TIDMHONY
RNS Number : 2992D
Honeycomb Investment Trust PLC
02 March 2022
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02 March 2022
Honeycomb Investment Trust plc
Annual Financial Report for the year ended to 31 December
2021
The Directors present the Annual Financial Report of Honeycomb
Investment Trust plc (the "Company") for the year ended 31 December
2021 (the "Annual Report"). A copy of the Annual Report will
shortly be submitted to the National Storage Mechanism and will be
available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism . The Annual
Report is also available to view and download from the Company's
website, www.honeycombplc.com/information . 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 2021 but is
derived from those accounts. Statutory accounts for the year ended
31 December 2021 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.
For the purposes of complying with the Disclosure and
Transparency Rules ("DTRs") and the requirements imposed on the
Company through the DTRs, the Annual Report, as will be submitted
to the National Storage Mechanism, contains the full text of the
Auditors' Report at page 60, which is excluded from this
announcement.
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 Company and its subsidiaries (together, "the Group") operate
an asset backed credit strategy that delivers stable income
alongside strong downside protection through providing
predominantly senior lending to non-bank lenders secured on their
underlying loan portfolios. The investment strategy is supported by
the ongoing structural changes in the financial services industry
that create a significant opportunity for non-bank lenders to reach
customers who are underserved by mainstream banks with bespoke and
appropriate products. The strategy is focused on generating
positive impact around five key areas where Honeycomb can make a
meaningful difference: environmental impact; affordable housing;
financial inclusion; regional economic growth and the highest
standards of governance.
Investment Manager
Pollen Street serves as the Company's investment manager. Pollen
Street is an independent, alternative investment management company
specialising in the financial and business services sector and has
extensive experience investing in both credit and private equity
strategies.
Performance Highlights
2021 8.0%
2020 8.0%
-----
Target 8.0%
-----
Dividend yield stable at 8.0 percent of IPO issue price - in
line with the published target
Note - target dividend is not a profit forecast
2021 8.5%
2020 7.7%
-----
Strong NAV return at 8.5 percent with no down months
2021 1,019p
2020 1,013p
-------
NAV per share increasing
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).
(1) See section 5 for reconciliation to Alternative Performance
Measures
Investment Characteristics
Non-Bank Lending
Non-bank lending is now an integral part of the lending
landscape, providing financing to millions of consumers and
businesses, including those that are underserved by high street
banks.
Since the global financial crisis, the role of non-bank lenders
has become increasingly an important part of 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 billion ([1]) in the UK alone, and these structural changes
have been accelerated by Covid-19 disruption.
IMPACT
Impact investments are a key focus, including environmental
impact; affordable housing; financial inclusion; regional economic
growth and the highest standards of governance.
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 the 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
is accelerated across the economy.
As the population becomes more engaged in having a positive
impact and seeking to live their lives on a sustainable basis, it
is expected that focused lending products such as to finance energy
efficient products in the home and transportation, will become more
in demand. These products have an important role to play in
enabling ordinary people to finance life improvements.
Finally, as a highly respected partner 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 secured on
diverse portfolios of financial (typically loan portfolios) and
hard assets that generate predictable cash flows. This is typically
to non-bank lenders but can also encompass other businesses that
have large and diverse portfolios of assets (for example, electric
vehicle leasing providers).
This approach allows Honeycomb to benefit from the advanced
origination and underwriting capabilities of its borrowers but
maintaining significant downside protection through typically
taking a senior position. The borrower is fully aligned with the
Group and their return is realised after the debt of the Group is
serviced. The facilities Honeycomb provides are typically of short
duration, with an average life of 2 to 3 years. The cash generated
by the portfolio of assets on which the facility is secured
generates sufficient cash flow to repay our loan removing
refinancing and exit risk.
The investment objective is to deliver consistent returns and a
diversified portfolio with high quality borrowers, 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 and broader
asset based finance 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
In lending, we see a large and growing opportunity for non-bank
lenders to reach customers that are underserved by mainstream banks
with bespoke and appropriate products. Our focus on Impact is built
around 5 key areas where Honeycomb makes a meaningful
difference:
Environmental Impact:
Reducing the carbon footprint and energy consumption of homes is
one of the key-ways that people can have a 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.
Affordable Housing:
Our real estate lending strategy aims to improve the quality of
the property stock and support the creation of affordable,
efficient and good value homes.
Financial Inclusion:
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.
Regional Economic Growth:
Lending to support SMEs and communities is ever more critical to
support regional growth across the UK. We work to support SME
lenders who are close to the customers and are able to offer
tailored products to support them in a prudent way. We also partner
with experienced real estate lenders with 96% of funding, across
the Manager's investments in 2021, going to projects outside of
London.
Highest Standards of Governance:
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
Chairman's Statement
I am pleased to present the Annual Report and Financial
Statements for Honeycomb Investment Trust plc, which covers the
year ended 31 December 2021.
Year under Review
In an environment where the economy and businesses were
cautiously returning to a 'new normal' of trading, Honeycomb
Investment Trust plc has continued to perform well throughout the
year executing on a strong pipeline of opportunities. The Company
started the year with a robust cash position, and a pipeline of
opportunities presenting strong underlying asset returns, and as a
result of this was able to produce the strongest year since
2017.
Earnings for the year were GBP30.3m (2020: GBP20.7m) and monthly
performance was consistent, delivering 8.5% NAV return for the
year, up from 7.7% over 2020. The stability of the returns is a
testament to the successful strategy.
The impairment charge for the year has reduced from GBP5.6
million in 2020 to a release of GBP0.8 million in 2021. The
reduction in impairment charge is attributable to the focus on
senior secured credit that protects the Company from adverse credit
losses and the improving economic outlook. The bridge on page 16
provides more details on the composition of the returns.
The Company 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.
The share price closed the year at 945p on 31 December 2021,
which is a modest discount of 7.3% (2020: 7.0%) to NAV.
ESG
The Board has supported the Investment Manager's Environmental
Social and Governance ("ESG") programme over the course of the
year, with progress made in embedding ESG as an integral part of
the investment process. There are 5 key impact areas that are
described in more detail on page 6. This is ever more critical in
the current environment and the Board is excited to advance our
progress towards sustainability in 2022 and beyond.
Outlook
2021 has been a year of execution and consistency for Honeycomb.
Having demonstrated the stability of the strategy over 2021 the
Board is confident the Company will continue to deliver attractive
investment returns. Looking ahead there are a number of factors
that position Honeycomb strongly for 2022.
Firstly, market dynamics continue to drive compelling investment
opportunities. Non-bank lending is an increasingly critical part of
the lending landscape, providing financing to millions, including
those that are underserved by high street banks. The Company
continues to aim to be the finance partner of choice for the
non-bank sector. Thanks to deep expertise and relationships, the
Investment Manager is able to source most investments internally
and negotiate bi-laterally.
Second is the strategy employed by the Company to address these
investment opportunities. The strategy focuses on senior secured,
asset-based credit investments, which is a structure that aligns
interests between Honeycomb and its borrowers. The strategy has
driven stable NAV returns over 2021.
Finally, positive societal and environmental impact continues to
be an important feature of the Honeycomb investment strategy.
Lending over the course of 2021 has supported regional economic
growth, affordable homes and the transition towards a net zero
emissions economy.
Combination With Pollen Street
On 15 February 2022, Honeycomb announced that it had reached
agreement on the terms of a recommended all share combination with
Pollen Street Capital Holdings Limited, the parent company of the
Investment Manager. Under the terms of the agreement, Honeycomb
will acquire the entire issued share capital of Pollen Street
Capital Holdings Limited in exchange for shares in the combined
group such that the Honeycomb and Pollen Street businesses will be
combined into a premium listed entity, owned by the shareholders of
Honeycomb and Pollen Street. The combination is conditional on
shareholder and regulatory approval. At announcement, shareholders
representing c.56.4% of Honeycomb's issued share capital have given
their support for the transaction.
As shareholders know, Honeycomb has been delivering strong and
stable performance since inception in 2015, consistently delivering
a net investment return of c.8%
We feel privileged to have many supportive shareholders, and
thank them for their longstanding support.
I strongly believe that this is an extremely attractive
opportunity for shareholders, as a combination with Pollen Street
will accelerate growth and unlock value, delivering recurring
income, retaining an attractive dividend yield (anticipated to be
6.5% and 6.6% in 2022 and 2023 respectively [2] , on the basis of
Pollen Street shareholders having agreed to waive dividends on 50%
of consideration shares issued to them through 2022 and 2023)
whilst presenting strong growth opportunities. The transaction is
also expected to be EPS accretive in the second full year post
closing for Honeycomb's shareholders [3] .
Pollen Street is a highly successful and fast growing
alternative asset manager with:
- deep capabilities in both Private Equity and Credit with
well-established and outperforming flagship strategies
- a business that is benefiting from strong tailwinds from
investor demand in its products; and
- a business that is at an inflexion point with highly visible growth ahead
The Board conducted extensive due diligence and believes that
the combination will generate substantial value for shareholders,
both because of the attractive valuation on which Honeycomb is
acquiring the Pollen Street business compared to listed peers in
the alternative asset management sector, and because of the profile
of the combined group going forward. In particular the combined
group will have:
- a balance of recurring fee income and interest income that
delivers an attractive and growing revenue profile; and
- exciting potential to accelerate high quality growth as
Honeycomb's capital can be deployed to unlock a multiplier effect
on capital raising and, in doing so, accelerate the growth of new
strategies.
The combined business will benefit from a complementary set of
investment management and balance sheet activities, with strong
earnings growth. The investment portfolio will continue to be
predominantly invested in high quality, diversified and low risk
asset based direct lending investments, generating stable returns.
The investment portfolio profile of the combined group is expected
to remain in line with the investment profile of Honeycomb on a
stand-alone basis.
The transaction creates a business with a rare combination of
high growth and high income yield. It also presents strong benefits
for shareholders from a public market perspective:
- increased investor universe providing opportunity to diversify the share register;
- larger scale and growth which is expected to attract greater analyst coverage; and
- possibility for increased liquidity on account of the larger
market cap and potential future FTSE 250 inclusion.
A shareholder circular will be published in due course and sent
to shareholders to provide further details of, and request
shareholder approval for the transaction.
The Board notes the current share price and if this persists
will consider reactivating the Company's share buyback programme as
the Board believes that at the current price the Company's shares
offer significant value and a share buyback will be value
accretive. The Board's policy is to consider conducting share
buybacks when the shares trade more than 5% below NAV subject to
maintaining the Company's gearing target limit.
I would like to thank my Board colleagues and the Investment
Manager for their hard work over 2021 and I look forward to
continuing to work together over 2022.
Robert Sharpe
Chairman
1 March 2022
Investment Manager's Report
The Investment Manager, Pollen Street, 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.
Investment Performance
The Group has maintained its track record of investment
performance with earnings of GBP30.3m (2020: GBP20.7m); NAV returns
of 8.5 percent (2020: 7.7 per cent) and dividend yield of 8.0 per
cent (2020: 8.0 per cent).
The Manager targets new investment opportunities with credit
asset returns of approximately 8 to 10 percent. The portfolio
remains stable, both with further advances invested in existing
facilities, and with new relationships. Pollen Street continues to
focus the portfolio on structured and secured loans, reducing the
risk of underperformance in the portfolio.
Profit for the year was GBP30.3 million (2020: GBP20.7 million),
which translated into a basic earnings per share of 86p (2020: 56.5
pence). This is equivalent to an annualised NAV return of 8.5
percent (2020: 7.7 per cent). The growth is driven by an increase
in average investment assets with an average value of
GBP601.8million during the year (2020: GBP560.9m) combined with a
reduction in the ECL charge, from a charge of GBP5.8 million to a
release of GBP0.8 million.
The Group ended the year with a net debt to equity of 70.9 [4]
per cent (31 December 2020: 59.1 per cent) which is within its
stated target of 50 per cent to 75 percent.
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 grown its
NAV per share (cumulative of income) at the end of the period of to
1,019 pence per ordinary share (31 December 2020: 1,013 pence).
We are pleased that the share price has been stable over the
course of 2021 closing at 945p (31 December 2020: 943p).
Other Highlights
In addition to the resilient investment performance, the Company
has continued to source and invest in senior secured investments,
with 76% of the portfolio in senior assets and 97% structurally
secured. In Q4 2021, the Company sold all of the organic portfolio
to enable it to focus on more structured and secured loans.
During 2021, the Company made commitments of GBP48.2m to two
credit investment vehicles that are managed by Pollen Street
Capital. These investments allow Honeycomb to gain a diversified
exposure to a broader range of Pollen Street's new investments when
the Company is close to full deployment.
The Company also participated in a senior asset backed facility
to the largest pure-play electric vehicle subscription business in
Europe. The facility is directly secured on the fleet of electric
vehicles and will fund growth in the number of cars to meet
customer demand and drive increased access and adoption of electric
vehicles across Europe.
In June 2021 the Company sold Honeycomb's listed bond portfolio
(including Amigo Holdings Plc) realising a small profit of GBP0.02m
with the sales proceeds of GBP22.41m marginally exceeding the net
book value of the portfolio of GBP22.39m.
Portfolio Overview
The portfolio compromises of GBP576.8 million of investments
balanced across the property, SME, consumer and sustainability
sectors. The portfolio is well-diversified, with an average
exposure of GBP16.2m, maximum single exposure of GBP54.6m and the
ten largest investments representing 65.5% of Net Investment
Assets.
Investments are secured on diverse asset portfolios, providing
high cash generation and stable returns. The strategy has focused
predominately on senior loans, with 76% of portfolio in senior
assets and 97% asset backed. Investments are all structured on a
bespoke basis with a focus on capital preservation with the
strategy combining the structuring and credit disciplines of
asset-based finance with those of direct lending.
The portfolio is focused on secured asset based Credit Assets.
These are loans to counterparties that benefit from two forms of
protection:
-- The Company has security over the underlying asset portfolios
that generate the cash flow for the borrowers. Honeycomb can
realise the collateral (sell or run off) to cover any shortfall on
its loan.
-- 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.
credit performance & Risk Management
The Company's financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRSs") including interpretations issued by the IFRS
Interpretations Committee adopted in the UK. 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 from GBP5.6
million in 2020 to a release of GBP0.8 million in 2021. The
reduction in impairment charge is attributable to the Company's
continued focus on senior secured Credit Assets. As at 31 December
2021, 97% of the assets were structurally secured (31 December
2020: 91%).
The Expected Credit Loss ("ECL", "Impairment Provision") balance
has reduced materially from GBP30.5 million as at 31 December 2020
to GBP10.8 million as at 31 December 2021. The main driver of the
reduction is sale of the consumer portfolio. 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.
ESG & impact
The Investment Manager has embedded Environmental, Social and
Governance "ESG" as a core part of its investment process - from
identifying ESG risks when selecting and assessing investments,
through to working with credit partners to embed an ESG framework
and monitor performance against key criteria and measures, linked
to the UN Sustainable Development Goals. Alongside ESG in the
investment process, the Investment Manager has identified 5 key
impact areas where the lending that Honeycomb Investment Trust plc
provides can make a meaningful difference. These impact areas are
listed on page 6. Progress against ESG targets and positive impact
for Investment Manager as a whole is monitored and reported in the
Pollen Street Capital Annual ESG Report. The Investment Manager
collects data to measure the sustainability of operations as well
as the relevant ESG impact. As the nascent environment for ESG data
evolves, we are reviewing the data robustness with our partners to
improve and align reporting. This will enable us to publish
relevant ESG information in the future.
Outlook
Honeycomb has built on a strong track record of consistent
credit performance and dividends with another successful year in
2021. The strong financial performance has continued following the
end of the financial year with annualised NAV returns of 8.1% in
January 2022.
The role of non-bank lenders is ever increasing, as banks narrow
their focus and customers are attracted to platforms that employ
technology to deliver more tailored and efficient service. Our
strong pipeline of deals, with over GBP1bn of deals under
consideration by the investment manager, means we are able to
select those that align with our strategy and ambitions in driving
positive impact.
The outlook for the economy remains somewhat uncertain with the
potential impact of the various supply shortages, the increasing
cost-of-living and consequences of emerging geopolitical events.
Despite this we believe that Honeycomb is well positioned for the
future and we are proud to have delivered strong returns for
Honeycomb shareholders over 2021 and indeed since inception in
2015.
We are excited about the potential combination of Pollen Street
and Honeycomb and look forward to working with Board in 2022 to
manage and grow the Company.
ESG at the Heart of Investment Management
The Investment Manager has embedded Environmental, Social and
Governance "ESG" as a core part of its investment process - from
identifying ESG risks when selecting investments, through to
working with credit partners to embed an ESG framework and monitor
performance against key criteria, linked to the UN Sustainable
Development Goals. We provide reporting on this framework annually
in the Pollen Street Capital ESG Report.
Environmental impact
We recognise our responsibility to do business in a manner that
protects and improves the environment for our future generations,
as well as supporting businesses that take us closer to a clean and
sustainable environment.
Create a lasting environmental impact - create solutions that
have a positive environmental impact - e.g. funding for residential
energy efficiency initiatives and electric vehicles
Social impact
We aim to ensure that the products and services of our portfolio
companies and credit partners provide the best outcomes for
stakeholders, including improving financial health for consumers
and SMEs.
Financial inclusion - access to loans and other financial
products is made available to a broad audience, promoting greater
access to opportunity
We believe a diverse business has multiple benefits. We champion
diversity and seek to ensure that equal opportunities are promoted
to all.
Promote diversity - Promoting diversity and, in particular
seeking to broaden representation at Board and company levels
We focus on efforts that provide real benefits and which address
relevant regional issues
Reginal economic growth - Provide services to small businesses
promoting growth and job creation throughout the markets in which
Pollen Street operates
Governance and leadership
We ensure we are appropriately accountable for our decisions,
implementing strong governance throughout operational processes
with the ability to identify and manage material risk factors,
including sustainability risks. As we focus our investments within
the largely regulated financial services sector, our portfolio
operates high governance standards as a baseline.
Reducing the impact of financial crime - Reduce overall levels
of financial crime in Financial Services with effective AML and
Cyber procedures and governance ESG in the Investment Process
The Investment Manager is committed to focus on actions that
generate positive impact for our investors, people, portfolio
companies and the wider society. As a core part of our investment
process, we engage with our Credit partners to identify impact
areas within ESG that are relevant to them and where we can support
them to accelerate their positive impact.
1 Upfront due diligence - as new partners join our portfolio, we
assess their existing ESG programme and impact, identifying areas
of improvement and ways to support.
2 Active management - we aim to be a true partner for our credit
portfolio companies. We engage with management teams to set goals
and ambitions, monitoring impact continuously.
3 Cross-Portfolio collaboration - The Pollen Street Hub leads
ESG best practice sharing, assisting with impact monitoring and
project activity within individual companies.
4 Effective monitoring and measurement - The Investment Manager
collects data to measure the sustainability of operations as well
as the relevant ESG impact. As the nascent environment for ESG data
evolves, we are reviewing the data robustness with our partners to
improve and align reporting. This will enable us to publish
relevant ESG information in the future.
5 Governance and oversight - The Pollen Street ESG Committee
reviews implementation of the ESG programme and recommends and
changes or improvements.
ESG Measurement
With an ever-growing focus on ESG reporting and transparency
from all stakeholder groups, as well as alignment with regulatory
disclosures such as the EU Sustainable Financial Disclosure
Regulation ("SFDR"), measuring impact is more important than
ever.
As we strengthen our approach to ESG, we have defined a set of
core metrics linked to ESG best practice which we collect from the
Trust's credit partners, as well as collecting impact measures
relevant to the investment (as set out below), and we continue to
improve and align reporting linked to our ESG framework.
ESG in Action
Recent examples of how Pollen Street Capital's credit facilities
have supported a tangible ESG impact include:
Regional Economic Growth - Financing real estate across the UK
and Ireland
The Investment Manager believes in investing into businesses
across the UK and Europe that reduce regional disparities and
support economic activities in all regions.
96% of overall real estate funding provided by Pollen Street
through its credit partners has gone to projects outside
London.
Financial Inclusion - Funding designed with small businesses in
mind
Pollen Street's partnerships support non-bank lenders who are
increasingly an integral part of the lending landscape. These
lenders provide financing to thousands of businesses including
those that would otherwise be underserved by mainstream banks.
During the year, the Investment Manager continued to build on
its strong relationships with one of Europe's largest small
business lenders, extending a GBP100m credit facility, of which
funds managed by Pollen Street participated in GBP75m and the
Company participated in GBP20m directly.
The facility enables the firm to grow its UK SME loan offering
and reach more small businesses with appropriate products to help
them flourish.
ESG - Ongoing focus
Best-in-class measurement and reporting - Measure what matters
with a streamlined data collection process for benchmarking and
setting targets; prepare our portfolio approach to EU Regulation on
sustainability disclosures.
Impact - Drive progress across our ESG impact areas. This
includes the development of lending products that enable
individuals and businesses to "go green".
Diversity and inclusion - Use data to better understand our
demographics, beyond gender, and create meaningful priorities
across the portfolio, closely linked to our culture and values.
Carbon commitment - User our carbon footprint assessment to help
set our strategy for portfolio carbon reduction and meet our
targets.
Best practice - Build and share ESG best-practice across the
firm and portfolio, including a best practice roadmap for new and
existing portfolio companies.
Culture - Scale a lasting programme with our Ten Years' Time
partners, and continue to embed responsibility and sustainability
into our Pollen Street culture.
Stewardship - Engage with key stakeholders - investors,
portfolio companies and industry bodies - to elevate the ESG agenda
across the wider industry.
Top Ten Holdings
Country Deal Type Sector Value LTV Percentage
of holding of assets(2)
at year-end
(GBPm)(1)
---------------- --------- ---------- ----------------- ------------- ------
Short
UK Agriculture United Term Property
1 Finance Kingdom Senior Loans 52.9 50% 8.6%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Sancus Short
Loans United Term Property
2 Limited Kingdom Senior Loans 52.8 54% 8.6%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Creditfix United Discounted
3 Limited Kingdom Senior Fee Receivables 51.3 39% 8.3%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Oplo Direct United Secured
4 Portfolio Kingdom Secured Consumer 48.6 81% 7.9%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Nucleus
Cash Flow
Finance United
5 Limited Kingdom Senior SME 40.6 96% 6.6%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Downing Short
Development United Term Property
6 Loans Kingdom Senior Loans 35.9 63% 5.8%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
United
7 Duke Royalty Kingdom Senior SME 35.2 40% 5.7%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
United Secured
8 GE Portfolio Kingdom Secured Consumer 31.2 61% 5.1%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
United Secured
9 Oplo Structured Kingdom Mezzanine Consumer 29.9 95% 4.9%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
Short
Queen United Term Property
10 Street Kingdom Senior Loans 24.6 75% 4.0%
--- ---------------- --------- ---------- ----------------- ------------- ------ --------------
(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 2021 the value of the top 10 assets totalled
GBP403.0 million (2020: GBP359.2 million) which equated to 65.5
percent (2020: 63.2 percent) 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).
Portfolio Composition
NAV stratification by structure
Type Percentage
Equity 3%
-----------
Structured 48%
-----------
Direct Portfolio 49%
-----------
Business review
The Strategic Report on pages 3 to 29 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 principal and emerging 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 6(th) Floor, 65
Gresham Street, London, EC2V 7NQ, United Kingdom.
Principal activities
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.
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 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").
The Group targets the payment of dividends which equate to a
yield of at least 8.0 percent 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.
Asset allocation and risk diversification
Credit Assets invested in by the Group consist of 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 and
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
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 percent of the aggregate net proceeds of any issue
of shares in Equity Assets. 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).
IMPAIRMENT REVIEW
The Expected Credit Loss ("ECL", "Impairment Provision") balance
has reduced materially from GBP30.5 million as at 31 December 2020
to GBP10.8 million as at 31 December 2021 on a NAV closing balance
of GBP359m (2020: GBP357m). The main driver of the reduction is
sale of the consumer portfolio.
The impairment charge for the year has reduced from GBP5.6
million in 2020 to a release of GBP0.8 million in 2021. The
reduction in impairment charge is attributable to the Company's
continued focus on senior secured Credit Assets and the improving
economic outlook. As at 31 December 2021, 97% of the assets were
senior secured (31 December 2019: 82%).
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.
Over 2020 many borrowers made requests for forbearance in line
with regulatory guidance on the matter. By the end of 2020 a
significant majority of borrowers had left payment holidays and
returned to paying.
The downside protection built into the majority of the portfolio
has limited the impact of Covid-19 on the ECL charge. 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 could experience
further impairments.
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 percent 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 percent 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 percent of Gross Assets;
-- No single SME or corporate loan, or trade receivable, shall
exceed 5.0 percent 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 percent 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 percent 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 2021, or the year ended 31 December 2020.
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"). CLOs are a form
of securitisation whereby payments from multiple loans are pooled
together and passed on to different classes of owners in various
tranches. CDOs are pooled debt obligations where pooled assets
serve as collateral.
These restrictions were not breached in year ended 31 December
2021 or the year ended 31 December 2020.
ESG
As detailed in the ESG section of the report. The Investment
Manager has embedded Environmental, Social and Governance "ESG" as
a core part of its investment process. This involves identifying
ESG risks and opportunities when selecting and assessing
investments, and working with credit partners to embed an ESG
framework and monitor performance against key criteria and
measures, linked to the UN Sustainable Development Goals.
Alongside ESG in the investment process, the Investment Manager
has identified 5 key impact areas where the lending that Honeycomb
Investment Trust plc provides can make a meaningful difference.
Progress against ESG targets and positive impact for Investment
Manager as a whole is monitored and reported in the Pollen Street
Capital Annual ESG Report. The Investment Manager collects both
core ESG practice metrics and relevant impact measures, and we
continue to improve and align reporting aligned to the ESG
framework and relevant regulatory developments.
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 percent 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 percent to 75 percent of Net Asset Value.
These restrictions were not breached in year ended 31 December
2021 or the year ended 31 December 2020.
In July 2021, the main debt facility was reduced by GBP50
million to GBP200m (2020: GBP250m). During the year, the Sting and
Bud debt facilities remained on the same terms as at the end of
2020.
Reference rate reform
From 1 January 2022, the Sterling Overnight Index Average
("SONIA") became the new market accepted benchmark, having a credit
adjustment spread applied to it where required to ensure that
neither party had been adversely impacted by the switch. Note 12
has further details on the effect of IBOR reform. As at the end of
the year the group had 51.268 million of asset and 30,129 million
of liabilities that had yet to transition to SONIA.
The key differences between GBP LIBOR and SONIA are that GBP
LIBOR is a 'term rate', which means that it is published for a
borrowing period (such as three months or six months) and is
'forward looking', because it is published at the beginning of the
borrowing period. SONIA is currently a 'backward-looking' rate,
based on overnight rates from actual transactions, and it is
published at the end of the overnight borrowing period.
Furthermore, LIBOR includes a credit premium over the risk-free
rate, which SONIA currently does not. To transition existing
contracts and agreements that reference GBP LIBOR to SONIA,
adjustments for term differences and credit differences are applied
to SONIA, to enable the two benchmark rates to be economically
equivalent on transition.
As at 31 December 2021, changes required to systems, processes
and models have been identified and implemented. The Group has
identified that the areas of most significant risk arising from the
replacement of GBP LIBOR are: systems and processes which capture
GBP LIBOR referenced contracts, amendments to those contracts, or
existing fallback/transition clauses not operating as
anticipated.
The US IBOR transition will continue into 2022 and no formal
interest rate has yet been decided.
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 2021 or the
period ending 31 December 2020.
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 2021 and 2020 can be found on
pages 108 and 109.
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's cash reserves decreased over the period with
GBP12.9million of assets held in cash at 31 December 2021 (31
December 2020: GBP62.5 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 percent 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 2025. Please see the viability statement on page 35 for more
detail.
Combination with Pollen Street
On 15 February 2022, the Company announced that it has reached
agreement on the terms of a recommended all share combination with
Pollen Street. Under the terms of the agreement, the Company will
acquire the entire issued share capital of Pollen Street in
exchange for shares in the combined group such that the Honeycomb
and Pollen Street will be combined into a single business, owned by
the shareholders of Honeycomb and Pollen Street. The combination is
conditional on shareholder and regulatory approval, and certain
other customary conditions.
The Group's anticipated future developments and outlook are
discussed in more detail in the Chairman's Statement on pages 7 to
8 and the Investment Manager's Report on pages 9 to 10.
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.
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 2021, the Board was authorised to allot
7,051,948 ordinary shares, such authority lasting until the
conclusion of the 2022 Annual General Meeting ("AGM") of the
Company (or, if earlier, until close of business on 31 August
2022). Of this, up to 7,051,948 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. No buy backs were executed over 2021 (2020: 4,190,178 share
were purchased by the Company during the year under review at an
average price of 821 pence). The last published NAV statement at
the date of signing these financial statements was the NAV for 31
January 2022.
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 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. Performance of the
Group 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
The table below sets out four principal decisions made by the
Board in 2021, in addition to consideration of the proposed
combination with Pollen Street (more details of which are set out
in the Chairman's Statement on pages 7 to 8): the response to
Covid-19, the sale of the organic book, a cyber risk review and an
operational resilience review. The table also includes the ways in
which stakeholder considerations were factored in and addressed
during the decision-making process:
Response to Covid-19
The Covid-19 pandemic has presented
unprecedented challenges. A focal
area for the Board over 2020
and 2021 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 and the performance
of the portfolio. The Board also
received regular updates on regulatory
changes, shareholder views and
on how to manage potential issues
for creditors. The Board considered
the credit partners to ensure
they were being dealt with fairly
whilst also protecting the interests
of the shareholders
What was the outcome of such
engagement
The Board supported the actions
taken by the Investment Manager
to steer the portfolio through
the period. The Board approved
changes to the Company's debt
facility during 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.
===============================================
The Sale of the Organic Book
The Company has previously held
a portfolio of loans that were
originated specifically for the
Company to acquire (the "Organic
Book"). Subsequently, it became
apparent that these loans delivered
less stable returns than other
portfolios.
How were stakeholders considered?
The Manager is in regular contact
with shareholders of the Company
in addition to other stakeholders
such as analyst and debt providers.
It was clear that the selling
the Organic book would benefit
stakeholders by making returns
more stable and simplifying the
business.
What was the outcome?
The Organic Book was sold to
a third party.
===============================================
Cyber Risk Review
Cyber Risk has been an area of
increasing focus recently given
the wide prevalence of cyber
incidents in corporates and other
areas of society. The Risk Committee
lead a review of cyber risk in
conjunction with the Manager.
How were stakeholders considered?
The Manager commissioned a review
of its systems and controls from
a third-party cyber risk expert.
The review and its conclusions
were discussed with the board
members.
What was the outcome?
The Manager implemented all recommendations
of the review and agreed to update
the review on an annual basis.
===============================================
Operational Resilience Review
The Covid-19 pandemic presented
intense challenges to the operations
of all companies. The 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 on pages 11 to 14.
The description of the way the Group operates on page 5 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 include 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. Further
details are included in the Notice of AGM which will be posted to
shareholders along with this Annual Report and Financial
Statements.
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
2021 AGM, which was 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 Financial Statements and
half-year results are made available on the Group's website and are
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 premium segment of the Main Market of 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 delivering stable
returns with limited risk.
Regulators
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 percent of the issued shares.
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.
As a result, the financial statements for the year ended 31
December 2021 and 31 December 2020 are prepared on a consolidated
basis.
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 has adopted 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 and is
currently exempt from the requirement to disclose TCFD disclosures.
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 or physical assets such as
property 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 on pages 11
to 14.
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.
The Board of Directors consists of four non-executive Directors,
one of whom is female. During 2019, the Board adopted a Board
Diversity and Inclusion policy and has established measurable
objectives for achieving diversity on the Board and has undertaken
to only engage executive search firms who have signed up to the
voluntary Code of Conduct on gender diversity and best practice.
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 faces a number of risks, both principal and emerging,
and as a result 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 maintains comprehensive risk management methodology
overseeing the risks which are considered to be material to its
business and maintaining surveillance of its operating environment
for emerging risks. This approach balances risks and opportunities,
and contributes to the achievement of the Group's strategic
objectives. It maintains a risk register which records risk
management process for the Group's identified risks, 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 20 January 2022.
The main change to the risk register since the prior year is a
reduction in borrowing risk given that all debt facilities are
operating comfortably within their limits and enhanced mitigation
actions have been implemented. 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 potentially resulting in performance degradation, reduced
profitability, and reputational damage.
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. The Investment
Manager engages actively with shareholders and analysts to help
communicate the Company's financial success and positive outlook
and an attractive dividend policy has been adopted. As at 31
December 2021, the Company's shares were trading at a discount to
Net Asset Value.
Revenue reserves have increased by 1.6million over the year,
consequently increasing NAV per share to 1,019pence from
1,013pence. The Company has paid a consistent dividend of 20.00p
per ordinary share throughout 2021, representing an 8.00%
annualised yield on the IPO issuance price, in line with the
Board's dividend policy. The last published NAV statement at the
date of signing these financial statements was the NAV for 31
January 2022.
Exposure to Credit Risk
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 investment.
The Covid-19 pandemic has continued to cause disruption across
the globe throughout 2021. Although grass roots of economic rebound
have been observed, at the time of writing a new variant has
emerged threatening the return to normality that economies depend
on for their continued recovery. However, the portfolio has
continued to perform robustly throughout the year, delivering
stable returns. The Group could experience impairments and
consequently reduced profits, particularly if economic expectations
deteriorate further. The overall effect of this cannot be
quantified reliably because of uncertainty surrounding further
waves, and the macro environment.
Mitigation
The Manager has substantial sector expertise and experience in
transformation, driving growth for the portfolio and performance
for investors. 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 diligences the established
underwriting criteria of the platforms which includes (where
applicable) 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
13 to the financial statements for more details on Credit Risk.
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.
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 percent of net debt to equity ratio (the target
is 75 percent net debt to equity). The Investment Manager may draw
debt facilities at its discretion when conditions and opportunities
exist to enhance investment returns, the facilities have long
maturity dates, and amortisation and cash sweep mechanics built
into the facility agreements.
2021 closed in a strong position with ample headroom on the
existing facilities. Further detail on these facilities can be
found in Note 17.
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 (e.g., as a result of loss of earnings), 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 the
natural hedge between floating rate borrowings (debt) 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.
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, or excessive losses
may occur in the event of the fire sale of assets.
Mitigation
The Group actively manages its liquidity position to ensure
there is sufficient liquidity to meet liabilities as they fall due
(note 19). The Group benefits from long term debt facilities with
amortisation periods rather than bullet repayments; amortising
assets that are highly cash generative; strong covenant packages
that give the Group ability to influence the borrower's behaviours
in times of stress.
Climate Risk
Climate change presents potential financial risks that have far
reaching implications, potentially impacting the group's
investments. The risks arise through two primary channels: the
physical effects of climate change and the impact of changes
associated with the transition to a lower carbon economy.
Climate risk is expected to manifest itself over the medium to
long term as emerging regulations are implemented. The greatest
risk is expected to lie within our partners businesses and the
investment portfolio. In this context, Honeycomb has comparatively
short duration assets. This substantially mitigates the exposure to
climate risk. No material impact on the financial statements has
been identified from the risks arising from climate change.
Mitigation
The Group has performed an initial high-level materiality
assessment of climate risk across its investment portfolio and is
developing a comprehensive action plan that takes into account the
components of the Taskforce for Climate-related Financial
Disclosures (TCFD). Through this, the Group is progressing a range
of activities to better understand the impacts of the Group's
operations on the climate and the impacts of climate change on the
Group's portfolios. The Group is focusing on its business
resilience in order to enhance the Group's capabilities for the
identification, management, monitoring and disclosure of climate
related risks and opportunities.
Operational Risks
Third Party Service Providers
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. 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 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 conducts 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, incorporating 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 helping to define the
overall attitude of the Group to risk.
-- Bottom-up: Emerging risks identified at a business level and
escalated, where appropriate by the Investment Manager, Manager,
via risk updates into the Risk Committee and the Board.
Recent developments such as the emergence of new markets and
technologies, and the existence of increasingly complex supply
chains have given rise to new challenges, uncertainties and
opportunities in the macro-economy.
Over the period, the risk committee has considered market,
political, and operational risks such as ESG, operational
resilience, financial instability, and cyber risks. These risks are
considered as new risks in known context; risks that have emerged
in the external environment but are associated with the existing
strategy of the Group.
It is anticipated that climate risk (including natural resources
management) will continue to dominate the emerging risk landscape
together with technology risk. There has been particular focus
recently on cyber risk and its potential impact on companies and
society.
Mitigation
Emerging risks are monitored by the Risk Committee on an ongoing
basis. Actions are tracked to ensure the Group's preparedness
should an emerging risk crystallise.
During 2021, the Risk Committee led a deep dive on cyber risk
and, together with the Investment Manager, commissioned an external
review of Pollen Street's cyber security arrangements. The review
did not identify any major weaknesses and all recommendations have
since been implemented.
The Risk Committee will continue to monitor these risks and
respond to the evolving risk landscape.
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 2021 31 December 2020
NET ASSET VALUE
----------------- -----------------
NET ASSET VALUE (CUM INCOME)
(GBP'000) (1) 359,342 357,232
----------------- -----------------
MARKET CAPITALISATION (GBP'000)
(2) (3) 333,204 332,323
----------------- -----------------
PER SHARE METRICS
----------------- -----------------
SHARE PRICE (AT CLOSE) (4) 945.0p 942.5p
----------------- -----------------
NAV PER SHARE (CUM INCOME)
(1) 1,019.1p 1,013.1p
----------------- -----------------
SHARES IN ISSUE 35,259,741 35,259,741
----------------- -----------------
PERFORMANCE INDICATORS AND
KEY RATIOS
----------------- -----------------
PREMIUM / (DISCOUNT) (2) (5) (7.3%) (7.0)%
----------------- -----------------
ANNUAL NAV RETURN (2) (6) 8.5% 7.7%
----------------- -----------------
PROFIT (GBP'000) (7) 30,318 20,701
----------------- -----------------
ITD TOTAL NAV RETURN (2) (8)
(9) 49.9% 41.1%
----------------- -----------------
DEBT TO EQUITY (2) (10) 74.5% 76.6%
----------------- -----------------
NET DEBT TO EQUITY (2) (11) 70.9% 59.1%
----------------- -----------------
DIVID RETURN (2) (12) 8.0% 8.0%
----------------- -----------------
ONGOING CHARGES (2) (13) 2.3% 2.0%
----------------- -----------------
Approval
The Strategic Report was approved by the Board of Directors on 1
March 2022 and signed on its behalf by:
Robert Sharpe
Chairman
1 March 2022
(1) NET ASSET VALUE (CUM INCOME): includes 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
period end.
( 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: as profit after taxation
(8) ITD: inception to date -- excludes issue costs.
(9) 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 percent 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 percent in relation to the April-18 capital raise.
(10) DEBT TO EQUITY: is calculated as the Group ' s interest
bearing debt divided by the net asset value, expressed as a
percentage.
(11) 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..
(12) DIVID RETURN: is calculated as the total declared dividends
for the period divided by IPO issue price.
(13) 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
Directors' Report
Board of Directors
The directors of the company who were in office during the year
and up to the date of signing the financial statements were Robert
Sharpe, Jim Coyle, Richard Rowney and Joanne Lake.
Robert Sharpe (1)
Chairman of the Board, the Nomination Committee and the
Management Evaluation Committee.
Member of 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 Chairman at Supply@ME Capital plc, 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 ("JHP")
and Nucleus Financial Group ("NFG") a leading retirement and wealth
management specialist managing over GBP48bn of assets. Backed by
Private Equity specialist Epiris, JHP is a consolidator in the
platform market. He is also a non-executive Director at MSP Capital
Limited. 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 had 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 35 years' experience in financial and
professional services. She is currently independent non-executive
chair of Made Tech Group plc, the AIM-listed leading provider of
digital, data and technology services to the UK public sector,
independent non-executive chairman of Mattioli Woods Plc, the
AIM-listed specialist wealth and asset management business,
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, an
established provider of non-standard financial services, and
Braemar Shipping Services PLC, an established international
provider of shipping, marine and energy services. 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 financial statements of the
Company and its subsidiaries (together, the "Group") for the year
ended 31 December 2021. The shares are listed on the Main Market of
the London Stock Exchange.
The strategic report on pages 3 to 29 includes section 172 of
the Companies Act 2006 highlighting the Directors' overarching
duty.
Board members, and directors' and officers' insurance
The names and biographical details of the Board members who
served on the Board as at the year-end can be found on pages 31 and
32.
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 2023.
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 (2020: 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 and emerging risks and uncertainties can be found
in the Strategic Report on pages 25 to 28 and details of the
Group's internal controls can be found on pages 45 and 46. Details
of the Group's hedging policies are set out in the Strategic Report
on page 19.
Share capital - voting and dividend
As at 31 December 2021, 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 2020 39,449,919
ordinary shares in issue, of which 4,190,178 were 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 8 June 2021, 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 GBP35,259.74 representing 3,525,974
ordinary shares. The authority will expire (unless previously
renewed, varied or revoked) on the conclusion of the 2022 AGM of
the Company (or, if earlier, at the close of business on 31 August
2022).
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, and pursuant to the
Articles of Association, a continuation vote will be put to
shareholders every five years. The Directors convened a General
Meeting on 16 December 2019 at which a resolution for the
continuation of the Company was proposed and passed by
Shareholders. The next such proposal shall be made no earlier than
the AGM in 2023 and no later than the AGM in 2024.
At the AGM held on 8 June 2021, the Directors were granted the
authority to purchase in the market up to 5,285,435 ordinary
shares, such authority expiring at the conclusion of the 2022 AGM
of the Company (or, if earlier, until close of business on 31
August 2022). The Company intends to seek approval from the
shareholders, by special resolution, to renew this authority at the
next AGM.
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. No shares were purchased
by the Company during the reporting period.
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
percent 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 was triggered for
2020 and a discontinuation vote was held at the 2021 AGM., at which
98.55% of the shares voted were against the resolution to
discontinue the business of the Company. The requirement to propose
a special resolution for the discontinuation of the business of the
Company at the 2022 AGM has not been triggered.
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 2021 are set out Note 9 to the financial
statements. A reconciliation of movements in reserves is presented
in the Statement of Changes in Shareholders' Funds on pages 72 to
73 of 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
Between 31 December 2021 and the date of this report, the
Company had been notified in accordance with Disclosure Guidance
and Transparency Rule 5 of the following interests in the voting
rights attaching to the Company's issued share capital:
Holder Ordinary Percentage
shares of total
voting
rights
=============== ============ ===========
Aberdeen Asset Undisclosed <5%
Management
PLC
Independent auditors
The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC"), were re-appointed at the Company's AGM in 2021 and have
expressed willingness to continue to act as the Group's auditors
for the forthcoming financial year.
As detailed in the Audit Committee report for 2021, Richard
McGuire had served as audit partner for five years and was replaced
by Claire Sandford during the reporting period. The Audit Committee
ensured there were appropriate arrangements in place to secure an
orderly and effective change of audit partner over the last
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 2022 AGM. At the 2022 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 on pages 48 to 52 of
the Audit 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 rs 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 for Honeycomb 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 and 2021; which incorporated one-off macro-economic
charges for Covid-19. The Directors consider these scenarios to be
the most relevant risks to the Group's operations. As part of these
projections, the Directors have also reviewed any financial and
non-financial covenants in place for all debt facilities with no
breaches anticipated, even in the stressed scenario.
The Directors have also reviewed the potential effect of the
combination with Pollen Street on financial projections of the
combined group. These financial projections have been stress tested
under different scenarios, including delaying all additional fund
raises to demonstrate that the combined group will be able to
generate sufficient cash flows in order to meet its liabilities as
they fall due.
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, including under the
proposed combination with Pollen Street, to meet its liabilities as
they fall due over the next 12 months from the date of approval of
these financial statements being the 1 March 2022.
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 on pages 25 to
28.
Viability statement
In accordance with provision 31 of the UK Corporate Governance
Code, published by the Financial Reporting Council in 2018 (the
"Code") and the corresponding provision 36 of The AIC Code of
Corporate Governance (the "AIC Code"), the Directors have assessed
the prospects of the Group over the three-year period to the AGM in
2025. 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.
At the year-end, the Group had cash balances of GBP12.9 million.
The Company also has GBP396 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, uncertainties and
mitigating factors that are detailed on pages 25 to 28. 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. In addition, the Board have
reviewed the potential effect of the combination with Pollen
Street. 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 and 2021 has been
considered in these projections as part of the stress testing in
the going concern analysis which has also been used as part of the
analysis for the Company's viability. In this case the Group
continues to be viable, though with the prospect of the continued
vaccine 'booster' rollout in the UK, and around the globe, the
Directors expect the actual impact to be more favourable than the
levels projected.
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, including under the
proposed combination with Pollen Street. 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 2025. 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.
capital re quirements
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.
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
percent on 1 January in each year); and (ii) an amount equal to the
sum of 1/12 of 0.06 percent of the portion of Net Asset Value up to
GBP150 million, and 1/12 of 0.05 percent 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 GBP60,000 (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 percent 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 percent of the listing proceeds of
any placing were invested the management fee payable was based on
1.0 percent of the Gross Assets. Further details on the management
fee and the performance fee can be found in Note 5 to the financial
statements. The management agreement can be terminated by either
party providing twelve months' written notice.
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
percent of NAV per annum, subject to a minimum monthly fee of
GBP2,500; and
(B) Where NAV is greater than GBP200 million, 0.02 percent of
NAV per annum in respect of the first GBP200 million of NAV
and:
i. 0.0175 percent 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 percent 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.
The Manager has been discussing the potential combination of
Pollen Street and the Company with the Company's debt facility
provider and expects that consent will be granted for the
transaction.
Subsequent events
On 23 February 2022 a dividend of 20.0 pence per ordinary share
was approved for payment on 25 March 2022.
Donations
The Group made no political or charitable donations during the
year under review to organisations either within or outside the UK
(2020: 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,
including the proposed combination of the Honeycomb and Pollen
Street businesses, are discussed in more detail in the Chairman's
Statement on pages 7 to 8.
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 2021 to 30 June 2021
======================= ====================================================
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.
Following the Company's entire share capital (being 39,449,919
ordinary shares) being admitted to the premium listing segment of
the Main Market on 28 October 2020, 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, as introduced by the Board in the
Company's 2020 Annual Report and Financial Statements, has 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") 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 2020 Annual Report and
Financial Statements that Joanne Lake was appointed as a Director
of the Company with effect from 1 January 2021, to bring further
skills and experience to the Board. 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 confirmed the following changes:
-- Jim Coyle was appointed as Senior Independent Director with effect from 1 March 2021;
-- The functions of the Audit and Risk Committee were split into
two separate committees, an Audit Committee and a Risk Committee;
and the functions of the Remuneration and Nomination Committee were
split into two separate committees, a Remuneration Committee and
Nomination Committee. These changes became effective 1 March
2021;
-- Joanne Lake was appointed Chairman of the Remuneration
Committee with effect from 1 March 2021, with Robert Sharpe
remaining as a member of the committee;
-- Richard Rowney was appointed Chairman of the Risk Committee
with effect from 1 March 2021; and
-- Robert Sharpe, as Chairman of the Company, stepped down as a
member of the Audit Committee and the Risk Committee, as
recommended by the AIC Code, with effect from 8 September 2021.
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 Audit Committee, Risk Committee, Remuneration Committee and
Nomination Committee.
The Board and committee structure and membership is therefore as
follows:
Board Robert Sharpe (Chairman)
Jim Coyle
Richard Rowney
Joanne Lake
================= ===========================
Audit Committee Jim Coyle (Chairman)
Richard Rowney
Joanne Lake
================= ===========================
Risk Committee Richard Rowney (Chairman)
Jim Coyle
Joanne Lake
================= ===========================
Remuneration Joanne Lake (Chairman)
Committee Robert Sharpe
Jim Coyle
Richard Rowney
================= ===========================
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 on pages 31 and 32 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
2022 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 on
pages 31 to 32. 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 from March
2021 to February 2022, following the split of the Audit and Risk
Committee, and the Remuneration and Nomination Committee.
Director Board(1) Audit Committee(2) Risk Committee(2) Remuneration Nomination Management
Committee Committee Engagement
Committee
============== ======== ================== ================= ============ ========== ===========
Robert Sharpe 5 5 5 1 1 1
Jim Coyle 5 5 5 1 1 1
Richard
Rowney 5 5 5 1 1 1
Joanne Lake 5 5 5 1 1 1
============== ======== ================== ================= ============ ========== ===========
Total 5 5 5 1 1 1
============== ======== ================== ================= ============ ========== ===========
(1) A number of additional ad-hoc meetings of the Board were
held throughout the year to discuss transactional matters,
including the proposed combination of Honeycomb and Pollen
Street.
(2) The Audit and Risk Committee met twice prior to the split in
the committees effective 1 March 2021 and all Directors were in
attendance.
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 on page 4. 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
review of the Company's culture policy, 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 provided a facility during
2021. 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. The Company no longer lends to Morses Club plc
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 2021 was evaluated by
means of a Director self-assessment questionnaire. The results of
the evaluation process were reviewed by the Board in November 2021
and actions arising from the evaluation process were agreed.
Continuing to closely monitor and observe the Company's risk and
control systems, maintaining business performance and resilience,
looking for further opportunities for sustainable growth.
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 during or before June 2022.
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. 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.
Management agreement and continuing appointment
Details of the Investment Manager's agreement and fees are set
out in Note 5 to the financial statements.
Directors' Interests
As at 31 December 2021 Joanne Lake held 2,713 shares in the
Company; No other Director held 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 23 February 2022.
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.
The committee noted that the proposed combination with Pollen
Street would likely result in changes to service providers. These
matters were under active consideration by the board.
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 on page 39, the Committee structure was reviewed by
the Board in early 2021. The Board now constitutes the following
Committees:
-- Audit Committee
-- Risk Committee
-- Remuneration Committee
-- Nomination Committee
-- Management Evaluation Committee
Jim Coyle, Richard Rowney and Joanne Lake are members of each
Committee. Robert Sharpe is a member of the Remuneration Committee,
Nomination Committee and Management Evaluation 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 on page 49.
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.
Throughout the course of the year. The Audit Committee received
updates on the Manager's internal audit programme. Further details
on the work of the Audit Committee can be found in the report of
the Audit Committee on pages 48 to 52.
Risk Committee
The Risk Committee is chaired by Richard Rowney and meets on a
quarterly basis. The Risk Committee is responsible for:
-- reviewing the Group's internal control and risk management
systems, in collaboration with the Audit Committee;
-- setting and monitoring the Company's risk appetite;
-- carrying out a robust assessment of the Company's emerging and principal risks; 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 and Financial Statements 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.
During the year under review, the Risk Committee met five times,
twice as the Audit and Risk Committee and three times subsequently.
The Risk Committee considered the following items during the year
under review:
-- The Company's risk appetite statement and risk dashboard,
taking in consideration the Company's risk profile;
-- Risk Reports received from the Investment Manager, which
included information relating to business continuity in view of
Covid-19, compliance monitoring activities, debt facilities and
compliance with covenants,
-- The Investment Manager's Whistleblowing and Conflicts Policy;
-- A presentation on the Manager's information security review,
in the context of the Company's cyber risk; and
-- A compliance report setting on regulatory developments potentially impacting the Company.
The Principal Risks and Uncertainties for the Group are set out
in detail on pages 25 to 28.
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.
Further details on the work of the Remuneration Committee can be
found in the Directors' Remuneration Report on pages 53 to 58.
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 principal 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 and Financial Statements.
-- 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.
Combination With Pollen Street
The Board has led the negotiations leading to the proposed
combination with Pollen Street, which was announced on 15 February
2022. The Company appointed financial and legal advisers to advise
on the terms of the transaction, as well as a sponsor to advise on
the Company's compliance with its regulatory obligations under the
Listing Rules. The Company's professional advisers conducted legal,
financial and tax due diligence on the Pollen Street corporate
group prior to agreeing the terms of the transaction. The Board is
reviewing the Company's governance structure and arrangements to
ensure they are robust and appropriate in light of the proposed
combination.
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 brokers 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 2021 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 considers 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 on pages 25 to 28 of 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 GBP18.9 million, split GBP8.1 million into variable
and GBP10.8 million in fixed remuneration. During the year, the
average number of beneficiaries at the Group which includes the
AIFM were 73 and the aggregate amount of remuneration paid in
relation to the Senior Management of the firm was GBP5.5 million.
Fixed remuneration is amounts paid as salaries. Variable
remuneration is amounts paid under bonus and similar remuneration
arrangements. 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 and Financial Statements.
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 on pages 25 to
28 and in Note 12 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
percent of NAV, the actual leverage employed by the Company as a
percentage of NAV was 74.5 percent as at 31 December 2021. 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 2021, and are as follows:
As a percentage Gross Commitment
of net asset method method
value
================= ======= ==========
Maximum l e ve
l of l e verage 200% 200%
Le verage as
at
3 1 De c em
b er 2 021 173% 177%
================= ======= ==========
Other matters
The Investment Manager has confirmed 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
1 March 2022.
On behalf of the Board
Robert Sharpe
Chairman
1 March 2022
Report of the Audit Committee
As Chairman of the Audit Committee, I am pleased to present the
Audit Committee report for the year ended 31 December 2021. Full
details of the number of committee meetings and attendance by
individual committee members can be found on pages 31 to 32.
As noted in the previous Audit and Risk Committee report for
reporting period to 31 December 2020, 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. The committee met twice
prior to this decision, in January and February 2021. For the
purposes of this report, the activities of the Audit Committee will
be presented here, while those of the Risk Committee are explained
on page 44.
Membership of the Audit Committee
For the reporting period, the Audit Committee was chaired by Jim
Coyle. Please see pages 31 and 32 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 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.
Following Ms Lake's appointment in January 2021, the Board
reviewed the composition of each Board committee and it was
considered appropriate during the reporting period that Mr Sharpe,
as Chairman of the Board, step down as a member of the Audit
Committee, due to the increased size of the Board.
The role of the Audit Committee
The role of the Audit 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 2021, the roles and
responsibilities of the Audit Committee include the following:
Financial and
narrative reporting * To monitor the financial reporting process;
* To review and monitor the integrity of the half-year
and annual financial statements and review and
challenge where necessary the accounting policies and
judgements of the Investment Manager and
Administrator
====================== ==============================================================
Internal controls
and risk management * In collaboration with the Risk Committee, to review
the adequacy and effectiveness of the Group's
internal financial and internal control and 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 2021 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 Committee met five times during the year under review,
twice prior to the split as the Audit and Risk Committee and three
times subsequently as the Audit Committee (please see pages 40 to
41 for member's attendance) and considered the following items:
-- The Group's Annual Report and Financial Statements for the
year ended 31 December 2020 and advised the Board accordingly in
2021;
-- The Group's Annual Report and Financial Statements for the
year ended 31 December 2021 and advised the Board accordingly in
2022; The Company's half-year financial statements for the period
ended 30 June 2021 and advised the Board accordingly;
-- The rotation of the external audit partner, which concluded
in a recommendation to the Board to appoint following Ms. Claire
Sandford as audit partner. The audit partner rotation was completed
in accordance with the Financial Reporting Council's Revised
Ethical Standard 2019;
-- 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 provided by the external auditor;
-- 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 on page 35 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; and
-- The ongoing impact and risks associated with the Covid-19 crisis.
The Audit Committee also reviewed the following items:
-- Whether there was a requirement for an internal audit function;
-- Before the split of the Audit and Risk Committee in March
2021, 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 Balance and Understandable Reporting
Following the year end, the Audit Committee has reviewed the
2021 Annual Report and Financial Statements to consider whether
they provide 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 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 2021 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 and Financial Statements'
narrative reporting was consistent throughout.
When forming its opinion, the Committee considered the following
questions 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 and Financial Statements a
document for shareholders and other stakeholders?
================ ==============================================================
Is the Report
understandable? * Is there a clear and understandable framework to the
Annual Report and Financial Statements?
* Are the Annual Report and Financial Statements
user-friendly, easy to understand and presented in
straightforward language?
================ ==============================================================
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 23 February 2022 to review the report
and financial statements for the year ended 31 December 2021. The
Audit Committee considered the following significant issues,
including principal risks and uncertainties in light of the Group's
activities and matters communicated by the external Auditors during
their audit, all of which were satisfactorily addressed:
Issue considered How the Committee gained assurance
======================== =================================================================
Risk of misappropriation T h e Audit Com mit t e e has reviewed r e p o
of assets and ownership r t s fr o m it s s e r v i ce p r o v id ers on
of investments k e y cont rols ove r the as sets o f the Group
over the course of 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 2021 and 2022 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 2022 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
monthly 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 2021
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 reporting under IFRS 9. The impact
of Covid-19 more widely is described in the Strategic
Report on pages 3 to 29; and the Board's role in
managing this impact over the course of 2021 is
set out in the s172 statement on page 21.
======================== ===============================================================
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 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 on page 35. 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
on page 49.
======================== ===============================================================
Retention of Investment The Audit Committee received a report from the
Trust Status Investment Manager in February 2022 confirming
that the Company has remained compliant with the
requirements to maintain its Investment Trust status.
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 8
June 2021 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 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 Ms. Claire Sandford. Ms Sandford was appointed in 2021
following Mr. Richard McGuire's fifth and final year as audit
partner. The audit partner rotation was completed in accordance
with the Financial Reporting Council's Revised Ethical Standard
2019.
The audit and non-audit fees for the year under review can be
found in Note 6 to the financial statements.
Non-Audit Services
In relation to non-audit services, the Audit 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 Committee and will include a description of the services to
be rendered and an anticipated cost. The Audit 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 Group
in 2021 (2020: 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 Committee monitors the auditors' objectivity and
independence on an ongoing basis. In determining PwC's
independence, the Audit 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
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 Committee met with the audit partner and assessed PwC's
performance to date. The review 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 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 23 February
2022.
Jim Coyle
C hai r m a n of t he Au d it C om m i ttee
1 March 2022
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 2021, 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.
In February 2021, the Board made the decision 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.
As at the date of this report, the Remuneration Committee
comprises all Directors and is chaired by Joanne Lake. Pages 31 and
32 include the member's biographies, and full details of the number
of committee meetings and attendance by individual committee
members can be found on page 41.
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 2021. An ordinary resolution
to approve the Directors' remuneration policy will be put to
shareholders at least once every three years, and will next be put
to shareholders at the AGM in 2023. At the 2022 AGM, shareholders
will also be asked to consider an advisory resolution on the
contents of the Directors' remuneration report.
As at 31 December 2021, the Board comprised four non-executive
Directors, all of whom are independent of the Investment Manager.
For the year ended 31 December 2021, the responsibilities of the
Remuneration a Committee were to:
-- consider and approve Directors' remuneration;
-- consider and approve the framework and policy for the remuneration of the Directors; and
-- consider the need to appoint external remuneration consultants.
The Committee met on 23 February 2022 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 2022:
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
========================== =======================
Chair of Remuneration Additional supplement
Committee of GBP5,000
per annum
========================== =======================
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 have 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 2020 and the Directors'Remuneration Policy were approved
by shareholders at the Annual General Meetings held on 8 June 2021
and 26 June 2020 respectively. The votes cast were as follows:
Directors' Directors'
Remuneration Report Remuneration Policy
========== ====================== ======================
Number % of Number % of
of Votes Votes of Votes Votes
Cast Cast
========== ============= ======= ============= =======
For 25,932,353 99.12 26,934,019 99.99
Against 229,225 0.88 2,875 0.01
Total
votes
cast 26,161,578 100 26,936,894 100
Number
of votes
withheld 2,118 - - -
========== ============= ======= ============= =======
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 2022 AGM on the
advisory resolutions will be disclosed in the remuneration report
for the year to 31 December 2022.
Directors' fees
Single total aggregate Directors' remuneration for the year
under review was GBP208,000 (2020: GBP178,000). The Directors who
served during the year under review received the following
emoluments:
Total Total
Fixed fees Fixed fees Variable Variable remuneration remuneration
paid or paid or fees paid fees paid paid or paid or
receivable receivable or receivable or receivable receivable receivable
during during during during during during
Director the year the year the year the year the year the year
================ ============ ============ =============== =============== ================== ==================
2021 2020 2021 2020 2021 2020
================ ============ ============ =============== =============== ================== ==================
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================ ============ ============ =============== =============== ================== ==================
Robert Sharpe
(Chair) 58 48 - 15 58 63
================ ============ ============ =============== =============== ================== ==================
Jim Coyle 53 45 - 15 53 60
================ ============ ============ =============== =============== ================== ==================
Richard Rowney
(1) 48 40 - 15 48 55
================ ============ ============ =============== =============== ================== ==================
Joanne Lake
(2) 48 - - - 48 -
================ ============ ============ =============== =============== ================== ==================
Total 207 133 - 45 207 178
================ ============ ============ =============== =============== ================== ==================
(1) Fees paid to the Directors during the year do not include
employers' national insurance costs
(2) Joanne Lake was appointed on 1 January 2021
No payments were made to past Directors for loss of office. 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.
The following table sets out the annual percentage change in
Directors' fees for the year ending 31 December 2021. The amounts
shown were effective from the 1 March 2021 and remain effective at
the year ending 31 December 2021.
Change Change
Variable Variable in fixed in variable
Director Fixed fees Fixed fees fees fees fees fees
================ =========== =========== ========= ========= ========== =============
2021 2020 2021 2020 2021 2020
================ =========== =========== ========= ========= ========== =============
GBP'000 GBP'000 GBP'000 GBP'000 % %
================ =========== =========== ========= ========= ========== =============
Robert Sharpe
(Chair) 60 48 - 15 25% (100%)
================ =========== =========== ========= ========= ========== =============
Jim Coyle 55 45 - 15 22% (100%)
================ =========== =========== ========= ========= ========== =============
Richard Rowney
(1) 50 40 - 15 25% (100%)
================ =========== =========== ========= ========= ========== =============
Joanne Lake 50 - - - - -
(2)
================ =========== =========== ========= ========= ========== =============
Total 215 133 - 45
================ =========== =========== ========= ========= ========== =============
The previous change to Directors fees was effective 1 March
2019. There was no change to Directors fees in 2020. The
requirements to disclose this information came into force for
companies with financial years starting on or after 10 June 2019
and, as such, this is the first year the Company has disclosed this
information. The Company does not have any employees and therefore
no comparisons are given in respect of Directors' and employees'
pay increases.
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.
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
on pages 7 to 8 and Investment Manager's Report on pages 9 to
10.
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 2021. The
table shows the remuneration paid to Directors for the year under
review, compared with the distribution payments to
shareholders.
31 December 31 December
2021 2020
GBP'000 GBP'000
========================== =========== ===========
Total remuneration
paid to Directors 203 178
Shareholder distributions
- dividends
or share buybacks 29,809 63,830
========================== =========== ===========
Directors' interests
The Company does not have any requirement for any Director to
own shares in the Company. As at 31 December 2021, Joanne Lake held
2,713 shares in the Company and no other Director held shares in
the Company (2020: None). There have been no changes to any
holdings between 31 December 2021 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
23 February 2022 and signed on behalf of the Board by:
Joanne Lake
Chairman of the Remuneration Committee
1 March 2022
Statement of Directors' responsibilities in respect of the
financial statements
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 (pages 7 and 8), the Investment Manager's Report (pages 9
to 10), Top Ten Holdings (page 15), Portfolio composition (page
16), the Business Review (page 17 to 24) and the Directors' Report
(pages 30 to 59). 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 Financial Statements and the financial statements in accordance
with applicable law and regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the group and the company financial statements in
accordance with UK-adopted international accounting standards.
Under company law, directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and company and of the
profit or loss of the group for that period. In preparing the
financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable UK-adopted international accounting
standards have been followed, subject to any material departures
disclosed and explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and company
will continue in business.
The directors are 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.
The directors are also responsible for keeping adequate
accounting records that are sufficient to show and explain the
group's 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 financial statements and
the Directors' Remuneration Report comply with the Companies Act
2006.
The directors are responsible for the maintenance and integrity
of the company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' confirmations
Each of the directors, whose names and functions are listed in
the Directors' Report confirm that, to the best of their
knowledge:
-- the group and company financial statements, which have been
prepared in accordance with UK-adopted international accounting
standards, give a true and fair view of the assets, liabilities and
financial position of the group and company, and of the profit of
the group; and
-- the management report, as represented by Chairman's
Statement, the Investment Manager's Report, Top Ten Holdings,
Portfolio composition, the Business Review and the Directors'
Report, includes a fair review of the development and performance
of the business and the position of the group and company, together
with a description of the principal risks and uncertainties that it
faces.
Robert Sharpe
Chairman
1 March 2022
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2021
For the year ended 31 For the year ended 31
December 2021 December 2020
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 4 56,484 - 56,484 54,970 - 54,970
(Loss) / Income
on credit and
equity assets
at fair value
through profit
and loss 11 1,874 (1,337) 537 - 400 400
Credit impairment
reversal / (losses) 10 844 - 844 (5,581) - (5,581)
Third party servicing (2,810) - (2,810) (3,918) - (3,918)
====================== ===== ======== ======== ======== ======== ======== ========
Net operating
income/(expense)
before financing
and fund costs 56,392 (1,337) 55,055 45,471 400 45,871
Finance costs 17 (12,859) - (12,859) (14,323) - (14,323)
====================== ===== ======== ======== ======== ======== ======== ========
Net operating
income/(Expense)
before fund costs 43,533 (1,337) 42,196 31,148 400 31,548
Management fee 5 (6,191) (158) (6,349) (5,823) (119) (5,942)
Performance fee 5 (3,369) - (3,369) (2,300) - (2,300)
Fund expenses 6 (2,160) - (2,160) (2,605) - (2,605)
Total operating
expenses (11,720) (158) (11,878) (10,728) (119) (10,847)
Profit/(Loss)
before taxation 31,813 (1,495) 30,318 20,420 281 20,701
Tax expense 7 - - - - - -
Profit/(Loss)
after taxation 31,813 (1,495) 30,318 20,420 281 20,701
====================== ===== ======== ======== ======== ======== ======== ========
Earnings per share
(basic and diluted) 8 90.2p (4.2)p 86.0p 55.7p 0.8p 56.5p
====================== ===== ======== ======== ======== ======== ======== ========
The total column of this statement represents the Statement of
comprehensive income prepared in accordance with UK-adopted
International Accounting Standards and with the requirements of the
Companies Act 2006 as applicable to companies reporting under those
standards. 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 on pages 76 to 120 form an integral part of the
financial statements.
Consolidated Statement of Financial Position
As at 31 December 2021
Notes 31 December 31 December
2021 2020 GBP'000
GBP'000
====================================== ===== =========== =============
Non-current assets
Assets held at fair value through
profit or loss 11 48,770 20,864
Credit assets at amortised cost 10 565,994 547,737
Derivative assets held at fair
value through profit or loss - 21
Fixed assets 14 - -
====================================== ===== =========== =============
614,764 568,622
Current assets
Cash and cash equivalents 12,948 62,548
Receivables 15 6,554 6,773
====================================== ===== =========== =============
19,502 69,321
Total assets 634,266 637,943
Current liabilities
Management fee payable 5 (1,037) (1,040)
Performance fee payable 5 (3,431) (2,300)
Other payables 16 (2,691) (3,832)
Derivative liability held at fair
value through profit or loss (108) -
Interest bearing borrowings 17 (49,339) (20,865)
====================================== ===== =========== =============
(56,606) (28,037)
Total assets less current liabilities 577,660 609,906
Non-current liabilities
Interest bearing borrowings 17 (218,318) (252,674)
Net assets 359,342 357,232
====================================== ===== =========== =============
Shareholders' funds
Ordinary share capital 19 352 352
Share premium 299,599 299,599
Revenue reserves 4,790 1,185
Capital reserves (2,244) (749)
Special distributable reserves 56,845 56,845
====================================== ===== =========== =============
Total shareholders' funds 359,342 357,232
====================================== ===== =========== =============
Net asset value per share 23 1,019.1 1,013.1p
====================================== ===== =========== =============
The notes on pages 76 to 120 form an integral part of the
financial statements.
The financial statements on pages 68 to 120 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 1 March 2022. They were
signed on its behalf by:
Robert Sharpe, Chairman
Company Statement of Financial Position
As at 31 December 2021
Notes 31 December 31 December
2021 2020
GBP'000 GBP'000
====================================== ===== =========== ===========
Non-current assets
Assets held at fair value through
profit or loss 11 48,770 20,864
Credit assets at amortised cost 10 565,994 547,737
Derivative assets held at fair
value through profit or loss - 21
Fixed assets 14 - -
====================================== ===== =========== ===========
614,764 568,622
Current assets
Cash and cash equivalents 10,500 59,673
Receivables 15 6,554 6,773
====================================== ===== =========== ===========
17,054 66,446
Total assets 631,818 635,068
Current liabilities
Management fee payable 5 (1,037) (1,040)
Performance fee payable 5 (3,431) (2,300)
Other payables 16 (2,392) (3,429)
Derivative liability held at fair
value through profit or loss (108) -
Deemed loan 18 (32,118) -
Interest bearing borrowings 17 (15,072) (73)
====================================== ===== =========== ===========
(54,158) (6,842)
Total assets less current liabilities 577,660 628,226
Non-current liabilities
Deemed loan 18 (50,208) (103,719)
Interest bearing borrowings 17 (168,110) (167,275)
====================================== ===== =========== ===========
Net assets 359,342 357,232
====================================== ===== =========== ===========
Shareholders' funds
Ordinary share capital 19 352 352
Share premium 299,599 299,599
Revenue reserves 4,790 1,185
Capital reserves (2,244) (749)
Special distributable reserves 56,845 56,845
====================================== ===== =========== ===========
Total shareholders' funds 359,342 357,232
====================================== ===== =========== ===========
Net asset value per share 23 1,019.1 1,013.1p
====================================== ===== =========== ===========
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 2021 was GBP30.3 million
(2020: GBP20.7 million). The financial statements on pages 68 to
120 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 1
March 2022. They were signed on its behalf by:
Robert Sharpe, Chairman
Consolidated Statement of Changes in Shareholders' Funds
For the year ended 31 December 2021
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 2021 352 299,599 1,185 (749) 56,845 357,232
================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
bought back
================== ======== ======== ========= ========= ============== ========
Profit / (Loss)
after taxation - - 31,813 (1,495) - 30,318
================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (28,208) - - (28,208)
================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at
31 December 2021 352 299,599 4,790 (2,244) 56,845 359,342
================== ======== ======== ========= ========= ============== ========
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 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
====================== ======== ======== ========= ========= ============== ========
For both year ended 2020 and 2021, the Group's capital reserve
arising on investments sold and revenue reserve could have been
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 on pages 76 to 120 form an integral part of the
financial statements.
Company Statement of Changes in Shareholders' Funds
For the year ended 31 December 2021
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 2021 352 299,599 1,185 (749) 56,845 357,232
================== ======== ======== ========= ========= ============== ========
Ordinary shares - - - - - -
bought back
================== ======== ======== ========= ========= ============== ========
Profit / (Loss)
after taxation - - 31,813 (1,495) - 30,318
================== ======== ======== ========= ========= ============== ========
Dividends paid
in the year - - (28,208) - - (28,208)
================== ======== ======== ========= ========= ============== ========
Shareholders'
funds at
31 December 2021 352 299,599 4,790 (2,244) 56,845 359,342
================== ======== ======== ========= ========= ============== ========
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 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 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.
The notes on pages 76 to 120 form an integral part of the
financial statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2021
31 December 2021 31 December 2020
Notes GBP'000 GBP'000
=================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 30,318 20,701
Adjustments for:
(Advances) / repayments of
Investments at amortised
cost (22,883) 18,982
Change in expected credit
loss 10 (844) 5,581
Net change in unrealised
(gains)/losses (854) (1,155)
Finance costs 12,859 14,323
Amortisation 14 - 41
(Increase) / decrease in
receivables 15 219 2,102
Decrease / (increase) in
derivatives 130 (21)
Increase in payables (13) 867
=================================== ===== ================ ================
Net cash inflow from operating
activities 18,932 61,421
Cash flows from investing
activities:
Purchase of fair value investments (21,583) (2,621)
=================================== ===== ================ ================
Net cash (outflow) / inflow
from investing activities (21,583) (2,621)
Cash flows from financing
activities:
Redemption of shares - (34,825)
Drawdown of interest bearing
borrowings 17 27,000 359,648
Repayments of interest-bearing
borrowings 17 (34,375) (289,013)
Interest paid on financing
activities 17 (11,366) (18,211)
Dividends declared and paid 9 (28,208) (29,005)
=================================== ===== ================ ================
Net cash (outflow) from financing
activities (46,949) (11,406)
Net change in cash and cash
equivalents (49,600) 47,394
Cash and cash equivalents
at the beginning of the year 62,548 15,154
================ ================
Cash and cash equivalents 12,948 62,548
=================================== ===== ================ ================
The notes on pages 76 to 120 form an integral part of the
financial statements.
Company Statement of Cash Flows
For the year ended 31 December 2021
31 December 2021 31 December 2020
Notes GBP'000 GBP'000
=================================== ===== ================ ================
Cash flows from operating
activities:
Profit after taxation 30,318 20,701
Adjustments for:
(Advances) / repayments of
Investments at amortised
cost (22,883) 18,982
Change in expected credit
loss 10 (844) 5,581
Net change in unrealised
(gains)/losses (854) 3,338
Finance costs 9,678 12,042
Amortisation 14 - 41
(Increase) / decrease in
receivables 15 219 1,552
Decrease / (increase) in
derivatives 130 (21)
Increase in payables 91 985
=================================== ===== ================ ================
Net cash inflow from operating
activities 15,855 63,201
Cash flows from investing
activities:
Purchase of fair value investments (21,583) -
Sale of fair value investments - (2,621)
(Purchase) / receipt from
deemed loans (21,393) 25,107
=================================== ===== ================ ================
Net cash inflow / (outflow)
from investing activities (42,976) 22,486
Cash flows from financing
activities:
Redemption of shares - (34,825)
Drawdown of interest bearing
borrowings 17 27,000 312,500
Repayments of interest-bearing
borrowings 17 (12,000) (272,752)
Interest paid on financing
activities 17 (8,844) (15,183)
Dividends declared and paid 9 (28,208) (29,005)
=================================== ===== ================ ================
Net cash (outflow) from financing
activities (22,052) (39,265)
Net change in cash and cash
equivalents (49,173) 46,422
Cash and cash equivalents
at the beginning of the year 59,673 13,251
================ ================
Cash and cash equivalents 10,500 59,673
=================================== ===== ================ ================
The notes on pages 76 to 120 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
UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies
reporting under those standards. 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 consistent
basis year on year, 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 signing of these accounts, being the 1 March 2022.
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 stressed scenario.
The Directors have also reviewed the potential effect of the
combination with Pollen Street on financial projections of the
combined group. These financial projections have been stress tested
under different scenarios, including delaying all additional fund
raises to demonstrate that the combined group will be able to
generate sufficient cash flows in order to meet its liabilities as
they fall due.
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 have been applied in these
financial statements:
Interest Rate Benchmark Reform Phase 2 - Amendments to IFRS 9,
IFRS 7, IFRS 4 and IFRS 16
In August 2020, the IASB made amendments to IFRS 9, IAS 39, IFRS
7, IFRS 4 and IFRS 16 to address the issues that arise during the
reform of an interest rate benchmark rate, including the
replacement of one benchmark with an alternative one. The Phase 2
amendments provide the following reliefs:
-- When changing the basis for determining contractual cash
flows for financial assets and liabilities (including lease
liabilities), the reliefs have the effect that the changes, that
are necessary as a direct consequence of IBOR reform and which are
considered economically equivalent, will not result in an immediate
gain or loss in the income statement.
The 'Phase 2' reforms are effective from 1 January 2021. The
amendments require that, for financial instruments measured using
amortised cost measurement (that is, financial instruments
classified as amortised cost and debt financial assets classified
as FVOCI), changes to the basis for determining the contractual
cash flows required by interest rate benchmark reform are reflected
by adjusting their effective interest rate. No immediate gain or
loss is recognised. These expedients are only applicable to changes
that are required by interest rate benchmark reform, which is the
case if, and only if, the change is necessary as a direct
consequence of interest rate benchmark reform and the new basis for
determining the contractual cash flows is economically equivalent
to the previous basis (that is, the basis immediately preceding the
change).
Where some or all of a change in the basis for determining the
contractual cash flows of a financial asset and liability does not
meet the above criteria, the above practical expedient is first
applied to the changes required by interest rate benchmark reform,
including updating the instrument's effective interest rate. Any
additional changes are accounted for in the normal way (that is,
assessed for modification or derecognition, with the resulting
modification gain / loss recognised immediately in profit or loss
where the instrument is not derecognised). Refer to note 12 for
further details on the group's exposure to IBOR as at the year
end.
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 percent of the issued shares. As
a result, the financial statements for the year ended 31 December
2020 and 31 December 2021 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 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 involvement in the
initial creation of Bud and in the absence of another entity now
having control over Bud. Bud was incorporated on 2 November 2020
and the junior note was funded on 2 December 2020.
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
(equity investments reported in Note 11);
-- Increases and decreases in the valuation of capital
investments held at the 31 December 2020 and 31 December 2021;
-- 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 percent to revenue and 2 percent 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
and are presented as a separate line on the statement of
comprehensive income.
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
Dividends to shareholders are recognised in the year in which
they are paid.
Investments in associates
Associates are entities over which the Company has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 percent and 50 percent 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.
Classification and measurement - Financial assets
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 2020 or 31 December 2021.
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.
Classification and measurement - Financial liabilities
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
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.
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
2021 as well as 31 December 2020, 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 percent 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 percent weighting and the downside and upside a 30 percent
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 Recovery Loan
Scheme 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 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.
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 percent 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 accordance with both
International Accounting Standards in conformity with UK-adopted
International Accounting Standards and with the requirements of the
Companies Act 2006 as applicable to companies reporting under those
standards 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 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 on pages 77 to 83 as well as in the accounting policies
section of the Notes.
Estimates
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 on page 84, 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 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, the overall narrative of the
scenarios is aligned to the macroeconomic risks faced by the Group
at the 31 December 2021.
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. It may be
insufficient to use three scenarios in certain economic
environments. Additional analysis may be requested at management's
discretion, including the production of extra scenarios. We
anticipate there will only be 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 thought of as an
alternative, more optimistic, base case in which households run
down savings accumulated during the pandemic at a faster pace than
assumed in the baseline, permanent scars to the supply side are
avoided, and the economy reverts to its pre-crisis trajectory
within a couple of years. This mild-upside case scenario sees UK
unemployment drop by 0.8 per cent in 2022. Consequently, for the
mild upside scenario the Bank of England base rate is forecast to
rise to around 0.9 per cent by the end of 2022. The one-year
forecast changes in these key economic drivers are shown in the
table below.
The base case forecasts unemployment reducing to 3.8% by the end
of 2025; returning to match unemployment seen in March 2020. The
downside scenario however forecasts a much slower recovery, with
unemployment at 6.1% by December 2025 and HPI still 19.3% lower
than at the end of 2021.
See Note 10 for the sensitivity analysis.
2021 Base Upside Down-side
============================ ======= ======= =========
UK unemployment rate yearly
change (0.17%) (0.84%) 1.64%
UK HPI yearly change (0.45) 4.25% (9.43%)
UK Base Rate 0.37% 0.75% (0.13%)
============================ ======= ======= =========
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%)
============================ ======= ======= =========
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 and the net asset value of the
investment. 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.
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 11.
Judgement
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 control was obtained. 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 and so
the Group consolidates Bud.
3. 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 percent 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 2021 and 31 December 2020 are prepared on a consolidated
basis.
4. InTEREST INCOME ON CREDIT ASSETS AT AMORTISED COST
Group 31 December 2021 31 December 2020
GBP'000 GBP'000
======================== ================ ================
Investment income
Interest income 51,900 50,948
Commitment fee income 2,403 2,154
Arrangement fee income 2,232 1,844
Net (loss) / gain on
foreign exchange* (53) 21
Total investment income 56,482 54,967
Other income
Deposit interest 2 3
================ ================
Total income 56,484 54,970
======================== ================ ================
*Net (loss)/Gain on foreign exchange also includes fair value
movements on derivatives taken out to economically hedge fair value
exposures
5. 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 percent 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 percent 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 percent 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 2021
totalled GBP6.4 million (2020: GBP5.9 million) of which GBP1.0
million was payable at the year-end (2020: GBP1.0 million).
Performance Fee
The Investment Manager is also entitled to a performance fee,
which is calculated in respect of each twelve-month period starting
on 1 January and ending on 31 December in each calendar year
("Calculation Period"), and the nal Calculation Period shall end on
the day on which the management agreement is terminated or, if
earlier, the business day immediately preceding the day on which
the Company goes into liquidation.
The performance fee will only be payable if the Adjusted Net
Asset Value at the end of a Calculation Period exceeds a hurdle
threshold, equal to the Adjusted Net Asset Value immediately
following admission to trading on the London Stock Exchange,
compounded at a rate equal to 5 percent 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 percent 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.
Performance fees for the year ended 31 December 2021 totalled
GBP3.4 million (2020: GBP2.3 million) of which GBP3.4 million was
payable at the year-end (2020: GBP2.3 million).
6. Fund Expenses
Group 31 December 2021 31 December 2020
GBP'000 GBP'000
========================= ================ ================
Directors' fees 203 200
Administrator's fees 179 148
Auditors' remuneration 319 287
Amortisation - 41
Potential merger costs - 585
LSE market listing costs 18 280
Other expenses 1,441 1,064
Total fund expenses 2,160 2,605
========================= ================ ================
All expenses where applicable are inclusive of VAT (except those
paid to the auditors which are net). Directors' fees above include
GBP203,000 (2020: GBP178,000) paid to Directors' and GBP23,256
(2020: GBP21,538) of employment taxes. Further details on
Directors' fees can be found in the Directors' remuneration report
on pages 53 to 56.
The auditors' remuneration net of VAT for the audit of the Group
was GBP319,000 for the year ended 31 December 2021 (2020:
GBP287,000). Remuneration includes the audit of subsidiaries during
the year was GBP29,000 (2020: GBP37,500). Non-audit fees amounted
to GBP0 in 2021 (2020: GBPnil).
7. Tax expense
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 2021.
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 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 - - -
==================================== ======== ======== ========
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 percent (2020: 19.00 percent). A
reconciliation of the 2021 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 29,809 509 30,318
================================== ======== ======== ========
Profit before taxation multiplied
by the standard rate of UK
corporation tax of 19.00% 5,664 97 5,761
Effects of:
Capital items exempt from
tax - (127) (127)
Excess management expenses
not utilised / (utilised) (304) 30 (274)
Interest distributions paid
in respect of
the year (5,360) - (5,360)
================================== ======== ======== ========
Total tax charge in income - - -
statement
================================== ======== ======== ========
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/(loss) before taxation 20,420 281 20,701
============================== ======== ======== ========
Profit/(loss) 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 855 (53) 802
Interest distributions paid
in respect of
the year (4,735) - (4,735)
============================== ======== ======== ========
Total tax charge in income - - -
statement
============================== ======== ======== ========
8. Earnings per Share
Group 31 December 31 December
2021 2020
====================== =========== ===========
Revenue 90.2p 55.7p
Capital (4.2)p 0.8p
====================== =========== ===========
Earnings per ordinary
share 86.0p 56.5p
====================== =========== ===========
The calculation for the year ended 31 December 2021 is based on
revenue returns of GBP31.8 million, capital returns of GBP(1.5)
million and total returns of GBP30.3 million and a weighted average
number of ordinary shares of 35,259,741.
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.
9. Ordinary Dividends
31 December 2021 31 December 2020
GBP'000 GBP'000
================================== ================ ================
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
================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2020
(paid 26 March 2021) 7,052 -
================================== ================ ================
20.00p Interim dividend for the
period to 31 March 2021
(paid on 25 June 2021) 7,052 -
================================== ================ ================
20.00p Interim dividend for the
period to 30 June 2021
(paid on 30 September 2021) 7,052 -
================================== ================ ================
20.00p Interim dividend for the
period to 30 September 2021
(paid 24 December 2021) 7,052 -
================================== ================ ================
Total dividend paid in period 28,208 29,005
================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2020
(paid 26 March 2021) - 7,051
================================== ================ ================
20.00p Interim dividend for the
period to 31 December 2021
(to be paid 25 March 2022) 7,052 -
================================== ================ ================
Total dividend paid/to be paid in
relation to period 28,208 28,606
================================== ================ ================
The 31 December 2021 interim dividend of 20.00 pence was
approved on 23 February 2022 and will be paid on the 25 March 2022
before the approval of the financial statements.
10. 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 2021:
31 December 2021 31 December 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 95,665 (3,190) 92,475 211,636 (20,000) 191,636
Property 383,473 (7,596) 375,877 343,219 (10,269) 332,950
SME 97,642 - 97,642 23,359 (208) 23,151
Total Assets 576,780 (10,786) 565,994 578,214 (30,477) 547,737
============= ============== ========= ============ ============== ========= ============
The following table analyses loans by staging for both the Group
and Company as at 31 December 2021:
31 December 2021 31 December 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
Stage 1 544,233 (952) 543,281 509,550 (1,464) 508,086
Stage 2 6,363 (946) 5,417 11,691 (1,927) 9,764
Stage 3 26,184 (8,888) 17,296 56,973 (27,086) 29,887
Total Assets 576,780 (10,786) 565,994 578,214 (30,477) 547,737
============= ============== ========= ============ ============== ========= ============
Group and Company Stage Total
1 Stage 2 Stage 3 GBP'000
GBP'000 GBP'000 GBP'000
================================= ========= ========= ========= =========
At 1 January 2021 1,464 1,927 27,086 30,477
Movement from stage 1 to
stage 2 (8) 450 - 442
Movement from stage 1 to
stage 3 (2) - 766 764
Movement from stage 2 to
stage 1 - (218) - (218)
Movement from stage 2 to
stage 3 - (321) 432 111
Movement from stage 3 to
stage 1 2 - (388) (386)
Movement from stage 3 to
stage 2 - 58 (237) (179)
Decreases due to repayments (53) (139) (1,651) (1,843)
Increases due to origination 67 - - 67
Remeasurements due to modelling 460 33 (94) 399
Loans sold (978) (843) (16,714) (18,535)
Loans written off - (1) (312) (313)
Allowance for ECL at 31
December 2021 952 946 8,888 10,786
================================= ========= ========= ========= =========
Group and Company Stage Total
1 Stage 2 Stage 3 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
================================= ========= ========= ========= =========
(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 2021:
Group Consumer Property SME Total
GBP'000 GBP'000 GBP'000 GBP'000
========================= ========= ========= ========= =========
At 1 January 2021 20,000 10,269 208 30,477
Charge for the period
- Stage 1 5 (41) 326 290
Charge for the period
- Stage 2 3 (486) - (483)
Charge for the period
- Stage 3 1,545 (2,196) - (651)
Charge for the period
- total 1,553 (2,723) 326 (844)
Loans sold (18,363) 50 (534) (18,847)
Allowance for ECL at 31
December 2021 3,190 7,596 - 10,786
========================= ========= ========= ========= =========
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
========================= ========= ========= ========= =========
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
percent. 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 percent
weight to the downside scenario. The scenarios are applicable to 31
December 2021. The analysis shows that the ECL would have been
GBP2.9 million higher under this sensitivity.
2021 Weighted Year end ECL 100% Downside Scenario
GBP'000 GBP'000
========= ===================== ======================
Consumer 3,190 5,096
Property 7,596 8,616
SME - -
Total 10,786 13,712
========= ===================== ======================
At 31 December 2020 if the weightings used represented a 100
percent downside scenario the ECL would have been GBP4.0 million
higher as split below:
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
========= ===================== ======================
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 GBP1.5 million higher under this
sensitivity.
The amortised cost of the structurally secured portfolio is
GBP297 million, and the largest exposure is on page 12. We have
stress tested each structured position as at 31 December 2021 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.
11. Assets at Fair Value Through Profit or Loss
Total assets at Fair Value Through Profit or Loss
Group and Company 2021
======================================
GBP'000
====================================== ========
Opening fair value 20,864
Purchases at cost 31,347
Reclassification from loans at
amortised cost 5,476
Disposal at cost (9,726)
Net change in unrealised gains 809
Realised (losses)/gains -
Closing fair value as at 31 December
2021 48,770
====================================== ========
Comprising:
Equity assets at fair value 15,659
Credit assets at fair value 33,111
Closing fair value as at 31 December
2021 48,770
====================================== ========
Group and Company 2020
===========================================
GBP'000
=========================================== ==========
Opening fair value 8,390
Purchases at cost 16,220
Reclassification from loans at
amortised cost 2,509
Disposal at cost (6,655)
Net change in unrealised gains 1,155
Realised (losses)/gains (755)
Closing fair value as at 31 December 2020 20,864
=========================================== ========
Comprising:
Equity assets at fair value 14,959
Credit assets at fair value 5,905
Closing fair value as at 31 December 2020 20,864
=========================================== ========
Equity assets 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 2021.
Group and Company 2021
GBP'000
=========================================== =========
Valued using transaction price 13,600
Valued using an earnings multiple 1,359
Opening fair value 14,959
Purchases at cost 2,037
Disposal at cost -
Net change in unrealised gains (1,337)
Realised (losses)/gains -
Closing fair value as at 31 December 2021 15,659
=========================================== =========
Comprising:
Valued using an earnings multiple 1,359
Valued using a TNAV [5] multiple 14,300
Closing fair value as at 31 December 2021 15,659
=========================================== =========
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 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 (755)
Closing fair value as at 31 December 2020 14,959
=========================================== =========
Comprising:
Valued using sales value 1,380
Valued using an earnings 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 (4,113)
Realised losses (755)
Closing fair value as 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
=========================================== =========
(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 2021 31 Dec 2020
GBP'000 GBP'000
========= ========================= =========================
Level 1 - -
Level 2 - -
Level 3 15,659 14,959
========= ========================= =========================
Total 15,659 14,959
========= ========================= =========================
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's Level 3 positions as at 31 December 2021 is given
below:
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2021 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
1,359 Multiple 238
1,359 238
============= =========== ==========
Earnings multiples used is 5.3x.
Closing fair Valuation TNAV multiple
value as at Technique changed
31 Dec 2021 by 0.25x
GBP'000 GBP'000
============= ============== ==============
14,300 TNAV Multiple 1,543
14,300 1,543
============= ============== ==============
Tangible Net Asset Value ("TNAV") multiple used is 2.1x.
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 value as at Valuation Technique Earnings multiple changed
31 Dec 2020 by 1
GBP'000 GBP'000
========================= ==================== ==========================
1,380 Earnings Multiple 265
1,380 265
========================= ==================== ==========================
Earnings multiples used is 4.3x.
Closing fair value as at Valuation Technique TNAV multiple 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.
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 2021.
Group and Company 2021
GBP'000
=============================================== =========
Opening fair value 5,905
Purchases at cost 29,310
Reclassification from loans at amortised cost 5,476
Disposals (9,726)
Net change in unrealised gains 2,146
Closing fair value as at 31 December 2021 33,111
=============================================== =========
Comprising:
Valued using an earnings multiple 7,775
Valued using a TNAV multiple 25,336
Closing fair value as at 31 December 2021 33,111
=============================================== =========
Group and Company 2020
GBP'000
========================================== =========
Opening fair value -
Purchases at cost 2,621
Reclassification from loans at amortised
cost 2,509
Disposals -
Net change in unrealised gains 775
Closing fair value as 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
========================================== =========
(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
and Company's investments:
Group and Closing fair value as at Closing fair value as at
Company 31 Dec 2021 31 Dec 2020
GBP'000 GBP'000
=========== ========================= =========================
Level 1 - -
Level 2 - -
Level 3 33,111 5,905
=========== ========================= =========================
Total 33,111 5,905
=========== ========================= =========================
Quantitative information regarding the unobservable inputs for
the Group and Company's Level 3 positions as at 31 December 2021 is
given below:
Closing fair Valuation Earnings
value as at Technique multiple
31 Dec 2021 changed
GBP'000 by 1
GBP'000
============= =========== ==========
Earnings
Multiple
7,775 1.08 1,740
============= =========== ==========
Earnings multiple used is 1.33x.
Closing fair Valuation TNAV multiple
value as at Technique changed
31 Dec 2021 by 0.1x
GBP'000 GBP'000
============= ============== ==============
TNAV Multiple
25,336 0.9 2,393
============= ============== ==============
TNAV multiple used is 1.0x.
Assets and liabilities not carried at fair value but for which
fair value is disclosed
For the Group as at 31 December 2021:
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 565,994 - - 579,482 579,482
Receivables 6,554 - 6,554 - 6,554
Cash and cash
equivalents 12,948 12,948 - - 12,948
================== ============ ======== ========= ======== =========
Total assets 585,496 12,948 6,554 579,482 598,984
================== ============ ======== ========= ======== =========
Liabilities
Management fee
payable (1,037) - (1,037) - (1,037)
Performance fee
payable (3,431) - (3,431) - (3,431)
Other payables (2,691) - (2,691) - (2,691)
Interest bearing
borrowings (267,657) - (267,657) - (267,657)
================== ============ ======== ========= ======== =========
Total liabilities (274,816) - (274,816) - (274,816)
================== ============ ======== ========= ======== =========
For the Company as at 31 December 2021:
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 565,994 - - 579,482 579,482
Receivables 6,554 - 6,554 - 6,554
Cash and cash
equivalents 10,500 10,500 - - 10,500
================== ============ ======== ========= ======== =========
Total assets 583,048 10,500 6,554 579,482 596,536
================== ============ ======== ========= ======== =========
Liabilities
Management fee
payable (1,037) - (1,037) - (1,037)
Performance fee
payable (3,431) - (3,431) - (3,431)
Other payables (2,392) - (2,392) - (2,392)
Deemed Loan (82,326) - (82,326) - (82,326)
Interest bearing
borrowings (183,182) - (183,182) - (183,182)
================== ============ ======== ========= ======== =========
Total liabilities (272,368) - (272,368) - (272,368)
================== ============ ======== ========= ======== =========
For the Group as at 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)
========================== ============ ======== ========= ======== =========
Categorisation within the hierarchy has been determined based on
the lowest level input that is significant to the fair value
measurement of the relevant asset or liability (see note 11).
Further details of the loans at amortised cost held by the Group
can be found in note 10 to the financial statements.
12. Financial Risk Management
The Group's investing activities undertaken in pursuit of its
investment objective, as set out on page 4, 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 13.
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 derivative instruments in the current or prior 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 2021 the Group had
GBP270.0 million drawn down under these facilities (2020: GBP273.5
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 2021 is shown below:
Fixed or Administered
Floating Rate Rate Total
Group Financial instrument GBP'000 GBP'000 GBP'000
=========================== ============= ===================== =========
Credit Assets at
amortised cost 269,053 296,941 565,994
Cash and cash equivalents 12,948 - 12,948
Interest bearing
borrowings (267,657) - (267,657)
=========================== ============= ===================== =========
Total exposure 14,344 296,941 311,285
=========================== ============= ===================== =========
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 2021 is shown below:
Fixed or Administered
Company Financial Floating Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
========================== ============= ===================== =========
Credit Assets at
amortised cost 269,053 296,941 565,994
Cash and cash equivalents 10,500 - 10,500
Interest bearing
borrowings (183,182) - (183,182)
Deemed loan (82,326) - (82,326)
========================== ============= ===================== =========
Total exposure 14,045 296,941 310,986
========================== ============= ===================== =========
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 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)
Deemed loan (103,719) - (103,719)
========================== ============= ===================== =========
Total exposure (6,802) 343,145 336,343
========================== ============= ===================== =========
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 percent change in interest rates impacts income on the
assets with a floating rate by GBP2.8 million (2020: GBP2.7
million). A 1 percent change in interest rates impacts debt expense
on the liabilities with a floating rate by GBP2.7 million (2020:
GBP2.7 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 did not designate any derivatives as hedges
for accounting purposes as described under IFRS 9 during the year
(2020: none) and records its derivative activities on a fair value
basis. The forward contracts held at 31 December 2021 were carried
out with Lumon Pay Limited and represent USD12,000k (2020: USD0)
and EUR1,950k (2020: 2,780k).
The largest exposure to FX is to the USD. The below table
presents the net exposure to USD and Euros as at 31 December 2021.
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 Forward
(GBP'000) (GBP'000) (GBP'000) Contract (GBP'000)
============ ================= ================ ==========================
9,149 - (8,758) 391
9,149 - (8,758) 391
============ ================= ================ ==========================
If the GBP exchange rate simultaneously increased/decreased by
10 percent against the above currencies, the impact on profit would
be an increase/decrease of GBP915k (2020: 3k). 10 percent is
considered to be a reasonably possible movement in foreign exchange
rates.
The table below presents the net exposure to Euro's 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.
Total Assets Total Liabilities Forward Contract Net Exposure after
(GBP'000) (GBP'000) (GBP'000) Forward Contract (GBP'000)
============ ================= ================ ===========================
1,762 - (1,750) 12
1,762 - (1,750) 12
============ ================= ================ ===========================
(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 11.
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 aims to meet these
objectives by 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 74.5 percent at 31 December 2021 (31
December 2020: 76.6 percent).
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 2021 the Company had a committed debt facility
totalling GBP200.0 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.
Categorisation within the hierarchy has been determined based on
the lowest level input that is significant to the fair value
measurement of the relevant asset or liability (see Note 11 for
details). Further details of the loans at amortised cost held by
the Group can be found in Note 10 to the financial statements.
The table below shows the amortised cost assets and liability
balances by maturity dates:
Group Total Less than 3 - 12months 1- 5years More than
3months 5
years
==========================
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================== ========== ========== ============= ========== ==========
Assets
Investments at amortised
cost 565,994 35,479 47,590 314,073 168,852
Liabilities
Interest bearing
borrowings (267,657) 96 (49,435) (182,602) (35,717)
========================== ========== ========== ============= ========== ==========
The table below shows the amortised cost assets and liability
principal by contractual maturity dates:
Group Total Less than 3 - 12months 1- 5years More than
3months 5
years
==================
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================== ========== ========== ============= ========== ==========
Liabilities
Interest bearing
borrowings (269,980) - (49,435) (185,545) (35,000)
Effect of IBOR reform
Following the financial crisis, the reform and replacement of
benchmark interest rates such as GBP LIBOR and other inter-bank
offered rates ('IBORs') become a priority for global regulators.
The Group's risk exposure that is directly affected by the interest
rate benchmark reform predominantly comprises its portfolio of GBP
credit assets that are measured at amortised cost, which as at the
31 Dec 2021 had an outstanding principal of GBP573.7m and
liabilities of GBP270m.
For the GBP LIBOR reforms, the UK Financial Conduct Authority
('FCA') has decided to no longer compel panel banks to participate
in the GBP LIBOR submission process after the end of 2021. The
Group will now be using the SONIA reference rates to measure the
variable elements of its credit assets and obligations. The key
differences between GBP LIBOR and SONIA. GBP LIBOR is a 'term
rate', which means that it is published for a borrowing period
(such as three months or six months) and is 'forward looking',
because it is published at the beginning of the borrowing period.
SONIA is currently a 'backward-looking' rate, based on overnight
rates from actual transactions, and it is published at the end of
the overnight borrowing period. Furthermore, LIBOR includes a
credit spread over the risk-free rate, which SONIA currently does
not. To transition existing contracts and agreements that reference
GBP LIBOR to SONIA, adjustments for term differences and credit
differences might need to be applied to SONIA, to enable the two
benchmark rates to be economically equivalent on transition.
As at 31 December 2021, changes required to systems, processes
and models have been identified. The Group has identified that the
areas of most significant risk arising from the replacement of GBP
LIBOR are: updating systems and processes which capture GBP LIBOR
referenced contracts, amendments to those contracts, or existing
fallback/transition clauses not operating as anticipated.
The Group currently has a number of contracts which reference
GBP or USD LIBOR and extend beyond 2021. The principal balance of
these contracts are disclosed within the tables below by GBP and
USD.
Non-derivative Carrying Value/Nominal Amount
assets and liabilities at 31 December 2021
exposed to GBP
LIBOR
Assets Liabilities
GBP'000 GBP'000
======================== ============ =================
Credit assets
at amortised cost 51,268 30,129
Total exposure 51,268 30,129
======================== ============ =================
Non-derivative Carrying Value/Nominal Amount
assets and liabilities at 31 December 2021
exposed to USD
LIBOR
Assets Liabilities
GBP'000 GBP'000
========================= ============ ==================
Credit assets
at amortised cost 285 -
Total exposure 285 -
========================= ============ ==================
The GBP positions that are yet to transition to SONIA will
transition within Q1 of 2022.
13. 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. The 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 gross 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 2021, each loan is assigned
to a credit risk band at inception:
Credit Risk Band Unsecured Secured Total
GBP'000 GBP'000 GBP'000
================= ========= ======== ========
A & B 1,411 575,369 576,780
C - - -
D & E - - -
================= ========= ======== ========
Total 1,411 575,369 576,780
================= ========= ======== ========
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:
Credit Risk Band Unsecured Secured Total
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
================= ========= ======== ========
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.
14. Fixed Assets
The tables below set out the movement in Fixed Assets for the
Group and Company.
Year ended 31 December 2021 IT Development and
Software Total
GBP'000 GBP'000
=========================== ================== ========
Opening net book amount - -
Additions - -
Amortisation charge - -
Closing net book amount - -
As at 31 December 2021
Cost - -
Accumulated amortisation - -
=========================== ================== ========
Net book amount - -
=========================== ================== ========
Year ended 31 December 2020 IT Development 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 - -
============================ ================== ========
15. Receivables
The table below set out a breakdown of the Group
receivables.
Group and Company 31 December 2021 31 December 2020
GBP'000 GBP'000
=========================== ================ ================
Prepayments and other
debtors 5,583 4,820
Amounts due from platforms 924 1,820
Other receivables 47 133
=========================== ================ ================
Total receivables 6,554 6,773
=========================== ================ ================
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.
16. Other Payables
The table below set out a breakdown of the Group payables.
Group 31 December 2021 31 December 2020
GBP'000 GBP'000
============================ ================ ================
Accruals and other payables 2,691 3,832
Total other payables 2,691 3,832
============================ ================ ================
The table below set out a breakdown of the Company payables.
Company 31 December 2021 31 December 2020
GBP'000 GBP'000
============================ ================ ================
Accruals and other payables 2,392 3,429
Total other payables 2,392 3,429
============================ ================ ================
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 2021 (31 December 2020: 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.
17. Interest Bearing Borrowings
The table below sets out a breakdown of the Group's
interest-bearing borrowings.
Group 31 December 2021 31 December 2020
GBP'000 GBP'000
============================== ================ ================
Current Liabilities
Credit facility 49,435 20,916
Interest and commitment
fees payable 195 183
Prepaid interest and
commitment fees (291) (234)
Total current liabilities 49,339 20,865
Non-Current Liabilities
Credit facility 220,545 256,438
Interest and commitment - -
fees payable
Prepaid interest and
commitment fees (2,227) (3,764)
Total non-current liabilities 218,318 252,674
============================== ================ ================
Total interest-bearing
borrowings 267,657 273,539
============================== ================ ================
The table below sets out a breakdown of the Company's
interest-bearing borrowings.
Company 31 December 2021 31 December 2020
GBP'000 GBP'000
============================== ================ ================
Current Liabilities
Credit facility 15,000 -
Interest and commitment
fees payable 72 73
Prepaid interest and - -
commitment fees
Total current liabilities 15,072 73
Non-Current Liabilities
Credit facility 170,000 170,000
Interest and commitment - -
fees payable
Prepaid interest and
commitment fees (1,890) (2,725)
Total non-current liabilities 168,110 167,275
============================== ================ ================
Total interest-bearing
borrowings 183,182 167,348
============================== ================ ================
At 31 December 2021 the Company's main debt facility was a
GBP250 million provided by Goldman Sachs, being a GBP170 million
term loan and GBP80 million revolving credit facility. At 31
December 2021 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. From 2022 onwards the
facility will be charged using SONIA; the Company does not expect
to be negatively impacted by the change to SONIA. 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
was charged at LIBOR plus a margin. From 2022 onwards, the facility
is now be charged at SONIA 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. The carrying value
of the portfolio of loans, which this facility is secured against,
at 31 December 2021 was GBP76.5 million (2020: GBP93.6
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 2021 was
GBP39.5 million. The debt facility charges LIBOR plus a margin and
is an amortising term loan with the full GBP35 million drawn on day
one. From 2022 onwards, the facility will be charged using
synthetic LIBOR plus a margin. The facility has a 49 year term but
final repayment is expected in 2024.
During 2021 the below related debt costs had been incurred by
the Group.
Group 2021 2020
GBP'000 GBP'000
======================== ======== ========
Interest and commitment
fees payable 11,022 8,729
Other finance charges 1,837 5,594
======================== ======== ========
Total finance costs 12,859 14,323
======================== ======== ========
During 2021 the below related debt costs had been incurred by
the Company.
Company 2021 2020
GBP'000 GBP'000
======================== ======== ========
Interest and commitment
fees payable 8,577 6,832
Other finance charges 1,103 5,210
======================== ======== ========
Total finance costs 9,680 12,042
======================== ======== ========
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.
During 2021 the below changes occurred for the Group:
Group Total
GBP'000
================================ =========
At 1 January 2021 273,539
Drawdown of interest
bearing borrowings 27,000
Repayments of interest-bearing
borrowing (34,375)
Finance costs 12,859
Interest paid on financing
activities (11,366)
At 31 December 2021 267,657
================================ =========
During 2021 the below changes occurred for the Company:
Company Total
GBP'000
================================ =========
At 1 January 2021 167,348
Drawdown of interest
bearing borrowings 27,000
Repayments of interest-bearing
borrowing (12,000)
Finance costs 9,678
Interest paid on financing
activities (8,844)
At 31 December 2021 183,182
================================ =========
During 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
========================================== ==========
During 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
========================================== ==========
The table below 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.
More than 5 Total
2021 < 1 year 1 - 5 years years GBP'000
Group Financial instrument GBP'000 GBP'000 GBP'000
============================ ======== =========== =========== ========
Credit facility 49,435 185,545 35,000 269,980
Interest and commitment
fees payable (96) (2,944) 717 (2,323)
Total exposure 49,339 182,601 35,717 267,657
============================ ======== =========== =========== ========
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.
2021 More than 5 Total
Company Financial < 1 year 1 - 5 years years GBP'000
instrument GBP'000 GBP'000 GBP'000
======================== ======== =========== =========== ========
Credit facility 15,000 170,000 - 185,000
Interest and commitment
fees payable 72 (1,890) - (1,818)
Total exposure 15,072 168,110 - 183,182
======================== ======== =========== =========== ========
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 7,310 186,448 193,758
============================== ======== =========== ========
18. Deemed Loan
The Company has two deemed loans as at 31 December 2021 (two as
at 31 December 2020). 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 2021 the Company had the below deemed loans:
Opening as at 1 January (Redemptions)/Novations Closing as at 31 December
2021 GBP'000 2021
GBP'000 GBP'000
======================= ======================= =========================
103,719 (21,393) 82,326
103,719 (21,393) 82,326
======================= ======================= =========================
As at the 31 December 2020 the Company had the below deemed
loan:
Opening as at 1 January (Redemptions)/Novations 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
======================= ======================= =========================
19. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the date of the Financial Statements.
31 December 2021 31 December 2020
================================= ================ ================
No. Issued, allotted and fully
paid ordinary shares of GBP0.01
each 35,259,741 35,259,741
Cost GBP'000 352 352
================================= ================ ================
The table below shows the movement in shares during the period
to 31 December 2021:
Shares in issue Shares in issue
at the at
beginning of the Buyback of the end of the
period Ordinary Shares period
================ ================= ================ ===============
Ordinary Shares 35,259,741 - 35,259,741
Treasury Shares 4,190,178 - 4,190,178
================ ================= ================ ===============
20. 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.
21. 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 percent of the issued shares. As a result, the
financial statements for the years ended 31 December 2020 and 31
December 2021 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 assets of the subsidiaries are credit assets that are
included as part of the impairment policies of the group and no
impairment triggers have been identified for the subsidiaries.
22. Investments in associates
As at 31 December 2021, the Company has no associates. In the
prior year, the Company disposed of its investment in Allium in
August 2020 with no gain or loss recognised on disposal.
23. Net Asset Value per Ordinary Share
31 December 2021 31 December 2020
============================= ================ ================
Net asset value per ordinary
share pence 1,019.1p 1,013.1p
Net assets attributable
GBP'000 359,342 357,232
============================= ================ ================
The net asset value per ordinary share as at 31 December 2021 is
based on net assets at the year-end of GBP359.3 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 2020 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.
24. Contingent Liabilities and Capital Commitments
As at 31 December 2021 there were no contingent liabilities or
capital commitments for the Group (2020: None). The Group had
GBP90.0 million (2020: GBP95.3 million) of undrawn committed
structured credit facilities as at 31 December 2021 and GBP113.7
million (2020: GBP48.2 million) of undrawn commitments in relation
to secured real estate loans.
25. 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:
Directors - The remuneration of the Directors is set out in the
Directors' Remuneration Report on pages 53 to 56. 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 2021, there was GBPnil (2020: 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 previously provided a facility.
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 5 to the financial statements.
During the year the Group paid GBP9.72 million (2020: GBP8.24
million) of fees and at 31 December 2021, there was GBP4.47 million
(2020: GBP3.34 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 1st Stop Group) is an
English based consumer lender and was owned by funds managed by an
affiliate of the Investment Manager. During the year the Group
provided a structured facility to Oplo that is secured on a
granular pool of consumer loans. As at 31 December 2021 the
structured facility was GBP29.7 million drawn (31 December 2020:
GBP35.0 million). The Group also had a forward flow facility in
place with Oplo in which the Group provided GBP26.7 million in 2021
(31 December 2020: GBP22.3 million) with the total pool of loans
having an outstanding balance of GBP47.6 million as at 31 December
2021 (31 December 2020: GBP30.0 million). The company also invested
GBP2m in Tandem Bank Limited.
Shawbrook Group PLC ("Shawbrook") is a specialist SME and
consumer lending and savings bank. Shawbrook is 50 percent owned by
funds that are managed by the Investment Manager. During the Year
the Company sold its Shawbrook bond holdings. The bonds were
acquired in the secondary market in 2020 from an unrelated third
party at an arm's length price. The exposure at 31 December 2021
was GBP0m (31 December 2020: GBP11.4m). During the year, the
Company carried out FX transactions with Lumon Risk Management LTD
("Lumon", formerly Infinity International Limited) in relation to
Euro and USD derivative transactions. Lumon is owned by a fund that
is managed by an affiliate of the Investment Manager. The exposure
as at 31 December 2021 is disclosed in Note 12.
During the year, the Company sold holdings in related parties
Freedom, Deko and Bumblebee portfolios which consisted of GBP9
million of assets. The Company also sold a portfolio of Avant loans
for GBP18 million.
26. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
27. Subsequent Events
On 23 February 2022, a dividend of 20.0 pence per ordinary share
was approved for the final quarter of 2021.
Shareholders Information
Directors, Portfolio Manager and Advisers
Directors Administrator
Robert Sharpe Apex Fund Services (UK) Ltd
Jim Coyle 6th 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 The Scalpel, 18(th) Floor, 52 Lime Street
London EC2V 7NQ London EC3M 7AF
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
Credit Assets Credit Assets are loans made to consumers and
small businesses as well as other counterparties,
together with related investments.
======================= ======================================================
Equity Assets Equity Assets are selected equity investments
that are aligned with the Company's strategy and
that present opportunities to enhance the Company's
returns from its investments.
======================= ======================================================
Net asset value Net asset value represents the total value of
("NAV") the Group's assets less the total value of its
liabilities. For valuation purposes, it is common
to express the NAV on a per share basis.
======================= ======================================================
Ongoing Charges Ongoing charges is calculated as a percentage
of annualised ongoing charge over average reported
NAV. Ongoing charges are those expenses of a type
which are likely to recur in the foreseeable future.
======================= ======================================================
Premium If the share price of the Company is higher than
the NAV per share, the Company's shares are said
to be trading at a premium. The premium is shown
as a percentage of the NAV.
======================= ======================================================
Discount If the share price of the Company is lower than
the NAV per share, the Company's shares are said
to be trading at a discount. The discount is shown
as a percentage of the NAV.
======================= ======================================================
Fair Value The amount for which an asset could be exchanged,
or a liability settled, between willing parties
in an arm's length transaction.
======================= ======================================================
Registrar An entity that manages the Company's shareholder
register. The Company's registrar is Computershare
Investor Services PLC.
======================= ======================================================
Alternative Investment An AIF, as defined in the AIFM Directive 2011/61/EU
Fund ("AIF") on Alternative Investment Fund Managers.
======================= ======================================================
London Inter-Bank The interest rate participating banks offer to
Offered Rate other banks for loans on the London market.
("LIBOR")
======================= ======================================================
Sterling Overnight The effective overnight interest rate paid by
Interbank Average banks for unsecured transactions in the British
Rate (SONIA) sterling market
======================= ======================================================
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 whole 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.
======================= ======================================================
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
The 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. APMs are not considered to be a substitute for IFRS
measures but provide additional insight on the performance of the
business.
Premium / (Discount) to NAV per share
31 December 2021 31 December 2020
=========================== ================ ================
NAV per share (Cum income) 1,019.1p 1,013.1p
Share Price at Close 945.0p 942.5p
Premium / (Discount) (7.3)% (7.0)%
=========================== ================ ================
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 2021 31 December 2020
============================ ================ ================
NAV per share (Cum income)
at year end 1,019.1p 1,013.1p
Opening NAV per share (Cum
income) 1,013.1p 1,014.9p
Dividends per share paid in
the year 80.0p 80.0p
Annual Nav per Share Return 8.5% 7.7%
============================ ================ ================
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 2021 31 December 2020
=============================== ================ ================
NAV per share (Cum income) 1,019.1p 1,013.1p
Opening NAV per share (Cum
income) at inception 982.0p 982.0p
Dividends per share paid since
inception 452.9p 372.9p
ITD NAV per Share Return 49.9% 41.1%
=============================== ================ ================
The ITD NAV per share return is calculated by taking the total
of the closing NAV per share (cum income) at year end and adding
the dividend per share paid since inception and 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 2021 31 December 2020
(GBP'000) (GBP'000)
============================ ================ ================
Net Asset Value 359,342 357,232
Interest Bearing Borrowings 267,657 273,539
Debt to Equity ratio 74.5% 76.6%
============================ ================ ================
Cash and cash equivalents 12,948 62,548
Net Debt to Equity Ratio 70.9% 59.1%
============================ ================ ================
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
2021 2020
============================= ======= =======
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
2021 2020
(GBP'000) (GBP'000)
======================= ========== ==========
Auditors' remuneration 319 287
Administrator's fees 179 148
Directors' fees 227 200
Management Fee 6,349 5,942
Other costs 1,417 908
Average NAV 360,793 373,853
Ongoing Charges 2.3% 2.0%
======================= ========== ==========
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
2021
GBP'000
============================== ========
Monthly Average Credit Assets 586,074
Monthly Average NAV Excluding
Leverage 629,929
Monthly Average NAV 360,793
============================== ========
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 and liabilities
held at fair value through profit or loss for each month end from
31 December 2020 to 31 December 2021, 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 2020 to 31 December 2021, inclusive.
Monthly Average NAV is the mean of the net assets of the Group
for month end from 31 December 2020 to 31 December 2021
inclusive.
2021
=================== ====== ================================================
Investment Yield 9.5% 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 0.1% Impairments and write-offs is calculated
write-offs as credit impairment release over Monthly
Average Credit Assets
=================== ====== ================================================
Credit asset return 9.6% Credit asset return is a sub-total of the
above
=================== ====== ================================================
Equity and working (0.8%) 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 2.9% Effect of leverage is calculated as the
above Statement of Comprehensive Income
amounts above plus finance costs divided
by Monthly Average NAV, less the impact
of items already disclosed above
=================== ====== ================================================
Investment Manager (2.7%) Calculated as Management fee and Performance
fees fee divided by Monthly Average NAV
=================== ====== ================================================
Fund Opex (0.5%) Calculated as Fund expenses, divided by
Monthly Average NAV
=================== ====== ================================================
NAV return 8.5% Calculated as a sub-total of the above
=================== ====== ================================================
[1] Bank of England, Ernst & Young, Financing & Leasing
Association and Pollen Street Internal estimates
[2] Based on the Honeycomb share price of 967.5 pence on 14
February 2022 (being the last business day prior to
announcement).
[3] The statement that the combination is expected to be EPS
accretive should not be construed as a profit forecast, and should
not be interpreted to mean that the EPS in any future financial
period will necessarily match or be greater than those for any
preceding financial period.
[4] See section 5 for reconciliation of Alternative Performance
Measures
[5] TNAV is defined as "Tangible Net Asset Value"
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END
FR FIFIIVVIFIIF
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March 02, 2022 02:01 ET (07:01 GMT)
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