Annual Financial Report
02/03/2022 07:01
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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
(https://urldefense.proofpoint.com/v2/url?u=https-3A__data.fca.org.uk_-23_nsm_nationalstoragemechanism&d=DwMGaQ&c=bZnDpUh0cTwskH9nIvyseq2tJ5dkOfcF56epRyP8Xxo&r=7O_KHh8PeJQByj0y82hKk1VHclbLgS25dGCs2pYEG8g&m=jtNcb2TeavByRN3-DSFGd6YEF9L3O1MpvIpmeXIlE1MbJs5XvkEQqEs5l-W1chBX&s=y7VD3jGvv4QqzpwsOtCb3B70p40GAI5lIUD5eWjFimQ&e=)
. The Annual Report is also available to view and download from the Company's
website, www.honeycombplc.com/information
(http://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 £330
billion(( 1 (#_ftn1) )) 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 £30.3m (2020: £20.7m) 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 £5.6 million in 2020 to a
release of £0.8 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
(#_ftn2) , 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 (#_ftn3) .
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 £30.3m (2020: £20.7m); 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 £30.3 million (2020: £20.7 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 £601.8million during the year (2020: £560.9m) combined with
a reduction in the ECL charge, from a charge of £5.8 million to a release of
£0.8 million.
The Group ended the year with a net debt to equity of 70.9 4 (#_ftn4) 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 £48.2m 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 £0.02m with the sales
proceeds of £22.41m marginally exceeding the net book value of the portfolio
of £22.39m.
Portfolio Overview
The portfolio compromises of £576.8 million of investments balanced across
the property, SME, consumer and sustainability sectors. The portfolio is
well-diversified, with an average exposure of £16.2m, maximum single exposure
of £54.6m 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 £5.6 million in 2020 to a
release of £0.8 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 £30.5 million as at 31 December 2020 to £10.8 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
£1bn 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
£100m credit facility, of which funds managed by Pollen Street participated
in £75m and the Company participated in £20m 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 of holding Percentage
at year-end (£m)((1))
of assets((2))
LTV
1 UK Agriculture Finance United Kingdom Senior Short Term Property Loans 52.9 50% 8.6%
2 Sancus Loans Limited United Kingdom Senior Short Term Property Loans 52.8 54% 8.6%
3 Creditfix Limited United Kingdom Senior Discounted Fee Receivables 51.3 39% 8.3%
4 Oplo Direct Portfolio United Kingdom Secured Secured Consumer 48.6 81% 7.9%
5 Nucleus Cash Flow Finance Limited United Kingdom Senior SME 40.6 96% 6.6%
6 Downing Development Loans United Kingdom Senior Short Term Property Loans 35.9 5.8%
63%
7 Duke Royalty United Kingdom Senior SME 35.2 40% 5.7%
8 GE Portfolio United Kingdom Secured Secured Consumer 31.2 61% 5.1%
9 Oplo Structured United Kingdom Mezzanine Secured Consumer 29.9 95% 4.9%
10 Queen Street United Kingdom Senior Short Term Property 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 £403.0 million
(2020: £359.2 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 £30.5 million as at 31 December 2020 to £10.8 million as at
31 December 2021 on a NAV closing balance of £359m (2020: £357m). The main
driver of the reduction is sale of the consumer portfolio.
The impairment charge for the year has reduced from £5.6 million in 2020 to a
release of £0.8 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 £50 million to £200m
(2020: £250m). 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 £12.9million of assets
held in cash at 31 December 2021 (31 December 2020: £62.5 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) (£'000) ((1)) 359,342 357,232
MARKET CAPITALISATION (£'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 (£'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%
DIVIDEND 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) DIVIDEND 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 £48bn 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 £0.01
each or grant rights to subscribe for, or convert any security into ordinary
shares in the Company up to an aggregate nominal amount of £35,259.74
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 shares Percentage of total voting rights
Aberdeen Asset Management PLC Undisclosed <5%
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 required by section 418 of the Companies Act 2006, the Directors who held
office at the date of this report each confirm that, so far as they are aware,
there is no relevant audit information of which the Group's auditor are
unaware and each Director has taken all the steps required of a Director to
make themselves aware of any relevant audit information and to establish that
the Group's auditors are aware of that information.
Articles of Association
Any amendments to the Company's Articles of Association must be made by
special resolution.
Going concern
The Directors have reviewed the financial projections of the Group from the
date of this report, which shows that the Group will be able to generate
sufficient cash flows in order to meet its liabilities as they fall due. 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 £12.9 million. The Company
also has £396 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
£50,000;
· 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) £5,305
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 £150 million, and 1/12 of 0.05 percent of the excess of Net Asset
Value above £150 million. The monthly fee is then reduced by £2,083.33 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 £60,000 (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 £1.30 per Shareholder per annum or
part thereof, subject to a minimum of £3,800 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 £200 million, 0.02 percent of
NAV per annum, subject to a minimum monthly fee of £2,500; and
(B) Where NAV is greater than £200 million, 0.02 percent of NAV per
annum in respect of the first £200 million of NAV and:
i. 0.0175 percent per annum of that part of NAV which is in excess of
£200 million but less than or equal to £400 million; plus
ii. 0.015 percent per annum of that part of NAV which is in excess of
£400 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 interest The Group has not capitalised any interest in the year under review.
9.8.4(2) - unaudited financial information The Company publishes a monthly NAV statement. 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 schemes The Group has no incentive schemes in operation.
9.8.4 (5) and (6) - waiver No Director of the Company has waived or agreed to waive any current or future
emoluments from the Group.
9.8.4 (7), (8) and (9) During the year under review, Honeycomb Investment Trust plc did not issue
shares.
9.8.4 (8) and 9.8.4 (9) - relate to companies that are part of a group of Not applicable
companies
9.8.4 (10) - contract of significance During the year under review, there were no 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 waived or agreed to waive any dividends or future dividends
waiving 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 Committee Joanne Lake (Chairman)
Robert Sharpe
Jim Coyle
Richard Rowney
Management Evaluation Committee Robert Sharpe (Chairman)
Jim Coyle
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 Committee Nomination Committee Management 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 £18.9 million, split £8.1 million into variable and
£10.8 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 £5.5 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 value
method
method
Maximum level of leverage 200% 200%
Leverage as at 173% 177%
31 December 2021
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 of assets and ownership of investments The Audit Committee has reviewed reports from its service providers on key
controls over the assets of the Group over the course of 2021. Any significant
issues are reported to the Board by the Investment Manager or the Company's
Depositary. The Investment Manager has put in place procedures to ensure that
investments can only be made to the extent that the appropriate contractual
and legal arrangements are in place to protect the 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 of unlisted equities at fair value The Audit and Risk Committee received presentations in 2021 and 2022 from the
Investment Manager including 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 misstatement of expected credit losses under IFRS 9 The Audit and Risk Committee view credit provisioning as the key accounting
Financial instruments estimate area for the Group. As in previous years, the Audit Committee and
Risk Committee received presentations in 2022 from the 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 viability statement The Audit Committee reviewed a paper from the Investment 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 and understandable The approach taken by the Committee in determining 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 Trust Status The Audit Committee received a report from the 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
Chairman of the Audit Committee
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 £60,000 per annum
Senior Independent Director £50,000 per annum
Non-Executive Director £45,000 per annum
Chair of Audit Committee Additional supplement of £5,000 per annum
Chair of Risk Committee Additional supplement of £5,000 per annum
Chair of Remuneration Committee Additional supplement of £5,000 per annum
Directors' remuneration policy
The fees for the Board as a whole are limited to £250,000 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 £250,000 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 Cast
of Votes
Votes 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
£208,000 (2020: £178,000). The Directors who served during the year under
review received the following emoluments:
Director Fixed fees paid or receivable during the year Fixed fees paid or receivable during the year Variable fees paid or receivable during the year Variable fees paid or receivable during the year Total remuneration paid or receivable during the year Total remuneration paid or receivable during the year
2021 2020 2021 2020 2021 2020
£'000 £'000 £'000 £'000 £'000 £'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.
Director Fixed fees Fixed fees Variable fees Variable fees Change in fixed fees Change in variable fees
2021 2020 2021 2020 2021 2020
£'000 £'000 £'000 £'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 ((2)) 50 - - - - -
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 2021 31 December 2020
£'000 £'000
Total remuneration 203 178
paid to Directors
Shareholder distributions 29,809 63,830
- dividends or share buybacks
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 December 2021 For the year ended 31 December 2020
Notes Revenue £'000 Capital Total Revenue £'000 Capital Total
£'000
£'000
£'000
£'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 11 1,874 (1,337) 537 - 400 400
loss
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 2021 31 December 2020 £'000
£'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 2021 31 December 2020
£'000 £'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 £30.3
million (2020: £20.7 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 Share Revenue Capital Special Total
Share
Premium
Reserves
Reserves
Distributable
Equity
Capital
£'000
£'000
£'000
Reserves
£'000
£'000
£'000
Shareholders' funds at 352 299,599 1,185 (749) 56,845 357,232
1 January 2021
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 352 299,599 4,790 (2,244) 56,845 359,342
31 December 2021
For the year ended 31 December 2020
Ordinary Share Revenue Capital Special Total
Share
Premium
Reserves
Reserves
Distributable
Equity
Capital
£'000
£'000
£'000
Reserves
£'000
£'000
£'000
Shareholders' funds at 394 299,599 5,270 (1,030) 96,128 400,361
1 January 2020
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 352 299,599 1,185 (749) 56,845 357,232
31 December 2020
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 Share Revenue Capital Special Total
Share
Premium
Reserves
Reserves
Distributable
Equity
Capital
£'000
£'000
£'000
Reserves
£'000
£'000
£'000
Shareholders' funds at 352 299,599 1,185 (749) 56,845 357,232
1 January 2021
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 352 299,599 4,790 (2,244) 56,845 359,342
31 December 2021
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 Share Revenue Capital Special Total
Share
Premium
Reserves
Reserves
Distributable
Equity
Capital
£'000
£'000
£'000
Reserves
£'000
£'000
£'000
Shareholders' funds at 394 299,599 5,270 (1,030) 96,128 400,361
1 January 2020
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 352 299,599 1,185 (749) 56,845 357,232
31 December 2020
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
Notes 31 December 2021 31 December 2020
£'000
£'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
Notes 31 December 2021 31 December 2020
£'000
£'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
£'000
£'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 £6.4
million (2020: £5.9 million) of which £1.0 million was payable at the
year-end (2020: £1.0 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
final 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 £3.4 million
(2020: £2.3 million) of which £3.4 million was payable at the year-end
(2020: £2.3 million).
6. Fund Expenses
Group 31 December 2021 31 December 2020
£'000
£'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 £203,000 (2020:
£178,000) paid to Directors' and £23,256 (2020: £21,538) 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 £319,000
for the year ended 31 December 2021 (2020: £287,000). Remuneration includes
the audit of subsidiaries during the year was £29,000 (2020: £37,500).
Non-audit fees amounted to £0 in 2021 (2020: £nil).
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
£'000
£'000
£'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
£'000
£'000
£'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.
Group Revenue Capital Total
£'000
£'000
£'000
Profit before taxation 29,809 509 30,318
Profit before taxation multiplied 5,664 97 5,761
by the standard rate of UK corporation tax of 19.00%
Effects of:
Capital items exempt from tax - (127) (127)
Excess management expenses not utilised / (utilised) (304) 30 (274)
Interest distributions paid in respect of (5,360) - (5,360)
the year
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.
Group Revenue Capital Total
£'000
£'000
£'000
Profit/(loss) before taxation 20,420 281 20,701
Profit/(loss) before taxation multiplied 3,880 53 3,933
by the standard rate of UK corporation tax of 19.00%
Effects of:
Excess management expenses not utilised 855 (53) 802
Interest distributions paid in respect of (4,735) - (4,735)
the year
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 £31.8 million, capital returns of £(1.5) million and total
returns of £30.3 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 £20.4 million, capital returns of £0.3 million and total returns
of £20.7 million and a weighted average number of ordinary shares of
36,657,807.
9. Ordinary Dividends
31 December 2021 31 December 2020
£'000
£'000
20.00p Interim dividend for the period to 31 December 2019 - 7,450
(paid 27 March 2020)
20.00p Interim dividend for the period to 31 March 2020 - 7,303
(paid on 23 June 2020)
20.00p Interim dividend for the period to 30 June 2020 - 7,201
(paid on 22 September 2020)
20.00p Interim dividend for the period to 30 September 2020 - 7,051
(paid 27 December 2020)
20.00p Interim dividend for the period to 31 December 2020 7,052 -
(paid 26 March 2021)
20.00p Interim dividend for the period to 31 March 2021 7,052 -
(paid on 25 June 2021)
20.00p Interim dividend for the period to 30 June 2021 7,052 -
(paid on 30 September 2021)
20.00p Interim dividend for the period to 30 September 2021 7,052 -
(paid 24 December 2021)
Total dividend paid in period 28,208 29,005
20.00p Interim dividend for the period to 31 December 2020 - 7,051
(paid 26 March 2021)
20.00p Interim dividend for the period to 31 December 2021 7,052 -
(to be paid 25 March 2022)
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 Company Gross Carrying Amount Allowance Net Carrying Amount Gross Carrying Amount Allowance Net Carrying Amount
for ECL
for ECL
£'000
£'000 £'000
£'000
£'000 £'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 Company Gross Carrying Amount Allowance Net Carrying Amount Gross Carrying Amount Allowance Net Carrying Amount
for ECL
for ECL
£'000
£'000 £'000
£'000
£'000 £'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 1 Stage 2 Stage 3 Total
£'000
£'000
£'000
£'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 1 Stage 2 Stage 3 Total
£'000
£'000
£'000
£'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
£'000
£'000
£'000
£'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
£'000
£'000
£'000
£'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 £2.9 million higher under this sensitivity.
2021 Weighted Year end ECL 100% Downside Scenario
£'000 £'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 £4.0 million higher as split below:
2020 Weighted Year end ECL 100% Downside Scenario
£'000 £'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 £10.0 million of credit assets at amortised cost moving from Stage 1 to
Stage 2. The analysis shows that the ECL would have been £1.5 million higher
under this sensitivity.
The amortised cost of the structurally secured portfolio is £297 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
£'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
£'0
00
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
£'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 (#_ftn5) 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
£'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
£'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 31 Dec 2021 Closing fair value as at 31 Dec 2020
£'000
£'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 value as at 31 Dec 2021 Valuation Technique Earnings multiple changed by 1
£'000
£'000
1,359 Earnings Multiple 238
1,359 238
Earnings multiples used is 5.3x.
Closing fair value as at 31 Dec 2021 Valuation Technique TNAV multiple changed by 0.25x
£'000 £'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 31 Dec 2020 Valuation Technique Earnings multiple changed by 1
£'000
£'000
1,380 Earnings Multiple 265
1,380 265
Earnings multiples used is 4.3x.
Closing fair value as at 31 Dec 2020 Valuation Technique TNAV multiple changed by 0.25x
£'000
£'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
£'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
£'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 Company Closing fair value as at 31 Dec 2021 Closing fair value as at 31 Dec 2020
£'000
£'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 value as at 31 Dec 2021 Valuation Technique Earnings multiple changed by 1
£'000
£'000
Earnings Multiple
7,775 1.08 1,740
Earnings multiple used is 1.33x.
Closing fair value as at 31 Dec 2021 Valuation Technique TNAV multiple changed by 0.1x
£'000
£'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
£'000
£'000
£'000
£'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
£'000
£'000
£'000
£'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
£'000
£'000
£'000
£'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
£'000
£'000
£'000
£'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 £270.0 million drawn down
under these facilities (2020: £273.5 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:
Group Financial instrument Floating Rate Fixed or Administered Rate Total
£'000
£'000
£'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:
Company Financial instrument Floating Rate Fixed or Administered Rate Total
£'000
£'000
£'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:
Group Financial instrument Floating Rate Fixed or Administered Rate Total
£'000
£'000
£'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:
Company Financial instrument Floating Rate Fixed or Administered Rate Total
£'000
£'000
£'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 £2.8 million (2020: £2.7 million). A 1 percent change in
interest rates impacts debt expense on the liabilities with a floating rate by
£2.7 million (2020: £2.7 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 Contract (£'000)
(£'000)
(£'000)
(£'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 £915k (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 Forward Contract (£'000)
(£'000)
(£'000)
(£'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
£200.0 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
£35m 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 3months 3 - 12months 1- 5years More than 5
years
£'000 £'000 £'000 £'000 £'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 3months 3 - 12months 1- 5years More than 5
years
£'000 £'000 £'000 £'000 £'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 assets and liabilities exposed to GBP LIBOR Carrying Value/Nominal Amount at 31 December 2021
Assets Liabilities
£'000 £'000
Credit assets at amortised cost 51,268 30,129
Total exposure 51,268 30,129
Non-derivative assets and liabilities exposed to USD LIBOR Carrying Value/Nominal Amount at 31 December 2021
Assets Liabilities
£'000 £'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
£'000 £'000 £'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
£'000 £'000 £'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
£'000
£'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
£'000
£'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
£'000
£'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
£'000
£'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
£'000
£'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: £nil) 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
£'000
£'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
£'000
£'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 £250 million
provided by Goldman Sachs, being a £170 million term loan and £80 million
revolving credit facility. At 31 December 2021 the term loan was fully drawn
with £nil 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 £81.0 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 £76.5 million (2020: £93.6 million).
In December 2020, the Group entered into a £35 million debt facility secured
against a structured SME facility, the carrying value of this structured SME
facility at 31 December 2021 was £39.5 million. The debt facility charges
LIBOR plus a margin and is an amortising term loan with the full £35 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
£'000
£'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
£'000
£'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
£'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
£'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
£'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
£'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.
2021 < 1 year 1 - 5 years More than 5 years Total
£'000
£'000
Group Financial instrument £'000 £'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 < 1 year 1 - 5 years More than 5 years Total
£'000
£'000
Company Financial instrument £'000 £'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
£'000
£'000
£'000
Group Financial instrument
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
£'000
£'000
£'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 2021 (Redemptions)/Novations Closing as at 31 December 2021
£'000 £'000 £'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 2020 (Redemptions)/Novations Closing as at 31 December 2020
£'000 £'000 £'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 £0.01 each 35,259,741 35,259,741
Cost £'000 352 352
The table below shows the movement in shares during the period to 31 December
2021:
Shares in issue at the Buyback of Shares in issue at
beginning of the period
Ordinary Shares
the end of the 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, £98.1 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 £'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 £359.3 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 £357.2 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 £90.0 million (2020:
£95.3 million) of undrawn committed structured credit facilities as at 31
December 2021 and £113.7 million (2020: £48.2 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 £nil (2020: £nil) 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 £9.72 million (2020: £8.24 million) of fees
and at 31 December 2021, there was £4.47 million (2020: £3.34 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 £29.7 million drawn (31 December
2020: £35.0 million). The Group also had a forward flow facility in place
with Oplo in which the Group provided £26.7 million in 2021 (31 December
2020: £22.3 million) with the total pool of loans having an outstanding
balance of £47.6 million as at 31 December 2021 (31 December 2020: £30.0
million). The company also invested £2m 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 £0m (31 December 2020: £11.4m). 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 £9 million of assets. The Company
also sold a portfolio of Avant loans for £18 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: GB00BYZV3G25
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: GB00BYZV3G25
· 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 £20,000.
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 ("NAV") Net asset value represents the total value of 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 Fund ("AIF") An AIF, as defined in the AIFM Directive 2011/61/EU on Alternative Investment
Fund Managers.
London Inter-Bank Offered Rate ("LIBOR") The interest rate participating banks offer to other banks for loans on the
London market.
Sterling Overnight Interbank Average Rate (SONIA) The effective overnight interest rate paid by banks for unsecured transactions
in the British 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
(£'000) (£'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
(£'000) (£'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
£'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 write-offs 0.1% Impairments and write-offs is calculated 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 capital (0.8%) The impact of equity and working 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 fees (2.7%) Calculated as Management fee and Performance 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 (#_ftnref1) Bank of England, Ernst & Young, Financing & Leasing
Association and Pollen Street Internal estimates
2 (#_ftnref2) Based on the Honeycomb share price of 967.5 pence on 14
February 2022 (being the last business day prior to announcement).
3 (#_ftnref3) 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 (#_ftnref4) See section 5 for reconciliation of Alternative Performance
Measures
5 (#_ftnref5) TNAV is defined as "Tangible Net Asset Value"
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