171 80 7,371
Allowance for ECL at
31 December 2019 19,844 10,051 259 30,154
======================= ========= ========= ========= =========
Measurement uncertainty and sensitivity analysis of ECL
The recognition and measurement of 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 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 statements,
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 2020 . The analysis shows that the ECL would have been
GBP4.0 million higher under this sensitivity.
2020 Weighted Year end ECL 100% Downside Scenario
GBP'000 GBP'000
========= ===================== ======================
Consumer 20,000 20,205
Property 10,269 14,099
SME 208 208
Total 30,477 34,512
========= ===================== ======================
At 31 December 2019 if the weightings used represented a 100 per
cent downside scenario the ECL would have been GBP2.1 million
higher as split below:
2019 Weighted Year end ECL 100% Downside Scenario
GBP'000 GBP'000
========= ===================== ======================
Consumer 19,844 20,749
Property 10,051 11,282
SME 259 260
Total 30,154 32,291
========= ===================== ======================
The sensitivity of the ECL has been further analysed 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 GBP2.5 million higher under this
sensitivity.
The amortised cost of the structurally secured portfolio is
GBP311 million, and the largest exposure is set out above. We have
stress tested each structured position as at 31 December 2020 to
analyse the sensitivity to impairment of the underlying assets. The
portfolio was able to withstand the stress test without incurring a
loss, this has been done by running each structured model on a 100%
downside scenario to show that excess cashflow remains, such that
in the event of default LGD is nil.
12. Equity Investments at Fair Value Through Profit or Loss
(a) Movements in the year
The table below sets out the movement in equities assets at fair
value through profit or loss for the Group for the year ended 31
December 2020.
Group 2020
GBP'000
========================== =========
Valued using transaction
price 550
Valued using an earnings
multiple 7,840
Opening fair value 8,390
Purchases at cost 13,599
Disposal at cost (6,655)
Net change in unrealised
gains 380
Realised (losses)/gains (755)
Closing fair value
at 31 December 2020 14,959
Comprising:
Valued using an earnings
multiple 1,380
Valued using a TNAV
multiple 13,579
Closing fair value
as at 31 December 2020 14,959
========================== =========
The table below sets out the movement in equity assets at fair
value through profit or loss for the Company for the year ended 31
December 2020.
Company 2020
GBP'000
=========================================== =========
Valued using Net Asset Value 4,493
Valued using transaction price 550
Valued using an earnings multiple 7,840
Opening fair value 12,883
Purchases at cost 13,599
Disposal at cost (6,655)
Net change in unrealised (losses)/gains (4,113)
Realised (losses)/gains (755)
Closing fair value at 31 December 2020 14,959
Comprising:
Valued using an earnings multiple 1,380
Valued using a TNAV multiple 13,579
Closing fair value as at 31 December 2020 14,959
=========================================== =========
The table below sets out the movement in equity assets 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 equity assets 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
=========================================== =========
(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 value as at Closing fair value as at
31 Dec 2020 31 Dec 2019
GBP'000 GBP'000
========= ========================= =========================
Level 1 - -
Level 2 - -
Level 3 14,959 8,390
========= ========================= =========================
Total 14,959 8,390
========= ========================= =========================
The following sets out the classifications in valuing the
Company's investments:
Group Closing fair value as at Closing fair value as at
31 Dec 2020 31 Dec 2019
GBP'000 GBP'000
========= ========================= =========================
Level 1 - -
Level 2 - -
Level 3 14,959 12,883
========= ========================= =========================
Total 14,959 12,883
========= ========================= =========================
The investments in unquoted equities are valued using several
different techniques, including recent transactions and recent
rounds of funding by the investee entities and the market approach.
Quantitative information regarding the unobservable inputs for the
Group and Company's Level 3 positions as at 31 December 2020 is
given below:
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2020 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
1,380 Multiple 265
1,380 265
============= =========== ==========
Earnings multiples used is 4.3x.
Closing fair Valuation TNAV multiple
value as at Technique changed
31 Dec 2020 by 0.25x
GBP'000 GBP'000
============= ============== ==============
13,579 TNAV Multiple 1,583
13,579 1,583
============= ============== ==============
TNAV multiple used is 2.15x.
Quantitative information regarding the unobservable inputs for
the Group and Company's Level 3 positions as at 31 December 2019 is
given below:
Group Valuation Technique Earnings multiple changed
Closing fair value as at by 1
31 Dec 2019 GBP'000
GBP'000
========================== ==================== ==========================
8,390 Earnings Multiple 1,948
8,390 1,948
========================== ==================== ==========================
Company Net Asset
Closing fair Value increased
value as at by 20%
31 Dec 2019 Valuation GBP'000
GBP'000 Technique
============== =========== =================
Net Asset
4,493 Value 899
4,493 899
============== =========== =================
Company Valuation Earnings
Closing fair Technique multiple
value as at changed
31 Dec 2019 by 1
GBP'000 GBP'000
============== =========== ==========
Earnings
8,390 Multiple 1,948
8,390 1,948
============== =========== ==========
Earnings multiples range from 2x to 8x.
13. Credit Assets at Fair Value Through Profit or Loss
(a) Movements in the year
The table below sets out the movement in credit assets at fair
value through profit or loss for the Group for the year ended 31
December 2020.
Group 2020
GBP'000
=============================================== =========
Opening fair value -
Purchases at cost 2,621
Reclassification from loans at amortised cost 2,509
Net change in unrealised gains 775
Closing fair value at 31 December 2020 5,905
Comprising:
Valued using an earnings multiple 1,655
Valued using a TNAV multiple 4,250
Closing fair value as at 31 December 2020 5,905
=============================================== =========
The table below sets out the movement in credit assets at fair
value through profit or loss for the Company for the year ended 31
December 2020.
Company 2020
GBP'000
=============================================== =========
Opening fair value -
Purchases at cost 2,621
Reclassification from loans at amortised cost 2,509
Net change in unrealised gains 775
Closing fair value at 31 December 2020 5,905
Comprising:
Valued using an earnings multiple 1,655
Valued using TNAV multiple 4,250
Closing fair value as at 31 December 2020 5,905
=============================================== =========
(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 value as at Closing fair value as at
31 Dec 2020 31 Dec 2019
GBP'000 GBP'000
======== ========================= =========================
Level 1 - -
Level 2 - -
Level 3 5,905 -
======== ========================= =========================
Total 5,905 -
======== ========================= =========================
The following sets out the classifications in valuing the
Company's investments:
Company Closing fair value as at Closing fair value as at
31 Dec 2020 31 Dec 2019
GBP'000 GBP'000
======== ========================= =========================
Level 1 - -
Level 2 - -
Level 3 5,905 -
======== ========================= =========================
Total 5,905 -
======== ========================= =========================
Quantitative information regarding the unobservable inputs for
the Group and Company's Level 3 positions as at 31 December 2020 is
given below:
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2020 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
1,655 Multiple 972
1,655 972
============= =========== ==========
Earnings multiple used is 2.65x.
Closing fair Valuation TNAV multiple
value as at Technique changed
31 Dec 2020 by 0.1x
GBP'000 GBP'000
============= ============== ==============
4,250 TNAV Multiple 425
4,250 425
============= ============== ==============
TNAV multiple used is 1.0x.
14. 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 credit risk, market risk and liquidity risk. The
Board reviews and agrees policies for managing each of these risks
as summarised below. Credit risk is analysed further in Note
15.
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:
-- 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.
-- 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);
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) 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 other benchmarks). 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 interest
rate 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 2020 the Group had
GBP273.5 million drawn down under these facilities (2019: GBP206.8
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 2020 is shown below:
Fixed or Administered
Floating Rate Rate Total
Group Financial instrument GBP'000 GBP'000 GBP'000
=========================== ============= ===================== =========
Credit Assets at
amortised cost 204,592 343,145 547,737
Cash and cash equivalents 62,548 - 62,548
Interest bearing
borrowings (273,539) - (273,539)
=========================== ============= ===================== =========
Total exposure (6,399) 343,145 336,746
=========================== ============= ===================== =========
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 2020 is shown below:
Fixed or Administered
Company Financial Floating Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
========================== ============= ===================== =========
Credit Assets at
amortised cost 204,592 343,145 547,737
Cash and cash equivalents 59,673 - 59,673
Interest bearing
borrowings (167,348) - (167,348)
========================== ============= ===================== =========
Total exposure 96,917 343,145 440,062
========================== ============= ===================== =========
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 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
================== ========= ============= =========
An administered rate is not like a floating rate, movements in
which are directly linked to benchmarks, such as 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 GBP2.7 million (2019: GBP2.2
million). A 1 per cent change in interest rates impacts debt
expense on the liabilities with a floating rate by GBP2.7 million
(2019: GBP2.0 million).
(b) 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 other currencies. 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 other currencies
.
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 Euros at 31
December 2020. 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)
========== ============ ========== ==============
2,537 - (2,508) 29
2,537 - (2,508) 29
========== ============ ========== ==============
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 GBP3,000. 10 per cent is
considered to be a reasonably possible movement in foreign exchange
rates. All forward contracts held at 31 December 2020 were carried
out with Infinity International Limit and represent EUR2,780,000 of
Euros.
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.
Total Assets Total Liabilities Forward Contract Net Exposure after
(GBP'000) (GBP'000) (GBP'000) Forward Contract (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.
(c) 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. This risk
applies to financial instruments held by the Group, including
equity assets, credit assets and derivatives. Sensitivity analysis
on the equity assets is included in Note 12.
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 Topco facility, a new amortising term loan
and an increase in an existing facility.
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 76.6 per cent at 31 December 2020 (31
December 2019: 51.7 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. 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 establishes and adheres to stringent
underwriting criteria. 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 continues to cause major disruption
across the globe. T he potential impacts of the government's
assistance to consumers and businesses coming to an end are yet
unknown, but they may increase the potential expected credit loss
impact. Depending on the evolution of the Covid-19 situation, this
could result in further 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 2020, each loan is assigned to a
credit risk band at inception:
Credit Unsecured Secured Total
Risk Band GBP'000 GBP'000 GBP'000
=========== ========= ======== ========
A & B 29,845 524,989 554,834
C 9,419 - 9,419
D & E 13,961 - 13,961
=========== ========= ======== ========
Total 53,225 524,989 578,214
=========== ========= ======== ========
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 Risk Band Unsecured Secured Total
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
================= ========= ======== ========
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 2020 the Company had a committed debt facility
totalling GBP250.0 million with a maturity date of 4 September
2023. This facility includes a term and revolving facility secured
on a range of assets. The Company also has a 2-year term facility
that is structured as run-off financing in that the debt will
paydown over the term of the facility and a GBP35m amortising term
loan with a 49 year term, but where final repayment is expected in
2024 in line with the facility it is secured against.
The repayment terms and the covenants have been stress tested
over the term of each of these facilities to ensure compliance.
Assets and liabilities not carried at fair value but for which
fair value is disclosed
For the Group for the year ended 31 December 2020:
Group As Presented Fair Value
================== ============ ========================================
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ============ ======== ========= ======== =========
Assets
Investments at
amortised cost 547,737 22,175 - 538,314 560,489
Receivables 6,773 - 6,773 - 6,773
Cash and cash
equivalents 62,548 62,548 - - 62,548
================== ============ ======== ========= ======== =========
Total assets 617,058 84,723 6,773 538,314 629,810
================== ============ ======== ========= ======== =========
Liabilities
Management fee
payable (1,040) - (1,040) - (1,040)
Performance fee
payable (2,300) - (2,300) - (2,300)
Other payables (3,832) - (3,832) - (3,832)
Interest bearing
borrowings (273,539) - (273,539) - (273,539)
================== ============ ======== ========= ======== =========
Total liabilities (280,711) - (280,711) - (280,711)
================== ============ ======== ========= ======== =========
For the Company for the year ended 31 December 2020:
Company As Presented Fair Value
================== ============ ========================================
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ============ ======== ========= ======== =========
Assets
Investments at
amortised cost 547,737 22,175 - 538,314 560,489
Receivables 6,773 - 6,773 - 6,773
Cash and cash
equivalents 59,673 59,673 - - 59,673
================== ============ ======== ========= ======== =========
Total assets 614,183 81,848 6,773 538,314 626,935
================== ============ ======== ========= ======== =========
Liabilities
Management fee
payable (1,040) - (1,040) - (1,040)
Performance fee
payable (2,300) - (2,300) - (2,300)
Other payables (3,429) - (3,429) - (3,429)
Deemed Loan (103,719) - (103,719) - (103,719)
Interest bearing
borrowings (167,348) - (167,348) - (167,348)
================== ============ ======== ========= ======== =========
Total liabilities (277,836) - (277,836) - (277,836)
================== ============ ======== ========= ======== =========
For the Group for the year ended 31 December 2019:
Group As Presented Fair Value
================== ============ ======================================
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ============ ======== ======== ======== ========
Assets
Investments at
amortised cost 580,998 14,492 - 565,820 580,312
Receivables 8,875 - 8,875 - 8,875
Cash and cash
equivalents 15,154 15,154 - - 15,154
================== ============ ======== ======== ======== ========
Total assets 605,027 29,646 8,875 565,820 604,341
================== ============ ======== ======== ======== ========
Liabilities
Management fee
payable 511 - 511 - 511
Performance fee
payable 3,468 - 3,468 - 3,468
Other payables 2,326 - 2,326 - 2,326
Interest bearing
borrowings 206,792 - 206,792 - 206,792
================== ============ ======== ======== ======== ========
Total liabilities 213,097 - 213,097 - 213,097
================== ============ ======== ======== ======== ========
For the Company for the year ended 31 December 2019:
Company As Presented Fair Value
================== ============ ======================================
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ============ ======== ======== ======== ========
Assets
Investments at
amortised cost 580,998 14,492 - 565,820 580,312
Receivables 8,325 - 8,325 - 8,325
Cash and cash
equivalents 13,251 13,251 - - 13,251
================== ============ ======== ======== ======== ========
Total assets 602,574 27,743 8,325 565,820 601,888
================== ============ ======== ======== ======== ========
Liabilities
Management fee
payable 511 - 511 - 511
Performance fee
payable 3,468 - 3,468 - 3,468
Other payables 1,805 - 1,805 - 1,805
Deemed Loan 78,613 - 78,613 - 78,613
Interest bearing
borrowings 130,741 - 130,741 - 130,741
================== ============ ======== ======== ======== ========
Total liabilities 215,138 - 215,138 - 215,138
================== ============ ======== ======== ======== ========
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 Notes 12 and 13
for details). Further details of the loans at amortised cost held
by the Group can be found in Note 11 to the financial
statements.
16. Fixed Assets
The tables below set out the movement in Fixed Assets for the
Group and Company.
Year ended 31 IT Development
December 2020 and Software Total
GBP'000 GBP'000
========================= ============== ========
Opening net book
amount 41 41
Additions - -
Amortisation charge (41) (41)
Closing net book - -
amount
As at 31 December
2020
Cost 830 830
Accumulated amortisation (830) (830)
========================= ============== ========
Net book amount - -
========================= ============== ========
Year ended 31 December 2019 IT Development 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
============================ ================== ========
17. Receivables
The table below set out a breakdown of the Group
receivables.
Group 31 December 2020 31 December 2019
GBP'000 GBP'000
=========================== ================ ================
Prepayments and other
debtors 4,820 2,656
Amounts due from platforms 1,820 5,889
Other receivables 133 330
=========================== ================ ================
Total receivables 6,773 8,875
=========================== ================ ================
The table below set out a breakdown of the Company
receivables.
Company 31 December 2020 31 December 2019
GBP'000 GBP'000
=========================== ================ ================
Prepayments and other
debtors 4,820 2,106
Amounts due from platforms 1,820 5,889
Other receivables 133 330
=========================== ================ ================
Total receivables 6,773 8,325
=========================== ================ ================
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 partners but not yet remitted to the
Group, whereby the credit asset at amortised cost has been treated
as if this cash had been received.
18. Other Payables
The table below set out a breakdown of the Group payables.
Group 31 December 2020 31 December 2019
GBP'000 GBP'000
============================ ================ ================
Accruals and other payables 3,832 2,326
Total other payables 3,832 2,326
============================ ================ ================
The table below set out a breakdown of the Company payables.
Company 31 December 2020 31 December 2019
GBP'000 GBP'000
============================ ================ ================
Accruals and other payables 3,429 1,805
Total other payables 3,429 1,805
============================ ================ ================
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 2020 (31 December 2019: 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.
19. Interest Bearing Borrowings
The table below sets out a breakdown of the Group's
interest-bearing borrowings.
Group 31 December 2020 31 December 2019
GBP'000 GBP'000
============================== ================ ================
Current Liabilities
Credit facility 20,916 130,000
Interest and commitment
fees payable 183 741
Prepaid interest and
commitment fees (234) -
Total current liabilities 20,865 130,741
Non-Current Liabilities
Credit facility 256,438 75,946
Interest and commitment
fees payable - 105
Prepaid interest and
commitment fees (3,764) -
Total non-current liabilities 252,674 76,051
============================== ================ ================
Total interest-bearing
borrowings 273,539 206,792
============================== ================ ================
The table below sets out a breakdown of the Company's
interest-bearing borrowings.
Company 31 December 2020 31 December 2019
GBP'000 GBP'000
============================== ================ ================
Current Liabilities
Credit facility - 130,000
Interest and commitment
fees payable 73 741
Prepaid interest and - -
commitment fees
Total current liabilities 73 130,741
Non-Current Liabilities
Credit facility 170,000 -
Interest and commitment - -
fees payable
Prepaid interest and
commitment fees (2,725) -
Total non-current liabilities 167,275 -
============================== ================ ================
Total interest-bearing
borrowings 167,348 130,741
============================== ================ ================
At 31 December 2019 the Company's main debt facility was GBP150
million with The Royal Bank of Scotland plc as agent. The facility
was 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 was syndicated. This
facility was subsequently extended to 19 June 2020 and then
terminated in May 2020.
In May 2020 this facility was refinanced with a different
lender, with GBP125.0 million capacity and the maturity extended to
May 2021. Interest was changed at one, three or six month LIBOR
plus a margin. The Group retained the flexibility to refinance this
facility, which took place in September 2020, at which point this
new facility was terminated.
At 31 December 2020 the Company's main debt facility was a
GBP250 million with Goldman Sachs, being a GBP170 million term loan
and GBP80 million revolving credit facility. At 31 December 2020
the term loan was fully drawn with GBPnil drawn on the revolving
element. Interest is charged at LIBOR plus a margin with the
facility maturing in September 2023. The debt facility is secured
against the Company's loan portfolios and other assets, in addition
to the net exposures the Company holds where the Company is the
junior lender to an SPV.
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. Interest is
charged at LIBOR plus a margin. . The facility was 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. During 2020 the 1-year extension was exercised and an
additional mortgage portfolio was transferred into the pool. The
facility therefore now expires in August 2022, by which time it is
expected that the facility will be repaid in full. The carrying
value of the portfolio of loans, which this facility is secured
against, at 31 December 2020 was GBP93.6 million (2019: GBP92.6
million).
In December 2020, the Group entered into a GBP35 million debt
facility secured against a structured SME facility, the carrying
value of this structured SME facility at 31 December 2020 was
GBP46.5 million. The debt facility charges LIBOR plus a margin and
is an amortising term loan with the full GBP35 million drawn on day
one. The facility has a 49 year term but final repayment is
expected in 2024.
As at the 31 December 2020 the below related debt costs had been
incurred by the Group.
Group 2020 2019
GBP'000 GBP'000
======================== ======== ========
Interest and commitment
fees payable 8,729 6,166
Other finance charges 5,594 2,251
======================== ======== ========
Total finance costs 14,323 8,417
======================== ======== ========
There were additional costs incurred in 2020 in other finance
charges in relation to the refinances in May and September 2020.
This was a combination of one-off costs to terminate the previous
facilities and to expense any remaining set-up fees.
As at the 31 December 2020 the below related debt costs had been
incurred by the Company.
Company 2020 2019
GBP'000 GBP'000
======================== ======== ========
Interest and commitment
fees payable 6,832 5,311
Other finance charges 5,210 2,138
======================== ======== ========
Total finance costs 12,042 7,449
======================== ======== ========
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 2020 the below changes occurred for the
Group:
Group Total
GBP'000
================================ ==========
At 1 January 2020 206,792
Drawdown of interest
bearing borrowings 359,648
Repayments of interest-bearing
borrowing (289,013)
Finance costs 14,323
Interest paid on financing
activities (18,211)
At 31 December 2020 273,539
================================ ==========
As at the 31 December 2020 the below changes occurred for the
Company:
Company Total
GBP'000
================================ ==========
At 1 January 2020 130,741
Drawdown of interest
bearing borrowings 312,500
Repayments of interest-bearing
borrowing (272,752)
Finance costs 12,042
Interest paid on financing
activities (15,183)
At 31 December 2020 167,348
================================ ==========
As at the 31 December 2019 the below changes occurred for the
Group:
Group Total
GBP'000
================================ ==========
At 1 January 2019 189,264
Drawdown of interest
bearing borrowings 272,463
Repayments of interest-bearing
borrowing (255,517)
Finance costs 8,417
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
Drawdown of 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
================================ ==========
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.
2020 < 1 year 1 - 5 years Total
Group Financial instrument GBP'000 GBP'000 GBP'000
============================ ======== =========== ========
Credit facility 20,865 256,490 277,355
Interest and commitment
fees payable 9,691 18,189 27,880
Total exposure 30,556 274,679 305,235
============================ ======== =========== ========
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.
2020 < 1 year 1 - 5 years Total
Company Financial instrument GBP'000 GBP'000 GBP'000
============================== ======== =========== ========
Credit facility - 170,000 170,000
Interest and commitment
fees payable 7,310 16,448 23,758
Total exposure 7,310 196,448 193,758
============================== ======== =========== ========
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 < 1 year 1 - 5 years Total
Group Financial instrument GBP'000 GBP'000 GBP'000
============================ ======== =========== ========
Credit facility 130,741 75,205 205,946
Interest and commitment
fees payable 3,484 1,475 4,959
============================ ======== =========== ========
Total exposure 134,225 76,680 210,905
============================ ======== =========== ========
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 < 1 year 1 - 5 years Total
Company Financial 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
============================== ======== =========== ========
20. Deemed Loan
The Company has two deemed loans as at 31 December 2020 (one as
at 31 December 2019). Deemed loans can only relate to the Company
as they relate to loans originated by the Company and subsequently
sold to a special purpose entity. Although the loans are not
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 special purpose entity. As at the 31
December 2020 the Company had the below deemed loans:
Opening as at 1 January Novations/ (Redemptions) Closing as at 31 December
2020 GBP'000 2020
GBP'000 GBP'000
======================= ======================== =========================
78,612 25,107 103,719
78,612 25,107 103,719
======================= ======================== =========================
As at the 31 December 2019 the Company had the below deemed
loan:
Opening as at 1 January Novations/ (Redemptions) Closing as at 31 December
2019 GBP'000 2019
GBP'000 GBP'000
======================= ======================== =========================
- 78,612 78,612
- 78,612 78,612
======================= ======================== =========================
21. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the date of the Financial Statements.
31 December 2020 31 December 2019
================================= ================ ================
No. Issued, allotted and fully
paid ordinary shares of GBP0.01
each 35,259,741 39,449,919
Cost GBP'000 352 394
================================= ================ ================
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.
On 10 August 2020 the Company announced the implementation of a
share buyback programme, pursuant to the authority granted at the
Company's Annual General Meeting held on 26 June 2020, to purchase
the Company's ordinary shares of GBP0.01 each. The Board believes
that implementation of an active share price discount management
strategy through this Buyback Programme works in the best interest
of the Company's shareholders and will be value accretive to the
Company. As at 31 December 2020 the Company had bought back
4,190,178 shares at an average price of 821p (equivalent to a
discount of 122p per share against the 31 December 2020 price).
The table below shows the movement in shares during the period
to 31 December 2020:
Shares Shares
in issue in issue
at the Buyback at
beginning of the end
of the Ordinary of the
period Shares period
========= ========== =========== ==========
Ordinary
Shares 39,449,919 (4,190,178) 35,259,741
Treasury
Shares - 4,190,178 4,190,178
========= ========== =========== ==========
22. 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 GBP4.50 million (2019: GBP0.62 million) of the
special distributable reserve was used to pay the Q2 2020 and Q3
2020 dividends.
During the year the Company repurchased 4,190,178 shares
(2019:nil) for GBP34.82 million using the special distributable
reserve.
23. 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 1 Bartholomew Lane, London,
United Kingdom, EC2N 2AX. The Group is considered to control Sting
through holding 100 per cent of the issued shares. As a result, the
financial statements for the years ended 31 December 2019 and 31
December 2020 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.
The Company also consolidates a structured entity, Bud Funding
Limited ("Bud"), a limited company incorporated under the law of
England and Wales. The company is registered at 1 Bartholomew Lane,
London, United Kingdom, EC2N 2AX. The Company is considered to
control Bud through its exposure to the variable returns of the
vehicle through holding of a junior note issued by it and by way of
control exerted through its involvement in the initial creation of
Bud and in the absence of another entity now having control. Bud
was incorporated on 2 November 2020 and the junior note was funded
on 2 December 2020, at which point the control began. The total
assets held in Bud at 31 December 2020 were GBP49.7 million with
net assets of GBP177,000.
24. Investments in associates
As at 31 December 2019, the Company had 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.
The Company disposed of its investment in Allium in August 2020
with no gain or loss recognised on disposal.
25. Net Asset Value per Ordinary Share
31 December 31 December
2020 2019
================ =========== ===========
Net asset
value per
ordinary share
pence 1,013.1p 1,014.9p
Net assets
attributable
GBP'000 357,232 400,361
================ =========== ===========
The net asset value per ordinary share as at 31 December 2019 is
based on net assets at the year-end of GBP357.2 million and on
35,259,741 ordinary shares in issue at the year-end.
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.
26. Contingent Liabilities and Capital Commitments
As at 31 December 2020 and 31 December 2019 there were no
contingent liabilities or capital commitments for the Group. In
respect of Credit Assets held, the Group had GBP95.3 million (2019:
GBP96.1 million) of undrawn committed structured credit facilities
at 31 December 2020 and GBP48.2 million (2019: GBP4.5 million) of
undrawn commitments in relation to secured real estate loans.
27. 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 2020 Allium Lending Group Limited
(formally GDFC Group Limited, Hiber Limited and The Green Deal
Finance Company Limited), is no longer an associate of the Company,
at 31 December 2019 it was an associate and held outstanding loan
balance from structured facilities totalling GBP8.7 million and
accrued interest of GBP1.1 million.
Directors - The remuneration of the Directors is set out in the
Directors' Remuneration Report. 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 2020, there was GBPnil (2019: GBPnil) payable to
the Directors for fees and expenses.
Joanne Lake was appointed as a Director on 1 January 2021 and is
a Director of Morses Club plc ("Morses"), an entity for which the
Company provides a facility. As at 31 December 2020 the facility
was drawn at GBP2.8 million. The facility was signed in April 2020,
prior to discussions beginning with the Company about her role as
non-executive Director.
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 GBP8.24 million (2018: GBP9.53
million) of fees and at 31 December 2019, there was GBP3.34 million
(2019: GBP3.98 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.
Oplo Group Limited ("Oplo", formerly 1(st) Stop Group) is an
English based consumer lender. During the year the Company had a
structured facility to Oplo secured on a granular pool of consumer
loans. Oplo is owned by a fund that is managed by an affiliate of
the Investment Manager. As at 31 December 2020 the facility was
GBP35.0 million drawn (31 December 2019: GBP28.0 million). The
Group also had a forward flow relationship in place with Oplo in
which the Group provided GBP22.3 million (31 December 2019: GBP11.1
million) and these loans have an outstanding balance as at 31
December 2020 of GBP30.0 million (31 December 2019: GBP10.6
million).
Shawbrook Group PLC ("Shawbrook") is a specialist SME and
consumer lending and savings bank. Shawbrook is 50 per cent owned
by funds that are managed by the Investment Manager. During the
Year the Company purchased bonds
issued by Shawbrook. The bonds were acquired in the secondary
market from an unrelated third party at an arm's length
price. The exposure at 31 December 2020 was GBP11.4m (31
December 2019: nil).
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. The exposure at 31 December 2020 is disclosed
in Note 14.
Origination Partner - Honeycomb 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
GBP36,668 (2019: GBP38,574), and at 31 December 2020, there was
GBPnil (2019: GBPnil) payable to the Origination Partner.
28. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
29. Subsequent Events
On 25 March 2021, a dividend of 20.0 pence per ordinary share
was paid.
On 29 April 2021, a dividend of 20.0 pence per ordinary share
was approved for payment on 25 June 2021.
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
Joanne Lake 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 Advisers and Brokers 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
Cenkos Securities plc Independent Auditors
6.7.8 Tokenhouse Yard PricewaterhouseCoopers LLP
London EC2R 7AS 7 More London Riverside
England London SE1 2RT
England
Custodian
Sparkasse Bank Malta PLC
101 Townsquare
Sliema SLM3112
Malta
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: G B 0 0 BYZV3G25
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 020 7954 9552 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: G B 0 0 BYZV3G25
-- 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.Definitions and
reconciliation to alternative performance measures
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 An AIF, as defined in the AIFM Directive 2011/61/EU
Investment Fund on Alternative Investment Fund Managers.
("AIF")
==================== =======================================================
LIBOR ("London The interest rate participating banks offer to
Inter-Bank Offered other banks for loans on the London market.
Rate")
==================== =======================================================
Structured Loan Credit Asset whereby the Group typically has senior
secured loans to speciality finance companies,
whereby the security on our investment comprises
the assets originated by the speciality finance
company and the company provides the 'first loss'
in the form of 'real capital' whilst the Company
provides the senior capital. Corporate guarantees
also typically taken
==================== =======================================================
Whole Loan Credit Assets whereby the Group is exposed to
the consumer or SME underlying risk and rewards
of the loan
==================== =======================================================
Direct Portfolio Portfolios of loans owned directly by the Group,
typically secured on property
==================== =======================================================
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
Premium / (Discount) to NAV per share
31 December 2020 31 December 2019
=========================== ================ ================
NAV per share (Cum income) 1,013.1p 1,014.9p
Share Price at Close 942.5p 972.5p
Premium / (Discount) (7.0)% (4.2)%
=========================== ================ ================
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 2020 31 December 2019
============================ ================ ================
NAV per share (Cum income)
at year end 1,013.1p 1,014.9p
Opening NAV per share (Cum
income) 1,014.9p 1,015.7p
Dividends per share paid in
the year 80.0p 80.0p
Annual Nav per Share Return 7.7% 7.8%
============================ ================ ================
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 subtracting 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 2020 31 December 2019
=============================== ================ ================
NAV per share (Cum income) 1,013.1p 1,014.9p
Opening NAV per share (Cum
income) at inception 982.0p 982.0p
Dividends per share paid since
inception 372.9p 292.9p
ITD NAV per Share Return 41.1% 33.2%
=============================== ================ ================
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 subtracting the
opening NAV per share (Cum Income) at inception, divided by the NAV
per share (cum income) at inception.
Debt to Equity
31 December 2020 31 December 2019
(GBP'000) (GBP'000)
============================ ================ ================
Net Asset Value 357,232 400,361
Interest Bearing Borrowings 273,539 206,792
Debt to Equity ratio 76.6% 51.7%
============================ ================ ================
Cash and cash equivalents 62,548 15,154
Net Debt to Equity Ratio 59.1% 47.9%
============================ ================ ================
Debt to equity ratio is calculated as the Group's
interest-bearing debt divided by the net asset value expressed as a
percentage. Net Debt to equity ratio is calculated as the Group's
interest-bearing debt less cash and cash equivalents, divided by
the net asset value expressed as a percentage.
Dividend Return
31 December 2020 31 December 2019
============================= ================ ================
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 2020 31 December 2019
(GBP'000) (GBP'000)
======================= ================ ================
Auditors' remuneration 287 160
Administrator's fees 148 192
Directors' fees 200 149
Management Fee 5,942 6,066
Other costs 908 673
Average NAV 373,853 402,619
Ongoing Charges 2.0% 1.8%
======================= ================ ================
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.
NAV Return Bridge
2020
GBP'000
============================== ========
Monthly Average Credit Assets 551,480
Monthly Average NAV Excluding
Leverage 588,936
Monthly Average NAV 373,880
============================== ========
Monthly Average Credit Assets is the mean of the aggregate of
the credit assets at amortised cost, credit assets held at fair
value through profit or loss and derivative assets held at fair
value through profit or loss for each month end from 31 December
2019 to 31 December 2020, inclusive.
Monthly Average NAV Excluding Leverage is the mean of the net
assets of the Group, excluding interest bearing borrowings, for
each month end 31 December 2019 to 31 December 2020, inclusive.
Monthly Average NAV is the mean of the net assets of the Group
for month end from 31 December 2019 to 31 December 2020
inclusive.
2020
=================== ====== ================================================
Investment Yield 9.4% Investment yield is calculated as Interest
Income on credit assets at amortised cost,
plus Income/(loss) on credit assets at fair
value through profit and loss, less third
party servicing, divided by Monthly Average
Credit Assets, excluding one-off charges.
=================== ====== ================================================
Impairments and (0.6%) Impairments and write-offs is calculated
write-offs as credit impairment losses before GBP2.3m
of one-off charges relating to expected
Covid-19 charges not yet incurred, over
Monthly Average Credit Assets
=================== ====== ================================================
Credit asset return 8.8% Credit asset return is a sub-total of the
above
=================== ====== ================================================
Equity and working (0.6%) The impact of equity and working capital
capital is calculated as the Statement of Comprehensive
Income amounts above plus Income / (Loss)
on equity assets at fair value through profit
and loss divided by Monthly Average NAV
Excluding Leverage, less the impact of items
already disclosed above
=================== ====== ================================================
Effect of leverage 2.1% Effect of leverage is calculated as the
above Statement of Comprehensive Income
amounts above plus finance costs before
one-off charges of GBP4.3m divided by Monthly
Average NAV, less the impact of items already
disclosed above
=================== ====== ================================================
Investment Manager (2.2%) Calculated as Management fee and Performance
fees fee divided by Monthly Average NAV
=================== ====== ================================================
Fund Opex (0.5%) Calculated as Fund expenses excluding the
GBP865,000 of one-off disclosed in Note
7, divided by Monthly Average NAV
=================== ====== ================================================
Underlying NAV 7.6% Calculated as a sub-total of the above
return
=================== ====== ================================================
One-off Effects 0.1% The impact of the one-off items remaining,
including the effect of share buybacks,
to reach the Annual NAV per Share Return
=================== ====== ================================================
NAV return 7.7% Annual NAV per Share Return
=================== ====== ================================================
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END
FR LKLLLFZLLBBF
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April 30, 2021 02:02 ET (06:02 GMT)
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