TIDMHONY
RNS Number : 6179D
Honeycomb Investment Trust PLC
28 April 2017
28 April 2017
FOR IMMEDIATE RELEASE
THE BOARD OF DIRECTORS OF HONEYCOMB INVESTMENT TRUST PLC
ANNOUNCES THE ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR
THE PERIOD FROM 2 DECEMBER 2015 (DATE OF INCORPORATION) TO 31
DECEMBER 2016.
Copies of the Company's Annual Report and Audited Financial
Statements are available from the Company Secretary, Apex Fund
Services (UK) Ltd at Veritas House, 125 Finsbury Pavement, London,
EC2A 1NQ and will also be available shortly on the Company's
website http://www.honeycombplc.com/documents.
Investment Objective
The investment objective of Honeycomb Investment Trust plc (the
"Company") is to provide shareholders with an attractive level of
dividend income and capital growth through the acquisition of loans
made to consumers and small businesses as well as other
counterparties, together with related investments ("Credit Assets")
and selected equity investments that are aligned with the Company's
strategy and that present opportunities to enhance the Company's
returns from its investments ("Equity Assets").
Financial and Operational Highlights
31 December 30 June 2016
2016 (Audited) (Unaudited)
============================ ================ =============
NET ASSET VALUE
NET ASSET VALUE (CUM
INCOME) (GBP'000)(1) 202,051 150,925
NET ASSET VALUE (EX
INCOME) (GBP'000)(2) 196,969 147,630
MARKET CAPITALISATION
(GBP'000)(3) 203,346 152,250
============================ ================ =============
PER SHARE METRICS
SHARE PRICE (AT CLOSE)(4) 1,020.5p 1,015.0p
NAV PER SHARE (CUM INCOME) 1,014.0p 1,006.2p
NAV PER SHARE (EX INCOME) 988.5p 984.2p
SHARES IN ISSUE 19,926,110 15,000,001
============================ ================ =============
KEY RATIOS
PREMIUM / (DISCOUNT)(5) 0.6% 0.9%
ITD TOTAL NAV PER SHARE
RETURN(6)(7) 7.8% 2.7%
DEBT TO EQUITY RATIO 0.0% 2.0%
REVENUE RETURN(8) 8.8% 3.2%
DIVID RETURN(9) 8.0% 2.9%
ONGOING CHARGES(10) 1.5% 1.7%
============================ ================ =============
(1) NET ASSET VALUE (CUM INCOME): will include all income not
yet moved to reserves (both revenue and capital income), less the
value of (i) any dividends paid in respect of that income and (ii)
any dividends in respect of that income which have been declared
and marked ex dividend but not yet paid.
(2) NET ASSET VALUE (EX INCOME): will be the NAV (Cum Income)
excluding net income (both revenue and capital income) that is yet
to be transferred to reserves as described below. For this purpose
net income will comprise all income not yet moved to reserves (both
revenue and capital income), less the value of (i) any dividends
paid in respect of that income and (ii) any dividends in respect of
that income which have been declared and marked ex dividend but not
yet paid. Any income in respect of a financial year, which is
intended to remain undistributed will be moved to reserves on the
first business day of the immediately following year, meaning that
each figure for NAV (Ex-Income) reported during a financial year
will equate to the NAV (Cum Income) less undistributed income which
has not been moved to reserves.
(3) MARKET CAPITALISATION: the closing mid-market share price
multiplied by the number of shares outstanding at month end.
(4) SHARE PRICE (AT CLOSE): closing mid-market share price at
month end (excluding dividends reinvested).
(5) PREMIUM / (DISCOUNT): the amount by which the price per
share of an investment trust is either higher (at a premium) or
lower (at a discount) than the net asset value per share (cum
income), expressed as a percentage of the net asset value per
share.
(6) ITD: inception to date - excludes issue costs.
(7) TOTAL NAV PER SHARE RETURN: is calculated as Net Asset Value
(Cum Income) at the end of the period, plus dividends declared
during the period, divided by NAV (Cum Income) calculated on a per
share basis at the start of the period.
(8) REVENUE RETURN: based on revenue account net income divided
by average Net Asset Value during the period
(9) DIVID RETURN: is calculated as the total of the dividends
for the period divided by average Net Asset Value during the
period
(10) ONGOING CHARGES RATIO: 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. The Annualised Ongoing Charge is
calculated using the Association of Investment Companies
recommended methodology.
Investment Characteristics
The Company is an investment trust focusing on UK consumer and
SME
specialist lending
The consumer lending market is large and growing with GBP250
billion(1) lent annually, with growth at 5% per annum for the last
4 years and is forecast to continue.
Managed by Pollen Street Capital, a dedicated investor in
lending businesses
Pollen Street Capital Limited (the "Investment Manager") serves
as the Company's investment manager. The team has focussed on the
financial services sector since 2008.
Long-term opportunity to deliver attractive returns from UK
consumer and SME loans
Mainstream lenders have elected to focus on large markets where
they can achieve scale with generic processes. This provides
opportunity in sectors which are not well suited to such generic
processes.
Direct lending through trusted origination partners
Provides access to sectors and lending with the most attractive
return characteristics. The Company partners with organisations
with an ability to integrate technologies and respond quickly to
new customer demands.
Equity investments in high-growth partners
The Company invests in high growth partners to enhance returns
for shareholders. These investments are aligned with the Company's
strategy to generate attractive return lending.
8.0% per ordinary share per annum target dividend, payable
quarterly
Once the Company has incurred borrowings in line with its
borrowing policy, the Company targets the payment of dividends
which equate to a yield of 8.0% per ordinary share per annum on the
issue price for the IPO placing, payable in quarterly instalments
(the "Target Dividend") based upon the average number of shares in
issue during a given period. Investors should note that the Target
Dividend, including its declaration and payment dates, is a target
only and not a profit forecast.
___________ (1) Source: Bank of England. The Investment Manager
forecast to Dec-16 based on Q3 changes in balances being repeated
in Q4 (Actual to Sept-16)
How the Business Works
Credit Assets
The Investment Manager, on behalf of the Company, actively
identifies sub-segments of the large consumer and SME lending
market that it believes delivers attractive net returns. It then
targets channels, origination partners and loan portfolio vendors
through which to develop Credit Assets and diversify the Company's
investment opportunities.
Each opportunity is underwritten by the Investment Manager or
Honeycomb Finance Limited (the "Origination Partner") to assess
whether the risk of the borrower is acceptable. There are various
processes adopted to underwrite each opportunity to ensure a
consistent approach to risk based pricing to ensure the weighted
risk adjusted return provides an attractive level of dividend
income with acceptable risk profile for shareholders of the
Company.
Through the Origination Partner's arrangements with Freedom
Finance, Pay4Later, Shawbrook Bank, Fly Now Pay Later and The Green
Deal Finance Company (the "Referral Partners"), together with
wholesale lenders and vendors of portfolios, the Directors believe
that the Company has access to diverse investment opportunities
across several market segments, each with different borrower
profiles and different risk return characteristics. Through access
to multiple Referral Partners and other counterparties, the Company
will reduce its dependence on any one single source of
opportunities to acquire Credit Assets and expects to gain a strong
visibility of high quality assets.
The Company believes it is important to provide best-in-class
servicing to ensure that Credit Assets forming part of the
portfolio are managed efficiently throughout their lifecycle. As
such, the Company appoints servicers best placed to service the
investment asset. The Company and the Origination Partner have
jointly appointed Target Servicing Limited ("Target") to administer
Credit Assets forming 92 per cent of consumer loans owned by the
Company. Additional service providers may be used by originators,
sellers of portfolios and wholesale borrowers or their affiliates
or other third party incumbents engaged by them.
The arrangements above can be summarised in the following
diagram:
Equity Assets
The Company's aim is to invest in Equity Assets that are aligned
with the Company's strategy and that present opportunities to
enhance the Company's returns from its investments. The Company
expects, that most of its investments in Equity Assets will take
the form of minority interests in Referral Partners, in pursuit of
the Company's investment policy. The Directors believe that an
ancillary benefit of these investments in Equity Assets will be to
more closely align the interests of the Company with those of its
commercial partners, and thereby improve the Company's underwriting
and analysis capabilities and visibility of trends and
opportunities in the specialist finance market.
Chairman's Statement
I am delighted to present the first set of annual results for
Honeycomb Investment Trust plc (the "Company"), covering the period
from the Company's incorporation on 2 December 2015 to its 31
December 2016 period end.
The Board has been pleased with progress during this, the first
year of trading. Following the initial share issue of GBP100.0
million, there have been two further successful share offerings
with total gross proceeds of GBP100.0 million. The net share
proceeds of all the share offerings have been deployed, with the
latest gross proceeds of GBP50.0 million largely deployed on 13
January 2017 following the Company's financing of the Green Deal
Finance Company.
Performance
The Company has performed well during the year. A detailed
assessment of the progress of the Company follows in the Investment
Manager's review but performance since the initial public offering
has been ahead of the Board's expectations. At 31 December 2016,
the Company's net assets were GBP202.1 million (cum income), with
market capitalisation at GBP203.3m. NAV per share (cum income) was
1014.0p, with the share price (at close) 1020.5p, representing a
premium of 0.6%. Total NAV per share return was 7.8%.
Dividend
The Board elected to pay dividends on a quarterly basis, and
paid the first dividend of 2.11p for Q1 2016 in May 2016.
The Q2 2016 dividend increased to 19.66p. The Q3 2016 dividend
was 23.13p, rising above the target yield on an annualised basis at
9.3%. The Q4 2016 dividend was 23.50p, providing an annualised
dividend of 12.5% undiluted and 9.4% fully diluted following the
issue of a further 4.9m shares on 16 December 2016. For the full
year, this represented 8.0% of average issued shares.
Gearing
The Company has arranged a debt facility of GBP37.5 million with
the Royal Bank of Scotland plc and is in the process of securing
further facilities. The facility was utilised on a small scale
during the year, but was not drawn at the year-end following net
receipts from the portfolio investments. It is expected this
facility will be drawn in the first half of 2017 in order to fund
further investment opportunities.
Outlook
The Company has deployed capital ahead of schedule on assets
that are performing in line with our expectations. Despite the
competitive consumer finance market place, we believe that the
retrenchment of mainstream lenders from specialist markets presents
an enormous opportunity to engage with customers in markets which
are underserved by traditional lenders and platforms. We further
believe that through targeting verticals that require a specialist
understanding, more detailed underwriting, or where the vertical
pre-selects higher quality borrowers, attractive risk-adjusted
returns can be delivered with low volatility throughout the
cycle.
We have continued to see some political uncertainty, including
Brexit, intensified competition and regulatory changes in consumer
finance in 2016 but despite this trading backcloth the Company has
made good progress. This has been possible because the business
strategy is robust and the excellent team of people involved are
executing the strategy successfully.
The Board is confident of the long-term prospects for the
Company.
Robert Sharpe
Chairman
26 April 2017
Investment Manager's Report
The Company was established in December 2015 to provide
investors with access to UK lending opportunities which the
Investment Manager believes have potential to provide attractive
and consistent risk-adjusted returns throughout the cycle. These
returns are delivered through the Investment Manager's focus on
high-quality underwriting of borrowers in markets that are
underserved by mainstream finance providers and platforms through
direct origination through specialist channels, investments in
loans to specialist lenders and the acquisition by the Company of
interests in portfolios of Credit Assets from third parties.
The Investment Manager has significant experience in specialist
lending, providing the Company with both deep insight to high
quality underwriting and access to the Investment Manager's
established eco-system, enabling whole of market, high-quality
origination flow and portfolio acquisition opportunities.
The Company completed its initial public offering on 23 December
2015, raising initial gross proceeds of GBP100.0 million. During
the first year of operation, we have focused on building a strong
portfolio of assets in line with our investment mandate. Within the
first six months of operation, we had visibility on the portfolio
being fully invested. As a result, further share offerings were
completed in May 2016 and December 2016 with total gross proceeds
of GBP100.0 million. This was in conjunction with the Company
completing its first debt facility with The Royal Bank of Scotland
plc for GBP37.5 million in June 2016.
At the end of the year, we have built a total portfolio of
GBP162.6 million, with a pipeline of over GBP100 million of further
opportunities over which we have strong visibility (within this, in
January 2017 the Company provided finance of GBP40m, which included
the acquisition of a loan book from, and taking an equity stake of
28.57% in, The Green Deal Finance Company). This portfolio is an
attractive mix of assets combining both strong yields with low bad
debt rates.
In Q1 2016, we focused on deploying the initial proceeds, whilst
maintain high underwriting standards. We achieved this more quickly
than initially expected by identifying two high quality portfolios.
Together, these portfolios comprised over 18,000 loans with strong
risk-adjusted returns. The transactions have performed ahead of
expectations and as a result the Company was able to invest in
follow-on transactions with both counter-parties throughout the
year.
In Q2 2016, the Company purchased a portfolio of secured and
unsecured consumer loans from GE Money. This represents the largest
individual investment the Company has made. The portfolio is highly
granular and diversified, both regionally across the UK, by asset
class and borrower type. At acquisition, the portfolio comprised
over 23,000 loans with an average balance of GBP8k and has
performed well since acquisition delivering both strong interest
yields and low levels of write-offs. Our other portfolio purchases
in 2016, representing a total investment of GBP45.0 million, have
also performed ahead of expectations. Together, the portfolios we
have purchased provide a strong underpinning of results in 2016,
with a total of GBP114 million investment remaining at the end of
the year.
In the second half of the year, we have focused on the organic
origination channels. With a backdrop of higher levels of consumer
indebtedness and increasing competition in mainstream markets, we
have grown our holdings of wholesale facilities. In these
facilities, we gain exposure to the underlying credit assets, but
with added protection of first loss from the relevant partner. All
the borrowers are performing well. The Company's Origination
Partner has seen the successful roll-out of its first three
referral partner arrangements with Freedom Finance, Pay4Later and
Fly Now Pay Later, all of whom have seen a steady growth of
origination volumes during the period. Further referral partners
are currently being on-boarded and the profile of returns and risk
is in line with expectations with The Green Deal Finance Company
being appointed in January 2017. In aggregate, the organic channels
had a total investment of GBP49.7 million at the balance sheet
date.
To further enhance investor returns, the Company intends to make
selected investments in companies which are aligned with the
Company's strategy, such as brokers and originators of loans and
strategic providers of data and technology related to consumers and
small and medium-sized enterprises. Equity Assets as at 31 December
2016 totalled GBP4.7 million, consisting of an 18.3 per cent
holding in Freedom Finance (the initial 19.9 per cent shareholding
being diluted due to subsequent issuances which occurred in July
2016 following the acquisition of Sensible Home Finance) and a 4.83
per cent equity investment in retail point of sale finance provider
Pay4Later. Both businesses are trading well, seeing new
partnerships as well as continued investments in technology and
management capabilities.
The financial performance of the Company has been strong. In our
initial guidance, we were targeting a dividend yield of at least 8
per cent (based on issue price) and reached this level in Q3 2016.
As shown in the charts below, we have outperformed these
expectations. Overall for the year, the four quarterly dividends as
a percentage of average NAV was 8.0%.
After initial listing costs, the Company had a NAV of 982 pence
per share at the time of listing, with the NAV per share
(cumulative of income) growing to 1,014 pence per ordinary share at
31 December 2016, which, including dividends declared or paid, is
equivalent to a NAV return of 7.8% since inception. Additionally,
the share price of the Company at 31 December 2016 was 1,020.5
pence per share, representing a 0.6% premium to NAV (cumulative of
income). We are pleased that the Company is trading ahead of its
net asset position, which we hope reflects the strong underlying
performance we have seen this year.
Looking ahead, there are likely to be challenges during 2017 as
the UK comes to terms with the impact of the Brexit vote and the
long-term effects of the UK leaving the European Union become
clearer. In addition, with household borrowing at high levels and
increased competition in main stream unsecured lending, we intend
to proceed with caution. That said, we believe that the Company's
business model, combined with our approach to risk, sets it in good
stead to find suitable pockets of risk adjusted return. We believe
that our ability to invest in wholesale facilities, combined with
our focus on specialist markets where we expect enhanced credit
performance, will allow us to continue to deploy the Company's
funds and deliver strong returns. We continue to view the future
with confidence.
Top Ten Holdings
Country Value of holding Percentage
at year-end of assets(1)
(GBPm)
=== ==================== ========= ================= ==============
1st Stop Group United
1 Limited Kingdom 10.0 6.14%
=== ==================== ========= ================= ==============
United
2 EZBob Limited Kingdom 4.1 2.51%
=== ==================== ========= ================= ==============
United
3 IWOCA Limited Kingdom 3.4 2.10%
=== ==================== ========= ================= ==============
Freedom Finance United
4 Limited Kingdom 2.7 1.68%
=== ==================== ========= ================= ==============
United
5 Pay4Later Limited Kingdom 2.0 1.23%
=== ==================== ========= ================= ==============
Individual consumer United
6 loan Kingdom 0.1 0.07%
=== ==================== ========= ================= ==============
Individual consumer United
7 loan Kingdom 0.1 0.05%
=== ==================== ========= ================= ==============
Individual consumer United
8 loan Kingdom 0.1 0.05%
=== ==================== ========= ================= ==============
Individual consumer United
9 loan Kingdom 0.1 0.05%
=== ==================== ========= ================= ==============
Individual consumer United
10 loan Kingdom 0.1 0.05%
=== ==================== ========= ================= ==============
(1) Percentage of total investment assets.
Portfolio Composition
The composition of the Honeycomb Investment Trust portfolio is
set out below:
Borrower Type (By
balances)
Counterparty Type
(By balances)
Loan Security
(excludes Equity
investments)
Credit Risk Bands
(By balances)
Credit Risk Bands
(excludes Equity
Investments)
Geography (By balances)
All investments are located
in the United Kingdom
Business Review
The strategic report on pages 3 to 20 has been prepared to help
shareholders assess how the Company works and how it has performed.
The strategic report has been prepared in accordance with the
requirements of Section 414 A-D of the Companies Act 2006 (the
"Act") and best practice. The business review section of the
strategic report discloses the Company's risks and uncertainties as
identified by the Board, the key performance indicators used by the
Board to measure the Company's performance, the strategies used to
implement the Company's objectives, the Company's environmental,
social and ethical policy and the Company's future
developments.
Principal activity
The Company carries on business as an investment trust and its
principal activity is investing in Credit Assets and Equity Assets,
with a view to achieving the Company'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,
please see:
http://www.theaic.co.uk/guide-to-investment-companies.
Strategic and investment policy
The Company's investment objective is to provide shareholders
with an attractive level of dividend income and capital growth
through the acquisition of loans made to consumers and small
businesses as well as other counterparties, together with related
investments ("Credit Assets") and selected equity investments that
are aligned with the Company's strategy and that present
opportunities to enhance the Company's returns from its investments
("Equity Assets").
Once the Company has incurred borrowings in line with its
borrowing policy, the Company will target the payment of dividends
which equate to a yield of 8.0% 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 Company believes that certain sub-segments of consumer loans
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 Company.
The Company has entered into an origination agreement with
Honeycomb Finance Limited (the "Origination Partner") whereby the
Origination Partner has agreed to provide the Company with
opportunities to acquire Credit Assets originated or acquired by it
which meet specified underwriting criteria relating to the
underlying borrower and the corresponding terms of credit (which
may be modified from time to time at the discretion of the
Investment Manager). Similar arrangements are entered into from
time to time with additional origination partners. The Origination
Partner has, also, entered agreements with several Referral
Partners to source such lending opportunities. The Company and the
Investment Manager will also actively seek opportunities to acquire
portfolios from third parties and make investments in loans to
specialist lenders.
Asset allocation and risk diversification
Credit Assets invested in by the Company will consist of debt
obligations, both secured and unsecured, 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, as well as secured loans and investments in loans
to specialist lenders to provide wholesale finance for consumer and
SME lending.
The Company's investment in Credit Assets will encompass the
following investment models:
1. the acquisition of interests in loans (which may be secured
or unsecured) to consumers, small businesses and other
counterparties;
2. the acquisition of interests in portfolios of Credit Assets from third parties; and
3. the investment in loans to specialist lenders for the
purposes of providing wholesale finance to those specialist
lenders, secured against (amongst other things) granular portfolios
of loan receivables.
The Company may undertake such investments directly, or via
subsidiaries or special purpose vehicles ("SPVs"). It is also
possible that the Company may, in the future, 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 Company or other efficiencies (such as, without limitation,
efficiencies as to origination, funding, servicing or
administration of the relevant Credit Assets).
The Company also invests in Equity Assets. The Company shall
invest no more than 10 per cent of the aggregate net proceeds of
any issue of issue shares in Equity Assets, calculated, in each
case, at the time of acquisition of any relevant Equity Assets
based on the consideration payable for those Equity Assets and the
aggregate consideration paid for all previous investments in Equity
Assets which form part of the portfolio. This restriction shall not
apply to any consideration paid by the Company for the issue to it
of any Equity Assets that are convertible securities. However, it
will apply to any consideration payable by the Company at the time
of exercise of any such convertible securities or any warrants
issued. The Company may invest in Equity Assets indirectly via
other investment funds (including those managed by the Investment
Manager or its affiliates).
Investment restrictions
The Company 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 Company
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 Company will not invest, in aggregate, more than 10 per cent
of the aggregate value of total assets of the Company ("Gross
Assets"), at the time of investment, in other investment funds that
invest in Credit Assets.
The Company will not invest, in aggregate, more than 50 per cent
of Gross Assets, at the time of investment, in Credit Assets
comprising investments in loans (alongside or in conjunction with
Shawbrook Bank ("Shawbrook") referred to the Origination Partner by
Shawbrook.
The following restrictions apply, in each case at the time of
the investment by the Company:
-- no single Credit Asset comprising a consumer credit asset shall exceed 0.15% of Gross Assets;
-- no single SME or corporate loan, or trade receivable, shall exceed 5.0% 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
Company) shall exceed 20% of Gross Assets. For the avoidance of
doubt, this restriction shall not prevent the Company from directly
acquiring portfolios of Credit Assets which comply with the other
investment restrictions described in this section. The Company will
not invest in Equity Assets to the extent that such investment
would, at the time of investment, result in the Company controlling
more than 35% of the issued and voting share capital of the issuer
of such Equity Assets.
Other restrictions
The Company 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 Company will not invest in collateralised loan obligations
or collateralised debt obligations.
Borrowing
Borrowings may be employed at the level of the Company and/or at
the level of any investee entity (including any SPV that may be
established by the Company in connection with incurring borrowings
against any of its assets). The Company may borrow (through bank or
other facilities on an unsecured or secured basis), whether
directly or indirectly through a subsidiary or an SPV, up to a
maximum of 100% of Net Asset Value in aggregate (calculated at the
time of draw down under any facility that the Company has entered
into). The maximum borrowing limit will take into account
investments made by the Company on a subordinated basis. The
Company targets borrowings in the range of 50% to 75% of Net Asset
Value.
The Company may seek to securitise all or parts of its Credit
Assets and may establish one or more SPVs in connection with any
such securitisation. To the extent that the Company establishes any
SPV in connection with incurring borrowings against any of its
assets or in connection with the securitisation of its Credit
Assets, it is likely that any such vehicles will be wholly-owned
subsidiaries of the Company. The Company may use SPVs for these
purposes to seek to protect the levered Portfolio from group level
bankruptcy or financing risks. The Company may also, in connection
with seeking such borrowings or securitising its Credit Assets,
seek to assign or transfer existing assets to one or more SPVs
and/or seek to acquire Credit Assets using an SPV (to the extent
permitted by applicable law and regulation).
Hedging
Fluctuations in interest rates are influenced by factors outside
the Company's control, and can adversely affect the Company's
results of operations and profitability in a number of ways. The
Company intends to invest in Credit Assets which may be subject to
a fixed rate of interest, or a floating rate of interest (which may
be linked to base rates or LIBOR). The Company expects that its
borrowings will be subject to a floating rate of interest. Any
mismatches the Company 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
Company may use derivative instruments, including interest rate
swaps, to reduce its exposure to fluctuations in interest
rates.
To the extent that the Company 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
Company to discharge its obligations could have a material adverse
effect on the Company's results, operations and financial
condition.
Cash management
Whilst it is intended that the Company will be close to fully
invested in normal market conditions, the Company 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 Company may hold and
there may be times when it is appropriate for the Company to have a
significant cash position instead of being fully or near fully
invested. As at 31 December 2016 the Company held GBP38.9m of its
assets in cash. This level of cash was the result of the new share
issue which completed on 16 December 2016 and was deployed on 13
January 2017.
Business model
The management of the Company's assets and the Company's
administration has been outsourced to third-party service
providers. The Board has oversight of the key elements of the
Company's strategy, including the following:
-- the Company's level of gearing. The Company has a maximum
limit of 100% 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 prospectus dated 18 December
2015 (the "Prospectus");
-- the Company's investment policy which determines the
diversity of the Company's portfolio. The Board sets limits and
restrictions with the aim of reducing risk and maximising
returns;
-- the appointment, amendment or removal of the Company's third-party service providers;
-- an effective system of oversight over the Company's risk
management and corporate governance; and
-- premium/discount control mechanism. The Board compares the
Company's share price against its then prevailing Net Asset
Value.
In order to effectively undertake its duties, the Board may seek
expert legal advice. It also can call upon the advice of the
company secretary. During the period under review the Board
appointed Slaughter and May to advise on the Company's Initial
Public Offering in December 2015 and to provide ongoing legal
services to the Company.
Future developments
The Company's future developments and outlook are discussed in
more detail in the Chairman's Statement on pages 8 and the
Investment Manager's review 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 takes action accordingly. During the
period under review the Company's ordinary shares traded
predominantly at a premium to its underlying Net Asset Value
throughout the period. The Board is of the view that an increase of
the Company's ordinary shares in issue provides benefits to
shareholders, including a reduction in the Company's administrative
expenses on a per share basis and increased liquidity in the
Company's shares. In order to satisfy natural demand in the market
during the period the Board authorised the issue of 9.9 million
shares by way of a tap issue.
On 18 December 2015, the Board was granted authority to issue up
to 20,000,000 ordinary shares and / or C shares in aggregate prior
to the conclusion of the Company's first annual general meeting
("AGM"). In addition, the Board was authorised to issue and allot
up to 25 million C shares on a non-pre-emptive basis from the
conclusion of the first AGM of the Company, such authority to
expire at the conclusion of the fourth AGM of the Company.
Shareholders' pre-emption rights over this unissued share capital
have been disapplied so that the Board will not be obliged to offer
any newly issued shares to shareholders pro rata to their existing
holdings. The reason for this is to retain flexibility to issue new
shares to investors. Notwithstanding this authority, no ordinary
shares will be issued (whether on a pre-emptive basis to existing
shareholders or otherwise) under this authority at a gross price
which is less than the Net Asset Value per existing ordinary share
at the time of their issue. The Board is seeking to renew its
authority to allot ordinary shares at the forthcoming AGM.
The Board believes that it is in 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, the Board
has vested powers to buy back ordinary shares up to a maximum of
14.99% of the shares issued following the Company's Initial Public
Offering. This authority will expire at the conclusion of the
Company's first AGM or, if earlier, 18 months from the date on
which the resolution conferring the authority was passed. As the
Company's shares traded predominantly at a premium to Net Asset
Value throughout the period under review, no repurchases were
authorised. At the forthcoming AGM the Board is seeking to renew
its powers to buy back ordinary shares.
The full text of the proposed resolutions authorising the Board
to buy back shares or allot shares can be found in the Notice of
the Company's forthcoming AGM.
Corporate and operational structure
Operational and portfolio management
The Company has outsourced its operations and portfolio
management to various service providers as detailed below:
-- Pollen Street Capital Limited has been appointed as the
Company'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 Company's company secretary and administrator;
-- Indos Financial Limited has been appointed to act as the Company's depositary;
-- Computershare Investor Services plc has been appointed as the Company's registrar; and
-- Liberum Capital Limited has been appointed to act as the
Company's corporate broker and financial adviser.
In addition to the above, the Company has been provided with
legal advice for the work undertaken in respect of the Initial
Public Offering, subsequent share placings and in respect of
various of its unquoted investments.
Alternative Investment Fund Managers Directive
In accordance with the AIFMD, the Company has appointed Pollen
Street Capital Limited to act as the Company's AIFM for the
purposes of the AIFMD. The AIFM ensures that the Company's assets
are valued appropriately in accordance with the relevant
regulations and guidance. In addition, the Company has appointed
Indos Financial Limited as depositary, to provide custody services
to the Company as required by the AIFMD.
Donations
The Company made no political or charitable donations during the
period under review to organisations either within or outside the
EU.
Environment, human rights, employee, social and community
issues
The Company is required by law to provide details of
environmental matters (including the impact of the Company'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 Company does not have any employees and the Board is
composed of independent non-executive Directors. As an investment
trust, the Company does not have any direct impact on the
environment. The Company 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 Company has no operations and therefore no greenhouse gas
emissions to report nor does it have responsibility for any other
emissions producing sources under the Companies Act 2006 (Strategic
Report and Directors' Reports) Regulations 2013, including those
within its underlying investment portfolio. However, the Company
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 Company aims to conduct itself responsibly,
ethically and fairly.
Board diversity
The Board consists of three non-executive Directors, none of
whom are female. The Board seeks to appoint new Directors on the
basis of merit as a primary consideration, with the aim of bringing
an appropriate range of skills and experience together.
Principal Risks and Uncertainties
The Board has carried out a robust assessment of its risks and
controls and in doing so, has established a robust process to
identify and monitor the risks faced by the Company. The process
involves the maintenance of a risk register, which identifies the
risks facing the Company 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 Company. The
day-to-day risk management functions of the Company have been
delegated to the Investment Manager, which reports to the
Board.
Operational Risks
Third Party Service Providers
The Company has no employees and the Directors have all been
appointed on an independent non-executive basis. Whilst the Company
has taken all reasonable steps to establish and maintain adequate
procedures, systems and controls to enable it to comply with its
obligations, the Company is reliant upon the performance of third
party service providers for its executive function. In particular,
the Investment Manager, Depositary, Administrator, Registrar and
Servicers, amongst others, will be performing services which are
integral to the day-to-day operation, including IT, of the
Company.
The termination of service provision by any service provider, or
failure by any service provider to carry out its obligations to the
Company, or to carry out its obligations to the Company in
accordance with the terms of its appointment, could have a material
adverse effect on the Company's operations and its ability to meet
its investment objective.
Mitigation
Day-to-day oversight of third party service providers is
exercised by the Investment Manager and reported to the Board on a
quarterly basis. As appropriate to the function being undertaken,
each of the service providers is subject to regular performance and
compliance monitoring. The performance of the Investment Manager in
its duties to the Company is subject to ongoing review by the Board
on a quarterly basis as well as formal annual review by the
Company'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 Company.
Reliance on key individuals
The Company 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 Company. 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 Company's business prospects and results of
operations. Accordingly, the ability of the Company 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 Company 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 Company is subject to
ongoing review by the Board on a quarterly basis as well as formal
annual review by the Company's Management Engagement Committee.
Fluctuations in the market price of Issue Shares
The market price of the issue shares may fluctuate widely in
response to different factors and there can be no assurance that
the issue shares will be repurchased by the Company even if they
trade materially below their Net Asset Value. Similarly, the shares
may trade at a premium to Net Asset Value whereby the shares can
trade on the open market at a price that is higher than the value
of the underlying assets. There can be no assurance, express or
implied, that shareholders will receive back the amount of their
investment in the issue shares.
Mitigation
The Investment Manager and the Board closely monitor the level
of discount or premium at which the 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 purchases will take
place or that any purchases will have the effect of narrowing any
discount to Net Asset Value at which the ordinary shares may trade.
When the shares trade at a premium the Company may issue shares to
reduce the premium at which shares trade. As at 31 December 2016
the shares were trading at a premium to Net Asset Value.
Investments
Achievement of the Investment Objective
There can be no assurance that the Investment Manager will
continue to be successful in implementing the Company's investment
objective.
Mitigation
The Company's investment decisions are delegated to the
Investment Manager. Performance of the Company 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. In the event it is required, any action
required to mitigate underperformance is taken as deemed
appropriate by the Investment Manager.
Borrowing
The Company 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 Company 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 issue shares when the value of
the Company'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 Company's income falls for whatever
reason, the use of borrowings will increase the impact of such a
fall on the Company's return and accordingly will have an adverse
effect on the Company's ability to pay dividends to
shareholders.
Mitigation
The Investment Manager and the Board closely monitors the level
of gearing of the Company. The Company has a maximum limitation on
borrowings of 100 per cent of Net Asset Value (calculated at the
time of draw down) which the Investment Manager may affect at its
discretion. As at the date of this report, the Company had a target
leverage ratio of 50-75 per cent of Net Asset Value and had no
current borrowing.
Exposure to Credit Risk
The Company is expected to invest a significant proportion of
its assets in Credit Assets which, by their nature, are exposed to
credit risk and may be impacted by adverse economic and market
conditions, including through higher impairment charges, increased
capital losses and reduced opportunities for the Company to invest
in Credit Assets. Additionally, competition could serve to reduce
yields and lower the volume of loans generated by the Company. The
Origination Partner has not guaranteed to provide a minimum number
of Credit Assets.
Mitigation
The Company will invest in a granular portfolio of assets,
diversified by the number of borrowers, the type, and the credit
risk (ranked A-E) of each borrower. Each loan is subject to,
amongst other restrictions, a maximum single loan exposure limit.
Additionally, the Company has made assumptions around loss and
arrears rates within the portfolio in its financial projections.
Further, the Investment Manager has established stringent
underwriting criteria which includes credit referencing, income
verification and affordability testing, identity verification and
various forward-looking indicators of a borrower's likely financial
strength.
Origination rates and performance of the underlying assets of
the Company are closely monitored on an ongoing basis by the
Investment Manager and the Board, and are reviewed in detail at
each Board meeting. In addition to the Origination Partner, the
Company has entered agreements with a number of referral partners
to provide a diversified range of sources from which to select
attractive assets. The Company looks to add additional referral
partners on an ongoing basis in order to further diversify its
origination sources.
Interest Rate Risk
The Company intends to invest in Credit Assets which may be
subject to a fixed rate of interest, or a floating rate of interest
(which may be linked to base rates or LIBOR) and expects that its
borrowings will be subject to a floating rate of interest. Any
mismatches the Company has between the income generated by its
Credit Assets, on the one hand, and the liabilities in respect of
its borrowings, on the other hand, may subject the Company to
interest rate risk.
Mitigation
Interest rate risk exposures may be managed, in part, by
matching any floating rate borrowings with investments in Credit
Assets that are also subject to a floating rate of interest. The
Company may use derivative instruments, including interest rate
swaps, to reduce its exposure to fluctuations in interest rates,
however some unmatched risk may remain.
Liquidity of Investments
The Company may invest in Equity Assets that are aligned with
the Company's strategy and that present opportunities to enhance
the Company's return on its investments. Such Equity Assets are
likely to be predominantly in the form of unlisted equity
securities. Investments in unlisted equity securities, by their
nature, involve a higher degree of valuation and performance
uncertainties and liquidity risks than investments in listed
securities and therefore may be more difficult to realise.
Mitigation
The Company has established investment restrictions on the
extent to which it can invest in Equity Assets, such that no more
than 10 per cent of the net proceeds of any placing are invested in
Equity Assets. Compliance with these restrictions is monitored by
the Investment Manager on an ongoing basis and by the Board
quarterly.
Regulations
Tax
Any changes in the Company's tax status or in taxation
legislation could affect the value of investments held by the
Company, affect the Company's ability to provide returns to
shareholders and affect the tax treatment for shareholders of their
investments in the Company.
Mitigation
The Company intends at all times to conduct its affairs so as to
enable it to qualify as an investment trust for the purposes of
Chapter 4 of Part 24 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 Company
to maintain its investment trust status. The conditions required to
satisfy the investment trust criteria shall be monitored by the
compliance function of the Investment Manager and performance of
the same shall be reported to the Board on a quarterly basis.
Breach of applicable legislative obligations
The Company and its third-party service providers are subject to
various legislation and regulations, including, but not limited to,
the Consumer Credit Act and the Data Protection Act. Any breach of
applicable legislative obligations could have a negative impact on
the Company and impact returns to shareholders.
Mitigation
The Company 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 to terminate each
of these counterparties with limited notice should they continually
or materially breach any of their legislative obligations, or their
obligations to the Company 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 Company. 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 Company is subject to ongoing review by the Board on a
quarterly basis as well as formal annual review by the Company's
Management Engagement Committee.
Key Performance Indicators (KPIs)
The Board monitors success in implementing the Company's
strategy against a range of key performance indicators (KPIs),
which are viewed as significant measures of success over the longer
term. Although performance relative to the KPIs is also monitored
over shorter periods, it is success over the long term that is
viewed as more important, given the inherent volatility of
short-term investment returns. The principal KPIs are set out
below:
-- the movement in Net Asset Value per ordinary share;
-- dividend per share and dividends as a proportion of average equity;
-- the premium/discount (after deducting borrowings at fair value);
-- the movement in the share price;
-- ongoing charges ratio; and
-- revenue return.
Approval
The Strategic Report was approved by the Board of Directors on
26 April 2017 and signed on its behalf by:
Robert Sharpe
Chairman
Board of Directors
Robert Sharpe (1)
Chairman of the Board and the Management Engagement Committee
and a member of the Audit Committee
Robert Sharpe (Chairman) (independent)
(aged 67)
Robert has over 35 years' experience in retail banking. He is
currently chairman at Al Rayan Bank plc and Bank of Ireland UK plc
and non-executive Director of Aldermore Group plc and Aldermore
Bank plc. He has recently returned from the Middle East where he
held several non-executive Directorships at banks in the UAE, Oman
and Turkey. Robert was previously executive chairman at Stonehaven
UK Limited and Chief Executive Officer at West Bromwich Building
Society, a role he took to chart and implement its rescue plan.
Prior to this, he was Chief Executive Officer at Portman Building
Society and Bank of Ireland in the UK.
Jim Coyle (1)
Chairman of the Audit Committee and member of the Management
Engagement Committee
Jim Coyle (independent) (aged 60)
Jim is a non-executive Director, chair of the Risk committee and
member of the Audit committee at HSBC Bank plc, chairman of HSBC
Trust Company (UK) Ltd, and a non-executive Director at the
Scottish Building Society, Scottish Water and Marks & Spencer
Bank plc. He was previously 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 a member of the Financial
Reporting Council's Monitoring Committee.
Ravi Takhar (1)
Member of the Audit and Management Engagement Committees
Ravi Takhar (independent) (aged 51)
Ravi has more than 20 years' experience in the financial
services sector as a lawyer, investment banker and entrepreneur. He
is currently Chief Executive Officer of London-listed Orchard
Funding Group, which he founded in 2002; the business specialises
in insurance premium finance and the professional fee funding
market. Ravi's previous roles were as Head of Financial Services
Investment at Nikko, Chairman of Mortgages PLC and Head of Mortgage
Principal Finance at Investec Bank.
(1) Appointed 14 December 2015Statutory Information
Board members, and directors' and officers' insurance
The names and biographical details of the Board members who
served on the Board as at the period end can be found on page 22.
Lindsey McMurray and James Scott were appointed the Company's
initial Directors at the Company's incorporation on 2 December
2015. Both Lindsey McMurray and James Scott resigned from the Board
on 14 December 2015 at which point Robert Sharpe, Jim Coyle, Ravi
Takhar, and Mark Huggins were appointed. Mark Huggins resigned on
13 April 2016.
During the year under review the Company purchased and
maintained directors' and officers' liability insurance for its
Directors and officers as permitted by section 233 of the Companies
Act 2006. The Company acquired specific Public Offering and
Securities Insurance which commenced on 24 February 2015 with a
five-year run-off period.
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
Chapter 4 of Part 24 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.
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 Company. Further
details of the Company's principal risks and uncertainties can be
found in the Strategic Report on pages 3 to 20 and details of the
Company's internal controls can be found on pages 31 to 32. Details
of the Company's hedging policies are set out in the Strategic
Report on page 15.
Share capital - voting and dividend
As at 31 December 2016, the Company had 19,926,110 ordinary
shares in issue. There are no other classes of shares in issue and
no shares are held in Treasury.
On 18 December 2015, the Board was granted authority to issue up
to an additional 20,000,000 ordinary shares and / or C shares in
aggregate prior to the conclusion of the Company's first AGM. In
addition, the Board was authorised to issue and allot up to 25
million C shares on a non-pre-emptive basis from the conclusion of
the first AGM of the Company, such authority to expire at the
conclusion of the fourth AGM of the Company. The Directors are
seeking to renew their authority to allot ordinary shares at the
Company's forthcoming AGM to be held on 2 June 2017.
During the period under review a total of 19,926,109 ordinary
shares were issued as detailed below:
Price Premium to
Shares paid net asset
issued per share value (%)
(pence) (1)
======= ========== ========== ==========
23 Dec
2015 10,000,000 1,000.0 1.8%
17 May
2016 5,000,000 1,000.0 0.6%
16 Dec
2016 4,926,109 1,015.0 1.0%
======= ========== ========== ==========
(1) Last published NAV at time of issue
The ordinary shares carry the right to receive dividends and
have one voting right per ordinary share. There are no shares which
carry specific rights with regard to the control of the Company.
The shares are freely transferable. There are no restrictions or
agreements between shareholders on the voting rights of any of the
ordinary shares or the transfer of shares.
The Company does not have a fixed life, however, pursuant to the
articles of association, an ordinary resolution for the
continuation of the Company will be proposed at the AGM of the
Company to be held in 2021 and if passed, every five years
thereafter. Upon any resolution not being passed, proposals will be
put forward to the effect that the Company be wound up, liquidated,
reconstructed or delisted.
In addition, where in a financial period of the Company ending
on or after 31 December 2016 the Ordinary Shares have traded, on
average over that financial period, at a discount in excess of 10
per cent to Net Asset Value per ordinary share, the Company will be
required to propose a special resolution at the next AGM for the
discontinuation of the business of the Company in its present form.
If such a discontinuation resolution is passed, proposals will be
put forward by the Directors to shareholders within four months to
address the trading discount to Net Asset Value per ordinary share
(which may include proposals for the reorganisation, reconstruction
or winding up of the Company).
On a winding up or a return of capital by the Company, the
ordinary shareholders are entitled to the capital of the
Company.
No final dividend is being recommended. The Company's policy is
to pay dividends on a quarterly basis, as set out in the Company's
prospectus dated 18 December 2015 (the "Prospectus"). The dividends
paid or payable in respect of the period ended 31 December 2016 are
set out Note 8 to the financial statements. A reconciliation of
movements in reserves is presented in the Changes in Shareholders'
Funds on page 48 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 period.
Substantial share interests
As at 31 December 2016, 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 Date notified Ordinary Percentage of total
shares voting rights
=================== =============== ========== ==============================
Before After
notification notification
=================== =============== ========== ============== ==============
Caledonian
Consumer Finance 23 February
Limited 2016 700,000 0.00% 7.00%
=================== =============== ========== ============== ==============
16 December
Invesco Limited 2016 9,137,469 46.00% 45.85%
=================== =============== ========== ============== ==============
Prudential
plc; M&G Group
Limited; M&G
Limited; M&G
Investment
Management
Limited;
M&G Securities 19 December Less than
Limited 2016 1,634,482 3% 8.20%
=================== =============== ========== ============== ==============
Following the year-end, the Company has not received any further
notifications.
Independent auditor
The Company's independent auditor, Pricewaterhouse-Coopers LLP
("PwC"), were appointed during the period and has expressed
willingness to continue to act as the Company's auditor for the
forthcoming financial year. The Audit Committee has carefully
considered the auditor's appointment, as required in accordance
with its Terms of Reference, and, having regard to its
effectiveness and the services it has provided the Company during
the period under review, has recommended to the Board that the
independent auditor be appointed at the forthcoming AGM. At the
first AGM resolutions are therefore to be proposed for the
appointment of the independent auditor and to authorise the
Directors to agree its remuneration for the forthcoming financial
year. In reaching its decision, the Audit Committee considered the
points detailed on pages 33 to 35 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 Company's auditor is 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 Company's auditor is 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
Company from the date of this report, which shows that the Company
will be able to generate sufficient cash flows in order to meet its
liabilities as they fall due. Accordingly, the Directors are
satisfied that the going concern basis remains appropriate for the
preparation of the financial statements. The Company also has
detailed policies and processes for managing the risks, set out in
the Strategic Report on pages 17 to 19.
Viability statement
In accordance with Principle 21 of the Association of Investment
Companies Code of Corporate Governance published in February 2015
and provision C.2.2 of the UK Corporate Governance Code, published
by the Financial Reporting Council in September 2014, the Directors
have assessed the prospects of the Company over a three-year period
ending December 2019. The Board believes this period to be
appropriate taking into account the current trading position and
the potential impact of the principal risks that could affect the
viability of the Company.
At the year-end, the Company had cash balances of GBP35.4
million in excess of all liabilities. There are therefore limited
risks to the viability of the Company. 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 funding
levels, origination volumes and the performance of the assets
acquired.
The analysis demonstrates that due to the stability and cash
generating nature of the portfolios and wholesale agreements, as
well as the debt facilities in place, the Company would be able to
withstand the impact of the risks identified. Based on the robust
assessment of the principal risks, prospects and viability of the
Company, the Board confirms that they have reasonable expectation
that the Company will be able to continue operation and meet its
liabilities as they fall due over the three-year period ending
December 2019. The Board also continuously monitor the financial
performance of the Company against key financial ratios ensuring a
strict discipline in the financial management of the business.
Management and administration
Company Secretary
Apex Fund Services (UK) Ltd (the "Company Secretary") has been
appointed as the company secretary of the Company. Under the terms
of the administration agreement, the fee for the provisions of the
Company Secretary's services will be included in the fee payable to
the administrator.
Administrator
Apex Fund Services (UK) Ltd (the 'Administrator'), a company
authorised and regulated by the Financial Conduct Authority
("FCA"), has been appointed as the administrator of the Company.
The Administrator provides the day-to-day administration of the
Company. The Administrator is also responsible for the Company's
general administrative functions, such as the calculation of the
Net Asset Value and maintenance of the Company's accounting
records, and ensures that the Company complies with its continuing
obligations as an investment trust.
Under the terms of the administration agreement, the
Administrator charges a fee for its fund administration services
equal to the greater of: (i) GBP5,150 per month (increased by 3 per
cent on 1 January in each year); and (ii) an amount equal to the
sum of 1/12 of 0.06 per cent of the portion of Net Asset Value up
to GBP150 million, and 1/12 of 0.05 per cent of the excess of Net
Asset Value above GBP150 million. The 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.
Investment Manager
The Investment Manager, a UK-based company authorised and
regulated by the FCA, has been appointed the Company'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 Company's assets and ensures that
these are valued appropriately in accordance with the relevant
regulations and guidance.
Under the terms of the management agreement, the Investment
Manager is entitled to a management fee and a performance fee
together with reimbursement of reasonable expenses incurred by it
in the performance of its duties. From the period from first
admission, the management fee payable was based on 1.0 per cent of
the Gross Asset Value (which includes only value attributable to
credit assets and equity assets held by the Company for investment
purposes). Once more than 80.0 per cent of the listing proceeds of
any placing are invested the management fee payable was based on
1.0 per cent of the Gross Assets. Further details on the management
fee and the performance fee can be found in Note 5 to the financial
statements. The management agreement can be terminated by either
party providing twelve months' written notice.
For as long as the Origination Partner is part of the same group
as the Investment Manager the fees payable to the Origination
Partner, which are calculated as a percentage of the purchase price
for each Credit Asset acquired by the Company from the Origination
Partner, shall be deducted from the management fee payable to the
Investment Manager. There was GBPnil payable to the Origination
Partner at 31 December 2016.
Depositary
The Company's depositary is Indos Financial Limited (the
"Depositary"), a company authorised and regulated by the FCA. Under
the terms of the depositary services agreement the Depositary is
entitled to a periodic fee calculated as follows:
(A) where NAV is less than or equal to GBP200 million, 0.02 per
cent. of NAV per annum, subject to a minimum monthly fee of
GBP2,500; and
(B) where NAV is greater than GBP200 million, 0.02 per cent. of
NAV per annum in respect of the first GBP200 million of NAV
and:
i. 0.0175 per cent. per annum of that part of NAV which is in
excess of GBP200 million but less than or equal to GBP400 million;
plus
ii. 0.015 per cent. per annum of that part of NAV which is in excess of GBP400 million.
The Depositary invoices the Company monthly in arrears in
respect of the periodic fee (together, if applicable, with any VAT
thereon), which shall be payable by the Company within 30 days of
the relevant invoice.
The Depositary is entitled to charge an additional fee where the
Company 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 Company 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 Company. 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 Company 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 Company not less than nine months'
written notice of its wish to do so. To the extent that the Company
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
Company 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.
Corporate broker and financial adviser
Liberum Capital Limited ("Liberum"), a company authorised and
regulated in the United Kingdom by the FCA, has been appointed as
the Company's corporate broker and financial adviser. Liberum is
entitled to a retainer fee of GBP1 per annum (exclusive of VAT and
out of pocket expenses). Liberum was also appointed as the placing
agent for the Company's initial public offering and subsequent
share issues, and under the terms of the placing agreement was
entitled to placing commission equal to 1 per cent of gross
proceeds (exclusive of VAT and out of pocket expenses). The broker
agreement between Liberum and the Company can be terminated by
either party providing three months' written notice.
Change of control
There are no agreements which the Company is party to that might
be affected by a change of control of the Company except for the
agreement in relation to the Company's debt facility with the Royal
Bank of Scotland plc. 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 and if
negotiations to continue the facility are not concluded within 30
days, the liability may be repayable.
Subsequent events
Save as noted below, there have been no important events to
disclose since the period end under review.
On 13th January 2017, the Company provided finance of GBP40m,
which included the acquisition of a loan book from, and taking an
equity stake of 28.57 per cent in, The Green Deal Finance
Company.
On 31 March 2017, a dividend of 23.50 pence per Ordinary Share
was paid. Other than this, there has been no significant change in
the financial condition and operating results of the Company during
or since the end of the period covered by this report.
Future developments
Indications of likely future developments in the business of the
Company are set out in the Strategic Report on pages 3 to 20.
Regulatory disclosures
The disclosures below are made in compliance with the
requirements of Listing Rule 9.8.4.
Listing Rule
======================= =========================================
9.8.4 (1) - The Company has not capitalised
capitalised any interest in the period under
interest review.
======================= =========================================
9.8.4(2) - unaudited The Company has not published any
financial information unaudited financial information
in either a class 1 circular or
a prospectus or in respect of any
profit forecast or profit estimate
in accordance with listing rule
9.2.18.
======================= =========================================
9.8.4 (3) - This provision has been deleted.
deleted
======================= =========================================
9.8.4 (4) - The Company has no incentive schemes
incentive schemes in operation.
======================= =========================================
9.8.4 (5) and No Director of the Company has waived
(6) - waiver or agreed to waive any current or
future emoluments from the Company.
======================= =========================================
9.8.4 (7), (8) During the period under review,
and (9) the Company issued a total of 9,926,109
ordinary shares with a nominal value
of GBP99,261 and an average price
of 1,007.44 pence per share for
a total consideration of GBP98,772,000
including commission and issue costs.
Further details can be found on
page 23.
======================= =========================================
9.8.4 (8) and The Company is not part of a group
9.8.4 (9) - of companies. These Listing Rules
relate to companies therefore, do not apply.
that are part
of a group of
companies
======================= =========================================
9.8.4 (10) - During the period under review,
contract of there were no contracts of significance
significance subsisting to which the Company
is a party and in which a Director
of the Company is or was materially
interested or between the Company
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 During the period under review,
(13) - there were no arrangements under
waiving dividends which a shareholder has waived or
agreed to waive any dividends or
future dividends.
======================= =========================================
9.8.4 (14) As set out in the Prospectus, the
Company has not voluntarily adopted
Listing Rule 9.8.4(14).
======================= =========================================
By order of the Board
Apex Fund Services (UK) Ltd
Company Secretary
26 April 2017
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 "UK
Code") has been voluntarily followed by the Company. The Directors
are ultimately responsible for the stewardship of the Company and
this section explains how they have fulfilled their corporate
governance responsibilities. This corporate governance statement
forms part of the Directors' report.
As set out in the Prospectus, the Company has voluntarily
adopted certain key provisions of the UK Listing Rules. Pursuant to
the Listing Rules as voluntarily adopted by the Company, the
Company must "comply or explain" against each of the provisions of
the UK Code. The Board is committed to high standards of corporate
governance. The Listing Rules and the Disclosure Guidance and
Transparency Rules ("DTR") require the Board to disclose how it has
applied the principles of the updated UK Code, published by the
Financial Reporting Council ("FRC") on 17 June 2016. A copy of the
UK Code is available from the website of the Financial Reporting
Council at frc.org.uk. The Association of Investment Companies
("AIC") has published its own Code on Corporate Governance (the
"AIC Code"), by reference to the AIC Corporate Governance Guide for
Investment Companies (the "AIC Guide"), revised in July 2016. 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 UK Code. The FRC has confirmed that AIC member companies who
report against the AIC Code and who follow the AIC Guide will be
meeting their obligations in relation to the UK Code and the
associated disclosure requirements of the DTR. Both the AIC Code
and AIC Guide are available from the AIC's website at
theaic.co.uk.
The Board has considered the principles and recommendations of
the AIC Code by reference to the AIC Guide. The AIC Code, as
explained by the AIC Guide, addresses all the principles set out in
the UK Code, as well as setting out additional principles and
recommendations on issues that are of specific relevance to the
Company.
The Board considers that voluntarily reporting against the
principles and recommendations of the AIC Code, and by reference to
the AIC Guide (which incorporates the UK Code), will provide better
information to shareholders.
Statement of compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Code, except as set out
below.
The UK Code includes provisions relating to:
-- The role of the chief executive;
-- Executive Directors' remuneration;
-- The senior independent Director;
-- The need for an internal audit function; and
-- The requirement for separate Nomination and Remuneration Committees.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the Company, being a small board with only 3 members and an
externally managed investment company. In particular, all of the
Company's day-to-day management and administrative functions are
outsourced to third parties. As a result, the Company has no
executive Directors, employees or internal operations. The Company
has therefore not reported further in respect of these
provisions.
The Board does not, at present, consider that separate
Nomination and Remuneration Committees would be appropriate at this
stage in the Company's life (the Company only having commenced
trading and gained its listing fewer than thirteen months prior to
the Company's period end) and given the Board's size, being three
members in total. Currently, decisions concerning the Board's
remuneration, nomination and Board appraisals are undertaken by the
Board as a whole. However, the need for separate Nomination and
Remuneration Committees and an internal audit function will be
considered on an annual basis.
The Board of Directors
The Board consists of three Directors, all of whom are
independent non-executive Directors. Biographies of the Directors
are shown on page 22 and demonstrate the wide range of skills and
experience that they bring to the Board. The Directors possess
business and financial expertise relevant to the direction of the
Company and consider themselves to be committing sufficient time to
the Company's affairs.
External search consultancy services were used to aid
recruitment of Board members prior to the Company's listing. The
Board may consider using an external search consultancy to aid in
the recruitment of future Board members.
None of the Directors has a service contract with the Company,
nor are any such contracts proposed. Each Director has been
appointed pursuant to a letter of appointment entered into with the
Company. The Directors' appointment can be terminated in accordance
with the 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 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
page 22.
The Directors have determined that the size of the Company's
Board does not warrant the appointment of a senior independent
Director at this time. All of the Directors are available to
address shareholder queries or engage in consultation as
required.
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 Board and
Audit Committee meetings held since the Company was first listed on
the London Stock Exchange on 23 December 2015 to 31 December 2016,
against the number of meetings each Board or Audit Committee member
was eligible to attend during the period under review. All
Directors attended the annual Management Engagement Committee
meeting held prior to the publication of this Annual Report.
Director Board Audit Committee
============== ===== ===============
Robert Sharpe 6/6 2/2
Jim Coyle 6/6 2/2
Ravi Takhar 6/6 2/2
============== ===== ===============
During the period under review Lindsey McMurray and James
William Scott served as Directors. However, they both resigned on
14 December 2015 before the Company commenced trading and they were
not eligible to attend the above meetings. Mark Huggins was
appointed as Director on 14 December 2015 and resigned as a
Director on 13 April 2016.
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 to ensure effective control of strategic,
financial, operational and compliance issues, which includes:
-- The Company'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;
-- Approving Board changes;
-- Considering and authorising Board conflicts of interest;
-- Approving the Company's annual accounts and half yearly
accounts including accounting policies;
-- Approving the Company's level of gearing;
-- The approval of terms of reference and membership of Board Committees; and
-- Approving liability insurance.
There is a procedure in place for the Directors to take
independent professional advice at the expense of the Company. No
such professional advice has been taken by the Directors during the
period under review other than in relation to the Company's initial
public offering.
The Company has taken out directors' and officers' liability
insurance, such cover to be maintained for the full term of each
Director's appointment.
Independence of Directors
Each of the Directors was considered, on appointment, to be
independent of Pollen Street Capital Limited and free from any
business or other relationship that could materially interfere with
the exercise of his independent judgement and remained so
throughout the period. There are no relationships or circumstances
relating to the Company that are likely to affect the judgement of
any of the Directors.
Care will be taken at all times to ensure that the Board is
composed of members who, as a whole, have the required knowledge,
abilities and experience to properly fulfil their role and are
sufficiently independent.
Directors' interests
No Director holds shares in the Company.
Board evaluation
In consideration of the Company's launch during 2015 and the
focus on investment, policies and procedures, the Board has
scheduled the first evaluation to take place during 2017 when it
was felt the Board and its Committees would be fully established
and the most benefit would be derived from the process. Any
training needs identified as part of the Board evaluation process
will be added to the agenda of the next Board meeting.
Board training and induction
The Company Secretary, the Board or the Investment Manager upon
request of the Board or any Director individually, will offer
induction training to new Directors about the Company, its key
service providers, the Directors' duties and obligations and other
matters as may be relevant from time to time.
The Board members are encouraged to keep up to date and attend
training courses on matters which are directly relevant to their
involvement with the Company.
Board appointment, election and tenure
The rules concerning the appointment and replacement of
Directors are contained in the Company's Articles of Association
and the Companies Act 2006.
None of the Directors consider length of service as an
impediment to independence or good judgement but, if they felt that
this had become the case, the relevant Director would stand
down.
The Chairman of the Company acts as Chairman of the Management
Engagement Committee. The Terms of Reference of all committees are
available from the Company Secretary's office and the Company's
website at www.honeycombplc.com
As the forthcoming AGM is the Company's first AGM, all members
of the Board will put themselves forward for re-election. 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 of 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.
Management agreement and continuing appointment
Details of the Investment Manager's agreement and fees are set
out in note 5 to the financial statements on pages 55 to 56.
The Board keeps the performance of the Investment Manager under
continual review. The Company's Management Engagement Committee
undertook its first annual appraisal of the manager and portfolio
manager after the period under review. The Management Engagement
Committee recommended to the Board that the appointments of all the
Company's third-party service providers continue. It was felt that
their appointment was in the best interests of the shareholders as
the Investment Manager had performed in line with expectations and
the Board is of the opinion that the continuing appointment of the
Investment Manager on the terms agreed is in the interests of the
Company's shareholders as a whole.
Conflicts of interest
The 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. Directors are not able
to vote in respect of any contract, arrangement or transaction in
which they have a material interest and in such circumstances, they
are not counted in the quorum at the relevant Board meeting. A
process has been developed to identify any of the Directors'
potential or actual conflicts of interest. This includes declaring
any potential new conflicts before the start of each Board meeting.
A schedule is maintained of each Director's potential conflicts of
interest.
Audit Committee
The Board has delegated certain responsibilities to its Audit
Committee. As there are only three members of the Board, including
the Chairman of the Board it is felt appropriate that all Directors
are members of the Audit Committee. The Board has established
formal terms of reference for the Audit Committee which are
available on the Company's website www.honeycombplc.com or from the
Company Secretary upon request. An outline of the remit of the
Audit Committee and its activities during the period are set out
below.
The Audit Committee is chaired by Jim Coyle and meets at least
twice a year. It is responsible for ensuring that the financial
performance of the Company is properly reported and monitored and
provides a forum through which the Company's external auditor may
report to the Board. The Audit Committee reviews and recommends to
the Board the annual and half-yearly reports and financial
statements, financial announcements, internal control systems, risk
metrics, decisions requiring a significant element of judgement and
procedures and accounting policies of the Company.
Further details on the work of the Audit Committee can be found
in the report of the Audit Committee on pages 33 to 35.
Management Evaluation Committee
The Management Evaluation Committee meets once a year. Its
principal duties are to formally review the actions and judgements
of the Investment Manager and the terms of the Investment
Management Agreement. The Committee reports to the Board on its
proceedings after each meeting.
Company secretary
The Board has direct access to the advice and services of the
Company Secretary, which is responsible for ensuring that the Board
and Committee procedures are followed and that applicable rules and
regulations are complied with. The Company Secretary is also
responsible for ensuring good information flows between all
parties.
Review of shareholder profile
The Board reviews reports provided by qualified independent
industry consultants and the Company's broker on the Company's
shareholder base and its underlying beneficial owners. The
Investment Manager and brokers disclose any concerns raised by
shareholders to the Board.
Stewardship responsibilities and the use of voting rights
The Financial Reporting Council ("FRC") introduced a Stewardship
Code which sets out the responsibilities of institutional
shareholders in respect of investee companies. Under the
Stewardship Code, managers should:
-- Publicly disclose their policy on how they will discharge
their stewardship responsibilities to their clients;
-- Disclose their policy on managing conflicts of interest;
-- Monitor their investee companies;
-- Establish clear guidelines on how they escalate Evaluation;
-- Be willing to act collectively with other investors where appropriate;
-- Have a clear policy on proxy voting and disclose their voting record; and
-- Report to clients.
The Investment Manager recognises that, in respect of Equity
Assets, one of the important obligations that it has as a
shareholder is the right to vote on issues submitted to
shareholders. These issues may include the election of Directors
and other important matters that affect the structure of the
investee company. The Investment Manager acts on behalf of the
Company in these matters and will consider exercising its voting
rights, supported by independent providers, if considered
appropriate, ahead of making an election.
Relations with shareholders
All shareholders have the opportunity to attend and vote, in
person or by proxy, 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 it
has agreed that it is appropriate for the Company to rely on the
internal audit controls which exist within its third-party
providers.
The Board has reviewed the effectiveness of the Administrator
and the Investment Manager's systems of internal control and risk
management. During the period under review, the Board has not
identified any significant failings or weaknesses in the internal
control systems of its service providers.
The Company 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 Company.
Details of the Company's risks can be found on pages 17 to 19 of
the Directors' Report, together with an explanation of the controls
that have been established to manage each risk. The risk matrix
provides a basis for the Audit 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 Company'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
Group companies which include the AIFM during the year was GBP2.6
million, split GBP2.3 million into fixed and GBP0.3 million in
variable remuneration. During the year, the average number of
beneficiaries at the Group which includes the AIFM were 19 and the
aggregate amount of remuneration paid in relation to the Senior
Management of the firm was GBP1.3 million. Fixed remuneration is
amounts paid as salaries. Variable remuneration is amounts paid
under bonus arrangements and distributions. The AIFM does not
consider that any individual member of staff of the AIFM has the
ability to materially impact the risk profile of the Company.
Other disclosures
The AIFMD requires that the AIFM ensures that certain other
matters are actioned and or reported to investors. Each of these is
set out below.
-- Provision and content of an Annual Report (FUND 3.3.2 and
3.3.5). The publication of the Annual Report and Accounts of the
Company satisfies these requirements.
-- Material change of information. The AIFMD requires certain
information to be made available to investors in the Company before
they invest and requires that material changes to this information
be disclosed in the Annual Report.
Periodic disclosure (FUND 3.2.5 and 3.2.6)
There are no assets subject to special arrangements due to their
illiquid nature and no new arrangements for the managing of the
liquidity of the Company.
There is no change to the arrangements, as set out in the
Prospectus, for managing the Company's liquidity.
The current risk profile of the Company is set out in the
Strategic Report: Principal Risks and Uncertainties on pages 17 to
19 and in note 21 Financial Risk Management on page 63.
The Company is permitted to be leveraged and the table below
sets out the current maximum permitted and actual leverage.
As a percentage Gross Commitment
of net method method
asset value
================ ======= ==========
Maximum
level of
leverage 100.0% 100.0%
Leverage
as at 31
December
2016 0.0% 0.0%
================ ======= ==========
There have been no breaches of the permitted leverage limits
within the reporting period and no changes to maximum level of
leverage employed by the Company.
Other matters
Pollen Street Capital Limited can confirm that required
reporting to the FCA has been undertaken in accordance with FUND
3.4.
Approval
This Report was approved by the Board of Directors on 26 April
2017.
On behalf of the Board
Robert Sharpe
Chairman
Report of the Audit Committee
As Chairman of the Audit Committee I am pleased to present the
Audit Committee report for the period ended 31 December 2016.
Membership of the Audit Committee
All the Directors are members of the Audit Committee. 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. As the Board is small with only three
members, because of the Chairman's relevant financial experience
gained through his involvement with other businesses during his
career and given our opinion that the Chairman is independent, the
Audit Committee greatly benefits from the Chairman's ongoing
input.
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. In summary, the role includes the
following:
-- To monitor the financial reporting process;
-- To review and monitor the integrity of the half-year and
annual financial statements and review and challenge where
necessary the accounting policies and judgements of the investment
manager and administrator;
-- To review the adequacy and effectiveness of the Company's
internal financial and internal control and risk management
systems;
-- To make recommendations to the Board on the re-appointment or
removal of the external auditor and to approve its remuneration and
terms of engagement;
-- To review and monitor the external auditor's independence and objectivity; and
-- To review and consider on an annual basis the need for an internal audit function.
Matters considered during the period
The Audit Committee has met twice during the period under review
and considered the following items:
-- The Company's initial accounts for the period ended 31 March
2016 and advised the Board accordingly;
-- The Company's half-year financial statements for the period
ended 30 June 2016 and advised the Board accordingly;
-- The Company's audit plan with the external auditor;
-- The policy on non-audit services;
-- The dividend policy; and
-- The Investment Manager's whistleblowing policy.
The Audit Committee also reviewed the following items:
-- Whether there was a requirement for an internal audit function;
-- Company's risk matrix and the internal controls implemented to manage those risks; and
-- The appropriateness of the Company's accounting policies and
whether appropriate estimates and judgements have been made.
UK non-audit services
In relation to non-audit services, the Audit Committee has
reviewed and implemented a policy on the engagement of the auditor
to supply non-audit services and this will be reviewed on an annual
basis. All requests or applications for other services to be
provided by the auditor are submitted to the Audit Committee and
will include a description of the services to be rendered and an
anticipated cost. The Company's policy follows the requirements of
the Financial Reporting Council's Ethical Standard for Auditors
published in September 2015 and which implemented the European
Union's revised Statutory Audit Directive (the revised Ethical
Standard became effective for periods commencing on or after 17
June 2016). The policy specifies a number of prohibited services
which it is not permitted for the auditor to provide under the
revised Ethical Standard.
During the period, the auditor provided reporting accountant
services on the Prospectus subsequent to the Company's listing and
in relation to the Company's subsequent further issuance of
ordinary shares. These non-audit fees amounted to GBP95,000. The
auditor also provided assurance services with respect to providing
an opinion on the Company's initial accounts, which were prepared
under a statutory requirement in order to enable the Company to pay
its first dividend prior to the issuance of the Company's annual
financial statements. The fees in relation to these services were
GBP19,500.
The Audit Committee reviewed the level of non-audit services and
were satisfied that the auditors maintained their independence.
Significant accounting matters
The Audit Committee met on 26 April 2017 to review the report
and accounts for the period to 31 December 2016. The Audit
Committee considered the following significant issues, including
principal risks and uncertainties in light of the Company's
activities and issues communicated by the Auditors during their
review, all of which were satisfactorily addressed:
Issue considered How the issue was addressed
========================= =========================================
Retention of Investment The Audit Committee receives a report
Trust Status from the Company's administrators
and Investment Manager confirming
if the Company has remained compliant
with the requirements to maintain
its Investment Trust status. HMRC
approved the investment status of
the Company. The Directors regularly
review the investments and their
mix to ensure they remain diversified,
its retained income levels to ensure
sufficient distributions are made
and the Company's shareholdings
to determine if the Company has
become a close company.
========================= =========================================
Risk of misappropriation The Audit Committee reviews reports
of assets and from its service providers on key
ownership of investments controls over the assets of the
Company. 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 Company's
assets. The Company's Depositary
issues a quarterly report on the
status of the assets to the Directors
for review.
========================= =========================================
The risk that The Board regularly reviews income
income is overstated, forecasts from the Investment Manager.
incomplete or The audit includes checks on the
inaccurate through completeness and accuracy of income
failure to recognise and also checks that this has been
proper income recognised in accordance with stated
entitlements or accounting policies.
to apply the appropriate
accounting treatment
for recognition
of income.
========================= =========================================
The risk that The Board regularly reviews impairment
impairment losses losses prepared by the Investment
are understated, Manager. The audit also includes
incomplete or checks on the completeness and accuracy
inaccurate through of impairments and also checks that
failure to implement this has been recognised in accordance
proper impairment with stated accounting policies.
policies or to
apply the appropriate
accounting treatment
========================= =========================================
External auditor
The Company's external auditor, Pricewaterhouse-Coopers LLP
("PwC"), were appointed 16 May 2016. 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. Due to the short period of time since PwC was appointed,
it is not considered appropriate to consider PwC's succession at
this point in time.
The individual at PwC who acts as the Company's appointed audit
partner is Mr. Richard McGuire. Mr McGuire's appointment is
reviewed annually. In accordance with UK legislation, the audit
partner must rotate at least every five years. As this is Mr
McGuire's first year as audit partner, he will be due to rotate out
of this role during 2021 at the latest.
The audit fees for the period under review can be found in note
6 to the financial statements on page 56.
The Audit Committee monitors the auditor's 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 period. The Audit
Committee is therefore satisfied that PwC is independent.
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 auditor. The Audit Committee has met
with the audit partner and assessed PwC's performance to date. I
have met with Mr McGuire separately to discuss the Company's audit
and other matters concerning the Company. I can confirm that Mr
McGuire did not raise any issues of concern during our meeting. The
review has involved an examination of the auditor's 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
has recommended to the Board that it proposes to shareholders via
an ordinary resolution that PwC be re-appointed as auditor at the
AGM. PwC has confirmed its willingness to continue in office.
The Audit Committee has direct access to the Company's auditor
and provides a forum through which the auditor reports to the
Board. Representatives of PwC attend the Audit Committee meetings
at least twice annually.
Internal audit
The Audit Committee believes that the Company does not require
an internal audit function, principally because the Company
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.
Approved
Jim Coyle
Chairman of the Audit Committee
26 April 2017
Directors' Remuneration Report
Statement from the Chairman
I am pleased to present the Directors' remuneration report for
the period ended 31 December 2016, prepared in accordance with The
Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 and the Companies Act 2006. The
Company's auditor is required to verify certain information within
this report subject to statutory audit by the Companies Act 2006.
Where information set out below has been audited it is indicated as
such.
We are required to seek shareholder approval of the Directors'
remuneration policy at least every third year and the remuneration
report annually. Any changes to the Directors' remuneration policy
will require shareholder approval. It is proposed that an ordinary
resolution to approve the Directors' remuneration policy will be
proposed as set out below at the Company's forthcoming AGM to be
held on 2 June 2017. It is proposed that this policy will be
adopted at that meeting with effect from the date of the AGM and
will remain in force for the year ending 31 December 2017 and for
the two subsequent years. An ordinary resolution to approve the
Directors' remuneration policy will be put to shareholders at least
once every three years. At the AGM, shareholders will also be asked
to consider an advisory resolution on the contents of the
Directors' remuneration report.
As at 31 December 2016, the Board comprised three non-executive
Directors, all of whom are independent of the Investment
Manager.
Given the size of the Board, and as the Company has no
employees, it is not considered appropriate for the Company to
establish separate Remuneration and Nomination Committees. It is,
therefore, the Company's practice for the Board to consider and
approve Directors' remuneration. At the period end Directors' fees
were set at the rate of GBP30,000 per annum for the Chairman and
GBP25,000 for the other Directors. The Nomination and Remuneration
Committee has considered the time commitment required to carry out
their duties and has approved an increase of the Board's fees. The
new fees will be at a rate of GBP40,000 per annum for the Chairman
and GBP33,000 per annum for the other Directors. A further GBP5,000
per annum will be paid to the Chairman of the Audit Committee. Many
parts of The Large and Medium-sized Companies and Groups (Accounts
and Reports) (Amendment) Regulations 2013 do not apply to the
Company as the Board is comprised entirely of non-executive
Directors and the Company has no employees. The Board has
considered and approved a formal policy for the approval of
Directors' expenses.
Directors' remuneration policy
The fees for the Board as a whole are limited to GBP250,000 per
annum in accordance with the Prospectus, divided between the
Directors as they may determine. Subject to this limit, the Board's
policy is that remuneration of non-executive Directors should
reflect the experience of the 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 Company.
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 Company's
affairs.
Due regard is taken of the Board's requirement to attract and
retain individuals with suitable knowledge and experience and the
role that individual Directors fulfil. There are no specific
performance-related conditions attached to the remuneration of the
Board and the Board members are not eligible for bonuses, pension
benefits, share options, long-term incentive schemes or other
non-cash benefits or taxable expenses. No other payments are made
to Directors other than reasonable out-of-pocket expenses which
have been incurred as a result of attending to the affairs of the
Company.
In addition to the Board's remuneration, Board members are
entitled to such fees as they may determine in respect of any extra
or special services performed by them, having been called upon to
do so. Such fees would only be incurred in exceptional
circumstances. An example of such a circumstance would be if the
Company was to undertake a corporate action, which would require
the Board to dedicate additional time to review associated
documents and to attend additional meetings. Such fees would be
determined at the Board's absolute discretion and would be set at a
similar rate to other comparable investment companies who have
undertaken equivalent activities. The fees would be set with the
Company's long-term success in mind and the interests of the
Company's members as a whole would be considered prior to the
setting of such fees.
The Directors are entitled to be paid all expenses properly
incurred by them in attending meetings with shareholders or other
Directors or otherwise in connection with the discharge of their
duties as Directors.
Shareholders have the opportunity to express their views in
respect of Directors' remuneration at the Company's AGM. The
Company has not sought shareholder views on its remuneration
policy. Any comment volunteered by shareholders on the remuneration
policy will be carefully considered and appropriate action taken.
No communications have been received from shareholders on the
Company's remuneration policy.
The Company's remuneration policy and its implementation are
reviewed by the Board as a whole on an annual basis. Directors do
not vote on their own fees. Reviews are based on third parties'
information on the fees of other similar investment trusts.
None of the Directors has a service contract with the Company,
nor are any such contracts proposed. Instead, Directors are
appointed pursuant to a letter of appointment entered into with the
Company. There is no notice period specified in the letters of
appointment or Articles of Association for the removal of
Directors. Directors are not appointed for a specific term. 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.
This policy has been followed since the Company's incorporation
on 2 December 2015.
Voting at Annual General Meeting
An ordinary resolution for the approval of the Directors'
remuneration policy will be put to a binding shareholder vote at
the forthcoming AGM. A binding vote means that if it is not
successful, the Board will be obliged to revise the policy and seek
further shareholder approval at a General Meeting specially
convened for that purpose.
The Directors' remuneration report, including 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 AGM on the two new
resolutions will be disclosed in the remuneration report for the
year to 31 December 2017.
Directors' fees (audited)
Single total aggregate Directors' remuneration for the period
under review was GBP93,593. The Directors who served during the
period under review received the following emoluments:
Fees paid during
the
period under
review
(2 December Total period
2015 to 31 to
December 2016) Taxable Non-taxable 31 December
Director (3) benefits benefits 2016
================= ================= ========== ============ =============
Robert Sharpe GBP31,844 - - GBP31,844
(Chair) (1)
================= ================= ========== ============ =============
Jim Coyle (1) GBP26,537 - - GBP26,537
================= ================= ========== ============ =============
Ravi Takhar GBP26,537 - - GBP26,537
(1)
================= ================= ========== ============ =============
Mark Huggins GBP8,675 - - GBP8,675
(1)
================= ================= ========== ============ =============
Lindsey McMurray - - - -
(2)
================= ================= ========== ============ =============
James Scott - - - -
(2)
================= ================= ========== ============ =============
Total GBP93,593 - - GBP93,593
================= ================= ========== ============ =============
(1) Robert Sharpe, Jim Coyle, Ravi Takhar and Mark Huggins were
appointed to the Board on 14 December 2015. Mark Huggins resigned
on 13 April 2016.
(2) Lindsey McMurray and James Scott were appointed as Directors
upon the Company's incorporation but resigned from the Board on 14
December 2015, prior to the Company's listing.
(3) Fees paid to the Directors during the period under review
does not include any employment taxes or valid business
expenses.
No payments were made to past Directors for loss of office. In
the absence of further major increases in the workload and
responsibility involved, the Board does not expect fees to increase
significantly over the next three years. The overall remuneration
of each Director will continue to be monitored by the Board, taking
into account those matters referred to in the annual statement
above. The Company did not pay any other benefits including
bonuses, pension benefits, share options, long-term incentive
schemes or other non-cash benefits or taxable benefits.
The Company has not made any loans to the Directors, nor has it
ever provided any guarantees for the benefit of any Director or the
Directors collectively nor does it intend to.
Company Performance
The Board is responsible for the Company's investment strategy
and performance, although day-to-day management of the Company's
affairs, including the management of the Company's portfolio, has
been delegated to third-party service providers. An explanation of
the performance of the Company is given in the Chairman's statement
and Investment Manager's review on pages 8 to 9.
The graph below shows the total return to ordinary shareholders
compared to the total shareholder returns of the FTSE All Share
Index during the period since the Company was listed (23 December
2015) to 31 December 2016. This index has been selected as the most
relevant, although there is no listed index that is directly
comparable to the Company's portfolio.
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 period since incorporation (2
December 2015) to 31 December 2016. The table shows the
remuneration paid to Directors for the period under review,
compared to the distribution payments to shareholders.
Period since
incorporation
(02 December
2015) to 31
December 2016
======================== ==============
Total remuneration GBP0.1m
paid to Directors
Shareholder distribution GBP6.7m
- dividends or share
buybacks
======================== ==============
Directors' interests (audited)
The Company does not have any requirement for any Director to
own shares in the Company.
As at 31 December 2016, the Directors do not hold shares in the
Company.
There have been no changes to any holdings between 31 December
2016 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
26 April 2017 and signed on behalf of the Board by:
Robert Sharpe
Chairman
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report,
the Directors' Remuneration Report and the financial statements in
accordance with applicable law and regulations.
Applicable law requires the Directors to prepare financial
statements for each financial year. As such the Directors have
prepared the financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union. The 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 Company and of the profit or loss of
the Company for that period. In preparing these financial
statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements and the Directors' Remuneration Report
comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
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.
The Directors consider that the Annual Report and financial
statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess a
company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed in
the Directors' Report, confirm that, to the best of their
knowledge:
-- the financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the Company;
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces;
-- so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
-- they have taken all the steps that they ought to have taken
as a director in order to make themselves aware of any relevant
audit information and to establish that the Company's auditors are
aware of that information.
Signed on behalf of the board by
Robert Sharpe
Chairman
26 April 2017
Independent Auditors Report
Report on the financial statements
Our opinion
In our opinion, Honeycomb Investment Trust plc's financial
statements (the "financial statements"):
-- give a true and fair view of the state of the Company's
affairs as at 31 December 2016 and of its profit and cash flows for
the 13-month period (the "period") then ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards ("IFRSs") as adopted by the European
Union; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
What we have audited
The financial statements, included within the Annual Report and
Audited Financial Statements (the "Annual Report"), comprise:
-- the statement of financial position as at 31 December 2016;
-- the statement of comprehensive income for the period then ended;
-- the statement of cash flows for the period then ended;
-- the statement of changes in shareholders' funds for the period then ended; and
-- the notes to the financial statements, which include a
summary of significant accounting policies and other explanatory
information.
The financial reporting framework that has been applied in the
preparation of the financial statements is IFRSs as adopted by the
European Union, and applicable law.
Our audit approach
Overview
Materiality
* Overall materiality: GBP2.0 million which represents
1 per cent of net assets.
============ ============================================================
Audit scope The Company is an Investment Trust Company
and engages Pollen Street Capital Limited
("the Investment Manager") to manage
its assets.
We tailored the scope of our audit taking
into account the types of investments
within the Company, the involvement
of the Investment Manager, the accounting
processes and controls, and the industry
in which the Company operates.
============ ============================================================
Areas of Our areas of focus comprised:
focus * Existence of loans;
* Valuation of loans reported at amortised cost less
provisions for impairment;
* Valuation of unlisted investments reported at fair
value; and
* Income recognition.
============ ============================================================
The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) ("ISAs (UK &
Ireland)").
We designed our audit by determining materiality and assessing
the risks of material misstatement in the financial statements. In
particular, we looked at where the Directors made subjective
judgements, for example in respect of significant accounting
estimates that involved making assumptions and considering future
events that are inherently uncertain. As in all of our audits we
also addressed the risk of management override of internal
controls, including evaluating whether there was evidence of bias
by the Directors that represented a risk of material misstatement
due to fraud.
The risks of material misstatement that had the greatest effect
on our audit, including the allocation of our resources and effort,
are identified as "areas of focus" in the table below. We have also
set out how we tailored our audit to address these specific areas
in order to provide an opinion on the financial statements as a
whole, and any comments we make on the results of our procedures
should be read in this context. This is not a complete list of all
risks identified by our audit.
Area of focus How our audit addressed the
area of focus
============================= =========================================================================
Existence of loans We obtained an understanding
Refer to page 51 of the design and implementation
(Principal Accounting of controls over recognition
Policies), page 58 and recording of loans and
(note 10) and page receivables.
34 (Report of the We obtained independent confirmation
Audit Committee). of loan balances from the Company's
There is a risk that loan administrators and counterparties
net assets could as applicable.
be misstated should We obtained a sample of loan
the loans not exist. agreements and agreed the principal
The Company hold amount, interest rates and
a large volume of other information to the Company's
individual loans accounting records.
which are originated No misstatements were identified
and serviced by third by our testing which required
parties, there is reporting to those charged
a risk that these with governance.
loans do not exist
and have been fraudulently
reported to the Company.
============================= =========================================================================
Valuation of loan We understood and assessed
investments reported the methodology and assumptions
at amortised cost applied by the Company in determining
less provisions for the amortised cost of loans
impairment and receivables, by reference
Refer to page 51 to accounting standards and
(Principal Accounting industry practice.
Policies), pages We tested the techniques used,
53 and 54 (Significant in determining the amortised
Accounting Judgements, cost amount and the recognition
Estimates and Assumptions), of any impairment loss. Our
page 58 (note 10) testing included:
and page 34 (Report * obtaining supporting information and analysis for the
of the Audit Committee). loan impairment assumptions used in the impairment
Loans and receivables assessment which were derived from historical data
are recorded at amortised and the performance of the Company's loan portfolios;
cost in the Statement
of Financial Position
and amounted to GBP157.8m * performing testing on a sample basis to confirm the
as at 31 December accuracy of the status of loans reported by the
2016, this amount servicers by agreeing payments of principal and
is net of an impairment interest to underlying transactions with borrowers;
provision of GBP6.2m and
(shown in note 10
of the financial
statements). * testing the calculation of impairment provision by
The impairment assessment agreeing loan inputs to servicers' reports and
requires estimates re-performing the calculation using the assumptions
and significant judgements determined by the Investment Manager.
to be applied by
the Directors such
that changes to key We found that the recording
inputs to the estimates of loans and receivables at
and/or the judgements amortised cost was consistent
made can result in with the Company's accounting
a material change policies and that the assumptions
to the valuation. used to calculate the impairment
provision were supported by
appropriate evidence.
============================= =========================================================================
Valuation of unlisted We understood and evaluated
investments reported the valuation methodology
at fair value applied, by reference to industry
Refer to page 51 practice and applicable accounting
(Principal Accounting standards, and tested the
Policies), page 54 techniques used by the Investment
(Significant Accounting Manager in determining the
Judgements, Estimates fair value of the unlisted
and Assumptions) investments.
and page 59 (note We performed the following:
11). * Agreed the price of recent investment to supporting
The fair value of documentation such as purchase agreements or bank
the unlisted investments statements.
("investee companies"),
which are the investments
reported by the Company * Held meetings with the Investment Manager to
at fair value through understand the performance of each investee company
profit or loss, is and the rationale for the valuation methodology
GBP4.7m as at 31 applied. We obtained supporting financial information
December 2016. This from the investee companies that corroborated the
is an area of focus discussions we held with the Investment Manager.
due to the fact that
unlisted investments
do not have readily We found that the Company's
determinable prices. valuations of unlisted investments
The valuation methodology were supported by the audit
primarily used by evidence we obtained.
the Company is based
on the 'price of
recent investment'.
The price of recent
investment approach
refers to any investment
into that investee
company that would
give an indication
of fair value. As
such, the valuation
of unlisted investments
is judgmental, increasing
the risk of material
misstatement based
on the size of the
investments held
in relation to the
overall financial
statements.
============================= ==== =====================================================================
Income recognition We obtained an understanding
Refer to page 50 of the design and implementation
(Principal Accounting of controls surrounding income
Policies), page 54 recognition.
(Significant Accounting Our testing procedures included
Judgements, Estimates the following:
and Assumptions), * We assessed the accounting policy for income
page 55 (note 4) recognition and determined that it was in compliance
and page 34 (Report with IFRSs as adopted by the European Union and the
of the Audit Committee). AIC SORP.
The accuracy and
occurrence of income
is an area of focus * We tested that income had been recognised in
for our audit given accordance with the accounting policy.
the objective of
the Company to provide
shareholders with * We performed sample testing on loan interest income,
an attractive level agreeing interest rates and maturities to supporting
of dividend income. documentation, including loan agreements, and to cash
received.
* We recalculated loan interest income recognised using
the effective interest method on a sample basis.
No misstatements were identified
by our testing which required
reporting to those charged
with governance.
============================= ==== =====================================================================
How we tailored the audit scope
The Company is an Investment Trust Company and engages Pollen
Street Capital Limited to manage its assets and an administrator,
Apex Fund Services (UK), Ltd, who maintains its books and
records.
We tailored the scope of our audit taking into account the types
of investments within the Company, the involvement of the third
parties referred to above, the accounting processes and controls,
and the industry in which the Company operates.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and on the financial
statements as a whole.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Overall materiality GBP2.0 million
==================== ============================================
How we determined 1 per cent of net assets.
it
==================== ============================================
Rationale The basis for our materiality is consistent
for benchmark with the benchmark we apply for our
applied investment trust clients, reflecting
the nature of operations, the performance
indicators from the financial statements
which are of focus for users of the
financial statements and our knowledge
of the industry in which the Company
operates.
==================== ============================================
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP100,000 as well
as misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.
Going concern
The Directors have voluntarily complied with Listing Rule
9.8.6(R)(3)(a) of the Financial Conduct Authority and provided a
statement in relation to going concern, set out on page 25,
required for companies with a premium listing on the London Stock
Exchange.
The Directors have requested that we review the statement on
going concern as if the Company were a premium listed Company. We
have nothing to report having performed our review.
The Directors have chosen to voluntarily report how they have
applied the UK Corporate Governance Code (the "Code") as if the
Company were a premium listed company. Under ISAs (UK &
Ireland) we are required to report to you if we have anything
material to add or to draw attention to in relation to the
Directors' statement about whether they considered it appropriate
to adopt the going concern basis in preparing the financial
statements. We have nothing material to add or to draw attention
to.
As noted in the Directors' statement, the Directors have
concluded that it is appropriate to adopt the going concern basis
in preparing the financial statements. The going concern basis
presumes that the Company has adequate resources to remain in
operation, and that the Directors intend it to do so, for at least
one year from the date the financial statements were signed. As
part of our audit we have concluded that the Directors' use of the
going concern basis is appropriate. However, because not all future
events or conditions can be predicted, these statements are not a
guarantee as to the Company's ability to continue as a going
concern.
Other required reporting
Consistency of other information
Companies Act 2006 reporting
In our opinion, the information given in the Strategic Report
and the Directors' Report for the financial period for which the
financial statements are prepared is consistent with the financial
statements.
ISAs (UK & Ireland) reporting
As a result of the Directors' voluntary reporting
on how they have applied the Code, under ISAs (UK
& Ireland)
we are required to report to you if, in our opinion:
=======================================================================================
We have
* information in the Annual Report is: no exceptions
to report.
* materially inconsistent with the information in the
audited financial statements; or
* apparently materially incorrect based on, or
materially inconsistent with, our knowledge of the
Company acquired in the course of performing our
audit; or
* otherwise misleading.
====================================================================== ===============
We have
* the statement given by the Directors on page 39, in no exceptions
accordance with provision C.1.1 of the Code, that to report.
they consider the Annual Report taken as a whole to
be fair, balanced and understandable and provides the
information necessary for members to assess the
Company's position and performance, business model
and strategy is materially inconsistent with our
knowledge of the Company acquired in the course of
performing our audit.
====================================================================== ===============
We have
* the section of the Annual Report on page 34, as no exceptions
required by provision C.3.8 of the Code, describing to report.
the work of the Audit Committee does not
appropriately address matters communicated by us to
the Audit Committee.
====================================================================== ===============
The Directors' assessment of the prospects of the Company and of
the principal risks that would threaten the solvency or liquidity
of the Company
As a result of the Directors' voluntary reporting
on how they have applied the Code, under ISAs (UK
& Ireland) we are required to report to you if
we have anything material to add or to draw attention
to in relation to:
==========================================================================
We have
* the Directors' confirmation on pages 17 to 19 of the nothing
Annual Report, in accordance with provision C.2.1 of material
the Code, that they have carried out a robust to add or
assessment of the principal risks facing the Company, to draw
including those that would threaten its business attention
model, future performance, solvency or liquidity. to.
============================================================= ===========
We have
* the disclosures in the Annual Report that describe nothing
those risks and explain how they are being managed or material
mitigated. to add or
to draw
attention
to.
============================================================= ===========
We have
* the Directors' explanation on page 25 of the Annual nothing
Report, in accordance with provision C.2.2 of the material
Code, as to how they have assessed the prospects of to add or
the Company, over what period they have done so and to draw
why they consider that period to be appropriate, and attention
their statement as to whether they have a reasonable to.
expectation that the Company will be able to continue
in operation and meet its liabilities as they fall
due over the period of their assessment, including
any related disclosures drawing attention to any
necessary qualifications or assumptions.
============================================================= ===========
The Directors have requested that we review and report on the
statement that they have carried out a robust assessment of the
principal risks facing the Company and the statement in relation to
the longer-term viability of the Company, as required under the
Listing Rules for companies with a premium listing on the London
Stock Exchange. Our review was substantially less in scope than an
audit and consisted only of making inquiries and considering the
Directors' process supporting their statements; checking that the
statements are in alignment with the relevant provisions of the
Code; and considering whether the statements are consistent with
the knowledge acquired by us in the course of performing our
audit.
Adequacy of accounting records and information and explanations
received
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept, or returns
adequate for our audit have not been received from branches not
visited by us; or
-- the financial statements and the part of the Directors'
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Directors' remuneration
Directors' remuneration report - Companies Act 2006 opinion
In our opinion, the part of the Directors' Remuneration Report
to be audited has been properly prepared in accordance with the
Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you
if, in our opinion, certain disclosures of Directors' remuneration
specified by law are not made. We have no exceptions to report
arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors'
Responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and ISAs (UK
& Ireland). Those standards require us to comply with the
Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and
only for the Company's members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We
do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of:
-- whether the accounting policies are appropriate to the
Company's circumstances and have been consistently applied and
adequately disclosed;
-- the reasonableness of significant accounting estimates made by the Directors; and
-- the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
Directors' judgements against available evidence, forming our own
judgements, and evaluating the disclosures in the financial
statements.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to provide
a reasonable basis for us to draw conclusions. We obtain audit
evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge acquired
by us in the course of performing the audit. If we become aware of
any apparent material misstatements or inconsistencies, we consider
the implications for our report.
Richard McGuire (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
26 April 2017
Financial Statements
Statement of Comprehensive Income
For the period from 2 December 2015 (date of incorporation) to
31 December 2016
Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
============================= ====== ========= ========= =========
Income
Investment interest 4 17,847 - 17,847
Other income 4 13 13
============================= ====== ========= ========= =========
17,860 - 17,860
Expenses
Management fee 5 (1,164) (44) (1,208)
Performance fee 5 (1,314) - (1,314)
Impairment of loans 10 (2,322) - (2,322)
Other expenses 6 (674) - (674)
============================= ====== ========= ========= =========
(5,474) (44) (5,518)
Profit / (loss) before
finance costs and taxation 12,386 (44) 12,342
Finance costs 15 (525) - (525)
Profit / (loss) before
taxation 11,861 (44) 11,817
Taxation on ordinary 7 - - -
activities
Profit / (loss) after
taxation 11,861 (44) 11,817
============================= ====== ========= ========= =========
Earnings per share (basic
and diluted) 9 94.4p (0.4)p 94.0p
============================= ====== ========= ========= =========
The total column of this statement represents the Statement of
comprehensive income prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union. The supplementary revenue return and capital return columns
are both prepared under guidance issued by the Association of
Investment Companies. All items in the above statement derive from
continuing operations.
No operations were acquired or discontinued during the year.
The Company does not have any income or expense that is not
included in net profit for the period. Accordingly, the net profit
for the period is also the Total Comprehensive Income for the
period, as defined in IAS1 (revised).
The notes on pages 50 to 65 form an integral part of the
financial statements.
Statement of Financial Position
As at 31 December 2016
31 December
2016
Notes GBP'000
============================= ====== ============
Non-current assets
Loans at amortised cost 10 157,845
Investments held at
fair value through profit
or loss 11 4,730
Fixed assets 12 369
============================= ====== ============
162,944
Current assets
Receivables 13 3,723
Cash and cash equivalents 38,877
============================= ====== ============
42,600
Total assets 205,544
Current liabilities
Management fee payable (136)
Performance fee payable (1,314)
Other payables 14 (2,030)
============================= ====== ============
(3,480)
Total assets less current
liabilities 202,064
Interest bearing borrowings 15 (13)
Total net assets 202,051
============================= ====== ============
Shareholders' funds
Ordinary share capital 16 199
Share premium 98,670
Revenue reserves 5,126
Capital reserves (44)
Special distributable
reserves 17 98,100
============================= ====== ============
Total shareholders'
funds 202,051
============================= ====== ============
Net asset value per
share 18 1,014.0p
============================= ====== ============
The notes on pages 50 to 65 form an integral part of the
financial statements.
The financial statements on pages 46 to 49 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 26 April 2017. They
were signed on its behalf by:
Robert Sharpe, Chairman
Statement of Changes in Shareholders' Funds
For the period from 2 December 2015 (date of incorporation) to
31 December 2016
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========== ========== =============== =========
Shareholders' - - - - - -
funds at 2
December 2015
======================= ========= ========= ========== ========== =============== =========
Management
shares issued 50 - - - - 50
======================= ========= ========= ========== ========== =============== =========
Management
shares bought
back (50) - - - - (50)
======================= ========= ========= ========== ========== =============== =========
Ordinary shares
issued 199 199,801 - - - 200,000
======================= ========= ========= ========== ========== =============== =========
Ordinary shares
issue costs - (3,031) - - - (3,031)
======================= ========= ========= ========== ========== =============== =========
Special distributable
reserves transfer - (98,100) - - 98,100 -
======================= ========= ========= ========== ========== =============== =========
Profit / (loss)
after taxation - - 11,861 (44) - 11,817
======================= ========= ========= ========== ========== =============== =========
Dividends
paid in the
period - - (6,735) - - (6,735)
======================= ========= ========= ========== ========== =============== =========
Shareholders'
funds at 31
December 2016 199 98,670 5,126 (44) 98,100 202,051
======================= ========= ========= ========== ========== =============== =========
As at 31 December 2016 the Company had distributable reserves of
GBP103.182 million for the payment of future dividends. The
distributable reserves are the revenue reserves (GBP5.126 million),
realised capital reserves (GBP0.044 million) and the special
distributable reserves (GBP98.100 million).
The notes on pages 50 to 65 form an integral part of the
financial statements.
Statement of Cash Flows
For the period from 2 December 2015 (date of incorporation) to
31 December 2016
31 December
2016
Notes GBP'000
================================ ====== ============
Cash flows from operating
activities:
Profit after taxation 11,817
Adjustments for:
Impairment of loans 10 2,322
Amortisation 12 99
(Increase) in receivables 13 (3,723)
Increase in payables 3,480
Net cash inflow from operating
activities 13,995
Cash flows from investing
activities:
Purchase of loans (160,167)
Purchase of investments 11 (4,730)
Purchase of fixed assets 12 (468)
Net cash (outflow) from
investing activities (165,365)
Cash flows from financing
activities:
Proceeds from issue of
ordinary shares 16 200,000
Share issue costs (3,031)
Proceeds from issue of
management shares 16 50
Redemption of management
shares 16 (50)
Interest bearing borrowings 15 19,013
Repayments of interest
bearing borrowing 15 (19,000)
Dividends declared and
paid 8 (6,735)
Net cash inflow from financing
activities 190,247
Net change in cash and
cash equivalents 38,877
Cash and cash equivalents -
at the beginning of the
period
Net cash and cash equivalents 38,877
================================ ====== ============
The notes on pages 50 to 65 form an integral part of the
financial statements.
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of accounting
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), which
comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB"), and
International Accounting Standards and Standing Interpretations
Committee interpretations approved by the International Accounting
Standards Committee ("IASC") that remain in effect, and to the
extent that they have been adopted by the European Union.
The principal accounting policies adopted by the Company 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 November 2014 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.
Foreign Currency
The financial statements are prepared in Pounds Sterling because
that is the currency of all of the transactions during the period,
so has been selected as the presentational currency.
The primary objective of the Company is to generate returns in
Pounds Sterling, its capital-raising currency. The liquidity of the
Company is managed on a day-to-day basis in Pounds Sterling as the
Company'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.
During the period under review there were no transactions in
foreign currencies. Transactions involving foreign currencies would
be converted at the exchange rate ruling at the date of the
transaction. Foreign currency monetary assets and liabilities would
be 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 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.
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 Company 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
Company's right to receive payment has been established, normally
the ex-dividend date.
Expenses
All expenses are accounted for on the accruals basis. In respect
of the analysis between revenue and capital items presented within
the Statement of Comprehensive Income, all expenses have been
presented as revenue items except as follows:
-- Transaction costs which are incurred on the purchases or
sales of investments designated as fair value through profit or
loss are expensed to capital in the Statement of Comprehensive
Income.
-- Expenses are split and presented partly as capital items
where a connection with the maintenance or enhancement of the value
of the investments held can be demonstrated and, accordingly, the
management fee for the financial period has been allocated 96.3 per
cent to revenue and 3.7 per cent to capital (being the ratio of
Credit Assets to Equity Assets at the financial year-end), in order
to reflect the Directors' long term view of the nature of the
expected investment returns of the Company.
Finance costs
Finance costs are accrued on the effective interest rate basis.
Since these costs are considered to be an indirect cost of
maintaining the value of investments they are allocated in full to
revenue.
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 period. 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 Company'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 Part 24, Chapter 4
of the Corporation Tax Act 2010 are not liable for taxation on
capital gains. The Company has been approved as an Investment Trust
by HMRC.
Irrecoverable withholding tax is recognised on any overseas
dividends on an accruals basis using the applicable rate for the
country of origin.
Financial instruments
Financial assets and financial liabilities are recognised in the
Statement of Financial Position when the Company becomes a party to
the contractual provisions of the instrument. The Company 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 Company settles its
obligations relating to the instrument.
Loans
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
interest rate method less impairment provisions (see note 10).
Investments
All investments held by the Company have been designated at fair
value through profit or loss ("FVPL") 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
2016 as recommended by the British Private Equity and Venture
Capital Association.
Purchases and sales of unlisted 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 Company 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 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 estimated irrecoverable
amounts (if any).
Cash and cash equivalents
Cash and cash equivalents (which are presented as a single class
of asset on the Statement of Financial Position) comprise cash at
bank and in hand and deposits with an original maturity of three
months or less. The carrying value of these assets approximates
their fair value.
Financial liabilities
Financial liabilities are classified according to the substance
of the contractual arrangements entered into.
Payables
Payables are non-interest bearing. They are initially stated at
their nominal value.
Interest bearing borrowings
Interest bearing borrowings are initially recognised at a
carrying value equivalent to the proceeds received net of issue
costs associated with the borrowings. After initial recognition,
interest bearing borrowings are subsequently measured at amortised
cost using the effective interest rate method.
Dividends
Interim dividends are recognised in the year in which they are
paid.
Adoption of New and Revised Standards
At the date of authorisation of these financial statements, the
following standards and interpretations, which have not been
applied in these financial statements, were in issue but were not
yet effective (and in some cases, had not been adopted by the
European Union):
IFRS 9 Financial Instruments
IFRS 9 "Financial Instruments", brings together the
classification and measurement, impairment and hedge accounting
phases of the IASB project to replace IAS 39, and is effective for
annual periods beginning on or after 1 January 2018. The key
elements of the standard are as follows:
-- Classification and measurement - IFRS 9 applies one
classification approach for all types of financial assets. Two
criteria are used to determine how financial assets should be
classified and measured: (a) the entity's business model (i.e. how
an entity manages its financial assets in order to generate cash
flows by collecting contractual cash flows, selling financial
assets or both); and (b) the contractual cash flow characteristics
of the financial asset (i.e. whether the contractual cash flows are
solely payments of principal and interest).
-- Impairment - the incurred loss model under IAS 39 is replaced
with a new expected loss model. 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. Risk of default and expected credit losses must
incorporate forward-looking and macroeconomic information. Expected
credit loss models will require more data and assumptions with
impairment provisions potentially becoming more volatile.
-- Hedge accounting - the new requirements align hedge
accounting more closely with risk management. The revised standard
also establishes a more principles-based approach to hedge
accounting.
The Company is currently working on its ability to:
-- review the classification and measurement of financial instruments under the requirements of
IFRS 9;
-- develop and validate a set of IFRS 9 models for calculating
expected credit losses on the Company's loan portfolios; and
-- implement internal governance processes which are appropriate for IFRS 9.
A detailed timetable is being prepared to ensure that credit
loss models are developed and tested in advance of 1 January 2018,
and that systems have been updated to report internally and
externally under IFRS 9. The impact on the Company's balance sheet
and income statement on adoption of IFRS 9 is being assessed.
IFRS 15 Revenue from Contracts with Customers
The Directors do not anticipate that the adoption of this
standard and interpretations will have a material impact on the
financial statements in the period of initial application.
Other future developments include the IASB undertaking a
comprehensive review of existing IFRSs. The Company will consider
the financial impact of these new standards as they are
finalised.
2. Significant Accounting Judgements, Estimates and Assumptions
The preparation of financial statements in conformity with IFRS
adopted in the EU requires the Company 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. Although these estimates
are based on the Directors' best knowledge of the amount, actual
results may differ ultimately from those estimates.
The areas requiring a higher degree of judgement or complexity
and areas where assumptions and estimates are significant to the
financial statements, are in relation to effective interest rate
impairment of loans and investments at fair value through profit or
loss described 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.
Impairment of Loans
The allowance for impairment losses on loans and receivables is
the Company's best estimate of losses incurred in the portfolio at
the reporting date. In determining the required level of impairment
provisions, the Company uses the outputs from the analysis of
historical data. Judgement is required to assess the robustness of
the outputs from this analysis and, where necessary, make
appropriate adjustments. Impairment allowances are made up of two
components, those determined collectively ("Collective Impairment")
and those determined individually ("Individual Impairment"). Both
components are applied to Consumer Loans, whilst only individual
impairment provisions are calculated for Wholesale loans.
Collective Impairment
Collective Impairment allowances are applied to Consumer Loans
with their smaller balances and homogenous product. This impairment
provision is established where it is believed that a loan is
impaired but this is not evidenced by way of a default on
contractual terms. Analysis takes into account factors such as the
type of asset, collateral type, past due status and other relevant
factors. These characteristics are relevant to the estimation of
future cash flows for groups of such assets as they are indicative
of the borrower's ability to pay all amounts due according to the
contractual terms of the assets being evaluated. Generally, the
impairment trigger used within the impairment calculation for a
loan, or group of loans, is when they reach a pre-defined level of
delinquency or where the customer is bankrupt. Loans where the
Company provides arrangements that forgive a portion of interest or
principal are also deemed to be impaired.
In addition, the collective provision also includes provision
for inherent losses, that is losses that have been incurred but
have not been separately identified at the reporting date. The
loans that are not currently recognised as impaired are grouped
into homogenous portfolios by product type. An assessment is made
of the likelihood of assets being impaired at the balance sheet
date and being identified subsequently; the length of time taken to
identify that an impairment event has occurred is known as the loss
emergence period. The loss emergence period is determined by the
Investment Manager for each portfolio which are dependent upon the
characteristics of the portfolio. Loss emergence periods are
reviewed regularly and updated when appropriate. In general the
period used is 3 months based on historical experience. This
provision is sensitive to changes in the loss emergence period.
Management use a significant level of judgement when determining
the collective unidentified impairment provision, including the
assessment of the level of overall risk existing within particular
sectors and the impact of the low interest rate environment on loss
emergence periods. In the portfolio, an increase of one month in
the loss emergence period in respect of the loan portfolio assessed
for collective unidentified impairment provisions would result in
an increase in the collective unidentified impairment provision of
GBP0.04 million.
The collective impairment allowance is also subject to
estimation uncertainty and in particular is sensitive to changes in
economic and credit conditions, including the interdependency of
house prices, unemployment rates, interest rates, borrowers'
behaviour, and consumer bankruptcy trends. It is, however,
inherently difficult to estimate how changes in one or more of
these factors might impact the collective impairment allowance.
Individual Impairment
Individual Impairment provisions are considered against the
assets based on pools of assets of a similar nature.
Consumer - The Company calculates specific impairment provisions
based on the Probability of Default ("PD") multiplied by the
Exposure at Default ("EAD") multiplied by the Loss Given Default
("LGD"):
-- The PD is based on the probability, dependent on stage of
arrears, that the loan will not recover to perform in line with
contractual payment terms; the assessment of the PD uses historical
experience of cohorts of similar products. Future cash flows are
estimated on the basis of the contractual cash flows of the assets
in the cohort and historical loss experience for similar assets.
The methodology and assumptions used for estimating future cash
flows are reviewed regularly by the Investment Manager to reduce
any differences between loss estimates and actual loss experience.
If the PD was increased by 25% then the provision at 31 December
2016 would have increased by GBP0.2 million.
-- The EAD is an estimate of the remaining exposure once a loan
defaults taking into account expected further repayments and is
dependent on stage of arrears. If the PD was increased by 25% then
the provision at 31 December 2016 would have increased by GBP1.4
million.
-- The LGD is based upon the Investment Manager's view of
losses, taking into consideration any collateral and the likely
recovery of any unsecured portion of the loan. The estimated cash
flows are calculated based on historical experience and are
dependent on estimates of the expected value of collateral which
takes into account house prices, and the net proceeds which might
be achieved in the event the property is repossessed and any prior
mortgages are repaid. The value of collateral supporting the
Company's secured loan portfolio is estimated by applying changes
in the house price indices to the original assessed value of the
property and periodic updates of the first mortgage balances. If
average house prices were ten per cent lower than those estimated
at 31 December 2016, the impairment charge would increase by
approximately GBP0.6 million in respect of secured loans within the
investment assets.
Wholesale - Wholesale assets are reviewed on a regular basis and
those showing potential or actual vulnerability are placed on a
watch list where greater monitoring is undertaken by the Investment
Manager and any adverse or potentially adverse impact on ability to
repay is used in assessing whether an asset should receive more
detailed scrutiny and support.
Specific examples of trigger events that could lead to the
initial recognition of impairment allowances against lending to
wholesale borrowers (or the recognition of additional impairment
allowances) include (i) trading losses, loss of business or major
customer of a borrower; (ii) material breaches of the terms and
conditions of a loan facility, including non-payment of interest or
principal, or a fall in the value of security such that it is no
longer considered adequate; (iii) disappearance of an active market
because of financial difficulties; or (iv) restructuring a facility
with preferential terms to aid recovery of the lending (such as a
debt for equity swap). For such individually identified financial
assets, a review is undertaken of the expected future cash flows
which requires significant management judgement as to the amount
and timing of such cash flows. Where the debt is secured, the
assessment reflects the expected cash flows from the realisation of
the security, net of costs to realise, whether or not foreclosure
or realisation of the collateral is probable. The determination of
individual impairment allowances requires the exercise of
considerable judgement by management involving matters such as
local economic conditions and the resulting trading performance of
the customer, and the value of the security held, for which there
may not be a readily accessible market. The actual amount of the
future cash flows and their timing may differ significantly from
the assumptions made for the purposes of determining the impairment
allowances and consequently these allowances can be subject to
variation as time progresses and the circumstances of the customer
become clearer.
There were no provisions as at 31 December 2016 as this asset
class is performing satisfactorily.
Effective Interest Rate Model ("EIRM")
Within the EIRM there are several areas of judgement that need
to be applied which impact the rate at which interest, fees and
expenses are recognised. These areas of judgement are required to
be updated on a periodic basis to ensure that they accurately
reflect management's best estimate of future cash flows. Key areas
of judgement within the policy include:
-- Estimated cash flow excluding expected losses
-- Incurred losses at acquisition
-- Fees and expenses
Equity Investments
The unquoted equity assets are valued on periodic basis using
techniques including a market approach, costs approach and/or
income approach. The valuation process is collaborative, involving
the finance and investment functions within the Investment Manager
with the final valuations being reviewed by the Investment
Manager's Valuation Committee. Given the recent nature of the
equity investments currently held the valuations have been
completed using the transaction prices. In future years the
specific techniques used will typically include earnings multiples,
discounted cash flow analysis, the value of recent transactions,
and, where appropriate, industry rules of thumb. The valuations
will 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 Company's stage of development, profitability, growth
prospects or risk as well as the rights associated with the
particular security.
Shareholders should note that increases or decreases in any of
the inputs in isolation may result in higher or lower fair value
measurements. Changes in fair value of all investments held at fair
value are recognised in the Statement of Comprehensive Income as a
capital item. On disposal, realised gains and losses are also
recognised in the 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.
3. Segmental Reporting
The Board and Investment Manager consider investment activity in
Credit Assets and selected Equity Assets as the single operating
segment of the Company, being the sole purpose for its existence.
No other activities are performed.
Whilst visibility over originations, portfolios, wholesale
lending and equity assets is afforded at an operational level, all
are considered 'routes to market' for acquiring interests in credit
assets, and thus act merely as indicators of the key drivers of
financial performance and position of the Company.
The four routes to market are not determinants of resource
allocations, rather each investment opportunity is considered on
its own merits. Additionally, there are no segment managers
directly accountable for the individual routes to market.
The Directors are of the opinion that the Company is engaged in
a single segment of business and operations of the Company are
wholly in the United Kingdom.
4. Income
31 December
2016
GBP'000
=================== ===========
Investment income
Effective Interest
from loans 17,594
Commitment fee
income 157
Arrangement
fee income 96
Total investment
income 17,847
Other income
Deposit interest 13
Total income 17,860
=================== ===========
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 per cent. per month of Gross Asset
Value (the "Management Fee"). The aggregate fee payable on this
basis must not exceed 1.0 per cent of the gross assets of the
Company and its group in any year.
In respect of any issue of Ordinary Shares or C Shares, until
the date on which 80 per cent of the net proceeds of such issue
have been invested or committed to be invested in Credit Assets or
Equity Assets, the Net Asset Value attributable to such Ordinary
Shares or C Shares shall, for the purposes of the Management Fee,
exclude any portion of the issue proceeds in cash, or invested in
cash deposits or cash equivalent investments. Where there are C
Shares in issue, the Management Fee will be calculated separately
on the gross assets attributable to the Ordinary Shares and the C
Shares.
For so long as the Origination Partner is part of the same group
as the Investment Manager, the amount of all fees payable by the
Company to the Origination Partner shall be deducted from the
Management Fee.
Performance Fee
The Investment Manager is also entitled to a performance fee,
which is calculated in respect of each twelve-month period starting
on 1 January and ending on 31 December in each calendar year
("Calculation Period"), and the nal Calculation Period shall end on
the day on which the management agreement is terminated or, if
earlier, the business day immediately preceding the day on which
the Company goes into liquidation.
The performance fee will only be payable if the Adjusted Net
Asset Value at the end of a Calculation Period exceeds a hurdle
threshold, equal to the Adjusted Net Asset Value immediately
following admission to trading on the London Stock Exchange,
compounded at a rate equal to 5 per cent per annum (the
"Hurdle").
If, on the last day of a Calculation Period (each a "Calculation
Date"), the Adjusted Net Asset Value exceeds the Hurdle, the
Investment Manager shall be entitled to a performance fee equal to
the lower of:
a) the amount by which the Adjusted Net Asset Value exceeds the
Hurdle, in each case as at the Calculation Date; and
b) 10 per cent of the amount by which total growth in Adjusted
Net Asset Value since first admission (being the aggregate of the
growth in Adjusted Net Asset Value in the relevant Calculation
Period and in each previous Calculation Period), after adding back
any performance fees paid to the Investment Manager, exceeds the
aggregate of all performance fees payable to the Investment Manager
in respect of all previous Calculation Periods.
'Adjusted Net Asset Value' means the Net Asset Value after: (i)
excluding any increases or decreases in net asset value
attributable to the issue or repurchase of any ordinary shares;
(ii) adding back the aggregate amount of any dividends paid or
distributions made in respect of any ordinary shares; (iii)
excluding the aggregate amount of any dividends or distributions
accrued but unpaid in respect of any ordinary shares; and (iv)
excluding the amount of any performance fees accrued but unpaid, in
each case without double counting.
In the event that C Shares are in issue, the Investment Manager
shall be entitled to a performance fee in respect of the net assets
referable to the C Shares on the same basis as summarised above,
except that a Calculation Period shall be deemed to end on the date
of the conversion of the relevant tranche of C Shares into Ordinary
Shares.
Fee payable to Origination Partner
The Origination Partner is entitled to be paid a fee calculated
on the purchase price for each Credit Asset acquired by the Company
from the Origination Partner. For so long as the Origination
Partner is part of the same group as the Investment Manager, the
amount of all fees payable by the Company to the Origination
Partner shall be deducted from the Management Fee payable to the
Investment Manager.
The Company reimburses the Origination Partner for the fees of
Referral Partners, and Servicers (to the extent paid by the
Origination Partner) in connection with Credit Assets in which the
Company acquires an interest. The amount of such fees are agreed
between the Origination Partner and the relevant counterparties on
arm's length commercial terms, taking account of the strength of
the relationship between the Origination Partner, the Investment
Manager and each relevant counterparty. There was GBPnil payable to
the Origination Partner at 31 December 2016.
6. Other Expenses
31 December
2016
GBP'000
======================= ===========
Directors' fees 103
Administrator's
fees 92
Auditor's remuneration
-
Audit of the
company 65
Auditor's remuneration
-
Audit related
assurance services 20
Auditor's remuneration
-
Other assurance
services 4
Amortisation 99
Other expenses 291
Total other expenses 674
======================= ===========
All expenses are inclusive of VAT where applicable. Directors'
fees above include GBP93,593 paid to Directors' and GBP9,521 of
employment taxes and valid business expenses. Further details on
Directors' fees can be found in the Directors' remuneration report
on pages 36 to 38.
During the period, the auditor provided reporting accountant
services on the Company's prospectus prior to the Company's listing
and in relation to its subsequent further issuance of ordinary
shares. These non-audit fees amounted to GBP95,000. The auditor
also provided assurance services with respect to providing an
opinion on the Company's initial accounts, which were prepared
under a statutory requirement in order to enable the Company to pay
its first dividend prior to the issuance of its annual financial
statements. The fees in relation to these services were
GBP19,500.
7. Taxation
It is the intention of the Directors to conduct the affairs of
the Company so as to satisfy the conditions for approval as an
investment trust. As an investment trust the Company is exempt from
corporation tax on capital gains. The Company's revenue income from
loans is subject to tax, but offset by any interest distribution
paid, which has the effect of reducing that corporation tax to nil.
This means the interest distribution may be taxable in the hands of
the Company's shareholders.
Any change in the Company's tax status or in taxation
legislation generally could affect the value of investments held by
the Company, affect the Company's ability to provide returns to
shareholders, lead the Company to lose its exemption from UK
Corporation tax on chargeable gains or alter the post-tax returns
to shareholders. It is not possible to guarantee that the Company
will remain a non-close company, which is a requirement to maintain
status as an investment trust, as the ordinary shares are freely
transferable. The Company, in the event that it becomes aware that
it is a close company, or otherwise fails to meet the criteria for
maintaining investment trust status, will as soon as reasonably
practicable, notify shareholders of this fact.
The following table presents the tax chargeable on the Company
for the period ended 31 December 2016.
Revenue Capital Total
GBP'000 GBP'000 GBP'000
========================== ======== ======== ========
Corporation tax - - -
========================== ======== ======== ========
Total current tax charge - - -
Deferred tax movement - - -
Deferred tax movement PYA - - -
Total tax charge in income - - -
statement
========================== ======== ======== ========
Factors affecting taxation charge for the year
The taxation charge for the year is lower than the standard rate
of UK corporation tax of 20.00% (2015: 20.67%). A reconciliation of
the taxation charge based on the standard rate of UK corporation
tax to the actual taxation charge is shown below.
Revenue Capital Total
GBP'000 GBP'000 GBP'000
============================== ======== ======== ========
Return on ordinary activities
before taxation 11,861 (44) 11,817
============================== ======== ======== ========
Return on ordinary activities
before taxation multiplied
by the standard rate of
UK corporation tax of 20% 2,372 (9) 2,363
Effects of:
Excess management expenses
not utilised 28 9 37
Interest distributions
paid in respect of
the period (2,400) - (2,400)
Total tax charge in income - - -
statement
============================== ======== ======== ========
Overseas taxation
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.
8. Ordinary Dividends
31 December 31 December
2016 2016
Pence GBP'000
========================== =========== ===========
Interim dividend
for the period ended 31
March 2016
(paid on 30 June 2016) 2.11p 316
Interim dividend
for the period ended 30
June 2016
(paid on 22 September
2016) 19.66p 2,949
Interim dividend
for the period ended 30
September 2016 (paid on
16 December 2016) 23.13p 3,470
Total dividend paid in
period 44.90p 6,735
=========================== =========== ===========
Interim dividend for the
period ended 31 December
2016 (paid on 28 March
2017) 23.50p 4,683
=========================== =========== ===========
Total dividend paid in
relation to period 68.40p 11,418
=========================== =========== ===========
9. Earnings per Share
For the financial period
ended Revenue Capital Total
31 December 2016 pence pence pence
============================ ======= ======= ======
Earnings per ordinary share 94.4p (0.4)p 94.0p
============================ ======= ======= ======
The calculation of the above is based on revenue returns of
GBP11.861 million, capital returns of GBP(0.044) million and total
returns of GBP11.817 million and a weighted average number of
ordinary shares of 12,560,147.
10. Loans at Amortised Cost
(a) Assets not carried at fair value but for which fair value is
disclosed
The table below provides details of the loans at amortised cost
held by the Company as at 31 December 2016.
Loans at
amortised
cost
GBP'000
======================= ===========
Amortised cost
before
impairment 164,032
Cumulative Impairment
Provision (6,187)
Amortised cost 157,845
Carrying Value 157,845
======================= ===========
Cumulative impairment includes incurred losses already present
on the loan portfolios acquired at a discount to face value in
secondary transactions which are brought onto the Statement of
Financial Position at an amount that includes impairment losses up
to the date of their acquisition. Impairment included in the
Statement of Financial Position for the period is reported in
impairment of loans in the Statement of Comprehensive Income. As at
31 December 2016 the cumulative impairment provision consisted of
GBP3.865 million of incurred losses and GBP2.322 million of
impairment provision recognised in the period.
(b) Impairment provision
The Company segments its assets into 2 categories when
considering impairment provisions; Consumer and Wholesale.
Impairment provisions are subject to periodic review conducted by
the Investment Manager's Valuation Committee, with the underlying
assumptions monitored on an on-going basis and are revised
accordingly based on actual loss experience of the business. The
methodology for these judgements, estimates and assumptions is set
out on pages 53 to 54.
The following impairment amounts have been recorded in the
Statement of Financial Position relating to loans at amortised
cost:
31 December
2016
GBP'000
======================== ============
Loans with no payments
past due (collective
provision for losses
not reported) 1,234
Loans with up to
1 payment past
due 68
Loans with 1-2
payments past due 297
Loans with 2-3
payments past due 292
Loans with 3-4
payments past due 347
Loans with more
than 4 payments
past due 3,949
Cumulative impairment 6,187
======================== ============
There is no impairment of Wholesale assets at the period
end.
The table below sets out the movement of the impairment
provision during the period.
Total
GBP'000
========================== =========
At 2 December 2015 -
Incurred Losses
(Portfolio Acquisition) (3,865)
Charge for the
year (2,322)
Amounts written -
off during the
period
Amounts recovered -
during the period
Cumulative impairment 6,187
========================== =========
Write-offs take place where it is deemed the balance is
irrecoverable or it is no longer considered economically viable to
try and recover the asset or final settlement is reached and the
shortfall written off. In the event of write off, the customer
balance and any related impairment balance are removed from the
balance sheet. Before any balance is written off an extensive set
of collections processes will have been completed, or the status of
the account reaches a point where policy dictates that forbearance
is no longer appropriate.
11. Investments at Fair Value Through Profit or Loss
(a) Movements in the year
2016
GBP'000
====================================== =========
Opening cost -
Opening fair value -
Purchases at cost 4,730
Closing fair value at 31 December
2016 4,730
Comprising:
Closing cost as at 31 December 4,730
Closing fair value as at 31 December
2016 4,730
====================================== =========
(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).
The following offsets out the classifications used as at 31
December 2016 in valuing the Company's investments:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
=========== ========== ========== ========= =========
Unquoted
equity
assets - - 4,730 4,730
Closing
fair
value
as at
31
December
2016 - - 4,730 4,730
=========== ========== ========== ========= =========
Given the unquoted equity assets are recent transactions, they
are valued at the transaction price. Sensitivity analysis is not
considered appropriate at this stage as there are not multiple
inputs used for valuation.
12. Fixed Assets
Period ended IT Development
31 December and Software Total
2016 GBP'000 GBP'000
========================= ====================================================== ========
Opening net - -
book amount
Additions 468 468
Depreciation
charge (99) (99)
Closing net book amount 369 369
As at 31 December
2016
Cost 468 468
Accumulated depreciation (99) (99)
========================= ====================================================== ========
Net book amount 369 369
========================= ====================================================== ========
13. Receivables
31 December
2016
GBP'000
================== ===========
Prepayments 1,249
Other receivables 2,474
Total receivables 3,723
================== ===========
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.
14. Other Payables
31 December
2016
GBP'000
================= ===========
Accruals and
deferred income 1,578
Withholding
taxation 452
Total other
payables 2,030
================= ===========
The above payables do not carry any interest and are short term
in nature. The Directors consider that the carrying values of these
payables approximate their fair value.
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, certain shareholders have not elected to or are not
eligible to have interest paid gross of tax, therefore withholding
tax is retained by the Company and paid directly to HMRC.
15. Interest Bearing Borrowings
31 December
2016
GBP'000
==================== ===========
Revolving credit
facility (13)
Total interest
bearing borrowings (13)
==================== ===========
The Company entered a two-year revolving credit facility for
GBP37.5 million on 17 June 2016 with Royal Bank of Scotland plc.
The revolving credit facility is secured upon the assets of the
Company, has a term of two years and interest is charged at one,
three or six month LIBOR plus a margin. As at 31 December 2016, the
Company had GBPnil drawn-down under the revolving credit facility,
however had GBP13,000 commitment fee payable at 31 December
2016.
31 December
2016
GBP'000
============== ===========
Interest and
commitment
fees payable 228
Other finance
charges 297
Total finance
costs 525
============== ===========
16. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the date of the Financial Statements.
Issued,
allotted No. of shares
and fully 31 December
paid 2016 GBP'000
============ ============== =========
Ordinary
shares
of
1 pence
each 19,926,110 199
============ ============== =========
On incorporation, the issued share capital of the Company was
GBP50,000.01 represented by one ordinary share of 1p and 50,000
management shares of GBP1 each, all of which were held by Honeycomb
Holdings Limited as subscriber to the Company's memorandum of
association. The ordinary share and management shares were fully
paid up.
The management shares, which were issued to enable the Company
to obtain a certificate of entitlement to conduct business and to
borrow under Section 761 of the Companies Act 2006, were redeemed
immediately following admission of 23 December 2015 out of the
proceeds of the issue.
On 23 December 2015, 10,000,000 ordinary shares of 1p each were
issued to shareholders as part of the placing and offer for
subscription in accordance with the Company's prospectus dated 18
December 2015.
On 18 December 2015, the Board was granted authority to issue up
to an additional 20,000,000 ordinary shares and / or C shares in
aggregate prior to the conclusion of the Company's first AGM. In
addition, the Board was authorised to issue and allot up to 25
million C shares on a non-pre-emptive basis from the conclusion of
the first AGM of the Company, such authority to expire at the
conclusion of the fourth AGM of the Company. The Directors are
seeking to renew their authority to allot ordinary shares at the
Company's forthcoming AGM to be held on 2 June 2017.
During the period under review a further 9,926,109 ordinary
shares were issued. The price paid per share ranged from 1,000p to
1,015p and the total paid for the shares during the period amounted
to GBP98.8 million.
The table below shows the share movement since incorporation (2
December 2015) to 31 December 2016.
Shares in Shares in
issue issue
at the beginning as at
of the period Shares Shares 31 December
issued redeemed 2016
=================== ================== =========== ========== =============
Management shares - 50,000 (50,000) -
Ordinary shares
of 1p each 1 19,926,109 - 19,926,110
=================== ================== =========== ========== =============
17. 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 has now become effective. Accordingly,
GBP98.1 million, previously held in the share premium account, has
been transferred to the special distributable reserve as disclosed
in the Statement of Financial Position.
18. Net Asset Value per Ordinary Share
Net asset
value
per
Year ended ordinary Net assets
31 December share attributable
2016 Pence GBP'000
============= ========= =============
Ordinary
shares
of 1 pence
each 1,014.0p 202,051
============= ========= =============
The net asset value per ordinary share is based on net assets at
the year-end of GBP202.051 million and on 19,926,110 ordinary
shares in issue at the year-end.
19. Contingent Liabilities and Capital Commitments
As at 31 December 2016 there were no contingent liabilities or
capital commitments for the Company.
20. 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 36 to 38. 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 2016, there was GBP456 payable to the Directors
for fees and expenses.
Investment Manager - Pollen Street Capital Limited (the
'Investment Manager'), a UK-based company authorised and regulated
by the FCA, has been appointed the Company's investment manager and
AIFM for the purposes of the AIFMD. Details of the services
provided by the Investment Manager and the fees paid are given on
pages 55 to 56.
During the period the Company paid GBP2.52 million of fees and
at 31 December 2016, there was GBP1.45 million payable to the
Investment Manager.
Origination Partner - Honeycomb Finance Limited (the
"Origination Partner"), a UK-based company authorised and regulated
by the FCA, has been appointed as one of the Company's origination
partners. Honeycomb Finance Limited is a wholly owned subsidiary of
Pollen Street Capital Limited. Details of the services provided by
the Origination Partners are given on page 56.
During the period given that the Origination Partner was part of
the same group as the Investment Manager, the fees payable to the
Origination Partner by the Company were deducted from the
management fee payable to the Investment Manager and totalled
GBP40,000, and at 31 December 2016, there was GBPnil payable to the
Origination Partner.
21. Financial Risk Management
The Company'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 Company's
financial instruments are market risk, credit risk and liquidity
risk. The Board reviews and agrees policies for managing each of
these risks as summarised below.
Market risk
The fair value or future cash flows of a financial instrument or
investment property held by the Company may fluctuate because of
changes in market prices. Market risk can be summarised as
comprising three types of risk:
-- Price risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk);
-- Interest rate risk - the risk that the fair value or future
cash flows of financial instruments will fluctuate because of
changes in market interest rates; and
-- Currency risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
foreign exchange rates.
The Company'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 Company's investment objective.
The investment portfolio is continually monitored to ensure an
appropriate balance of risk and reward. The Board has also
established a series of investment parameters, which are reviewed
annually, designed to limit the risk inherent in managing a
portfolio of investments.
(a) Price risk
Price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents
the potential loss the Company might suffer through holding market
positions in the face of price movements (other than those arising
from interest rate risk or currency risk.
The Company is exposed to price risk arising from its equity
investments. Given the Company's unquoted equity assets were
acquired as a result of recent transactions, they are valued at the
transaction price. Sensitivity analysis is not considered
appropriate at this stage as there are not multiple inputs used for
valuation.
(b) Interest rate risk
The Company invests in Credit Assets which may be subject to a
fixed rate of interest, or a floating rate of interest (which may
be linked to base rates or LIBOR). The Company's borrowings may be
subject to a floating rate of interest.
The Company 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 Company 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 Company finances its operations mainly through its share
capital and reserves, including realised gains on investments. In
addition, financing has been obtained through a GBP37.5 million
revolving credit facility. As at 31 December 2016 the Company had
GBPnil drawn-down under this facility, although it has been drawn
throughout the period with a maximum balance of GBP7 million.
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 2016 is shown below:
Fixed
or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ======== ============= ========
Loans
at amortised
cost 17,532 140,313 157,845
Cash and
cash equivalents 38,877 - 38,877
Interest - - -
bearing
borrowings
================== ======== ============= ========
Total
exposure 56,409 140,313 196,722
================== ======== ============= ========
An administered rate is not like a floating rate, movements in
which are directly linked to LIBOR. The administered rate can be
changed at the discretion of the lender.
A 1% change in interest rates impacts income on the assets with
a Floating rate by GBP36 thousand.
(c) Currency risk
None of the Company's assets, liabilities or income is
denominated in currencies other than Pounds Sterling (the Company's
functional currency, in which it reports its results). Thus, the
Company is not exposed to currency risk.
22. 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 Company's credit risks arise principally through exposures
to loans originated or acquired by the Company and cash deposited
with banks, both of which are subject to risk of borrower
default.
The Investment Manager and the Origination Partner established
and adheres to stringent underwriting criteria. For consumer loans,
underwriting includes credit referencing, income verification and
affordability testing, identity verification and various
forward-looking indicators of a borrower's likely financial
strength. The Company 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.
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. Set out below is
the analysis of the closing balances of the Company's credit assets
split by the type of loan and the credit risk band as at 31
December 2016:
Credit Unsecured Secured Total
Risk GBP'000 GBP'000 GBP'000
Band
======= ========= ======== ========
A & B 18,809 126,594 145,403
C, D
& E 14,577 37 14,614
Total 33,386 126,631 160,017
======= ========= ======== ========
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 Elevated credit risk, elevated adverse
indicators
E High credit risk, with adverse indicators
(e.g. lower borrowing ability, credit
history, existing debt)
=========== ===========================================
The Company ensures that it only deposits cash balances with
institutions with appropriate financial standing or those deemed to
be systemically important.
Liquidity risk
Liquidity risk is the risk that the Company will have difficulty
in meeting its obligations in respect of financial liabilities as
they fall due.
The Company 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 Company.
Liquidity risk is not viewed as significant as a substantial
proportion of the Company's net assets are in loans, whose cash
collections could be utilised to meet funding requirements if
necessary. The Company has the power, under its Articles of
Association, to take out both short and long-term borrowings
subject to a maximum value of one times its share capital and
reserves.
The Company has a revolving credit facility totalling GBP37.5
million (details of which is disclosed in note 15).
Assets and liabilities not carried at fair value but for which
fair value is disclosed
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
========================== ======== ======== ======== ========
Assets
Loans at amortised
cost - - 157,845 157,845
Receivables - 3,723 - 3,723
Cash and cash equivalents 38,877 - - 38,877
Total assets 38,877 3,723 157,845 200,445
Liabilities
Management fee payable - 136 - 136
Performance fee
payable - 1,314 - 1,314
Other payables - 2,030 - 2,030
Interest bearing
borrowings - 13 - 13
========================== ======== ======== ======== ========
Total liabilities - 3,493 - 3,493
-------------------------- -------- -------- -------- --------
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
Investments at Fair Value Through Profit or Loss for details).
Further details of the loans at amortised cost held by the Company
can be found in note 10.
Capital Management
The Company's primary objectives in relation to the management
of capital are:
-- to ensure its ability to continue as a going concern; and
-- to maximise the long-term capital growth for its shareholders
through an appropriate balance of equity capital and gearing.
The Company is subject to externally imposed capital
requirements:
-- the Company's Articles of Association restrict borrowings to
the value of its share capital and reserves;
-- as a public company, the Company has a minimum share capital of GBP50,000;
-- to be able to pay dividends out of profits available for
distribution by way of dividends, the Company must be able to meet
one of the two capital restriction tests imposed on investment
companies by company law; and
-- the Company's borrowings are subject to covenants limiting
the total exposure based on interest cover ratios, a minimum total
net worth and a cap of borrowings as a percentage of the eligible
borrowing base.
The Company has complied with all the above requirements during
this financial period.
23. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
24. Subsequent Events
Save as noted below, there have been no important events to
disclose since the period end under review.
On 13th January 2017, the Company provided finance of GBP40
million, which included the acquisition of a loan book from, and
taking an equity stake of 28.57% in, The Green Deal Finance
Company.
On 31 March 2017, a dividend of 23.50 pence per Ordinary Share
was paid.
Other than this, there has been no significant change in the
financial condition and operating results of the Company during or
since the end of the period covered by this report.
Shareholders' Information
Directors, portfolio manager and advisers
Directors Administrator and Company Secretary
Robert Sharpe Apex Fund Services (UK) Ltd
Jim Coyle Veritas House
Ravi Takhar 125 Finsbury Pavement
London EC2A 1NQ
all of the registered office below England
Registered Office Registrar
Veritas House Computershare Investor Services PLC
125 Finsbury Pavement The Pavilions, Bridgewater Road
London EC2A 1NQ Bristol BS99 6ZZ
England England
Investment Manager and AIFM Depositary
Pollen Street Capital Limited Indos Financial Limited
8 Hanover Street 25 North Row
London W1S 1YF London W1K 6DJ
England England
Financial Adviser and Broker Independent Auditor
Liberum Capital Limited PricewaterhouseCoopers LLP
Level 12, Ropemaker Place 7 More London Riverside
25 Ropemaker Place London SE1 2RT
London EC2Y 9LY England
England
Share Identifiers
Website ISIN: GB00BYQDNR86
http://www.honeycombplc.com/ 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 trustnet.com and morningstar.co.uk.
Annual and half-yearly reports
Copies of the annual and half-yearly reports may be obtained
from the Company Secretary by calling 0203 697 5368 or by visiting
www.honeycombplc.com.
Share prices and Net Asset Value information
The Company's ordinary shares of 1p each are quoted on the
London Stock Exchange:
-- SEDOL number: BYZV3G2
-- ISIN number: GB00BYQDNR86
-- EPIC code: HONY
The codes above may be required to access trading information
relating to the Company on the internet.
Electronic communications with the Company
The Company's Annual Report & Accounts, half-yearly reports
and other formal communications are available on the Company's
website. To reduce costs the Company's half-yearly accounts are not
posted to shareholders but are instead made available on the
Company's website.
Whistleblowing
As the Company has no employees, the Company does not have a
whistleblowing policy. The Audit Committee reviews the
whistleblowing procedures of the Investment Manager and
Administrator to ensure that the concerns of their staff may be
raised in a confidential manner.
Warning to shareholders - share fraud scams
Fraudsters use persuasive and high-pressure tactics to lure
investors into scams. They may offer to sell shares that turn out
to be worthless or non-existent, or to buy shares at an inflated
price in return for an upfront payment. While high profits are
promised, if you buy or sell shares in this way, you will probably
lose your money.
How to avoid share fraud
-- Keep in mind that firms authorised by the FCA are unlikely to
contact you out of the blue with an offer to buy or sell shares
-- Do not get into a conversation, note the name of the person
and firm contacting you and then end the call
-- Check the Financial Services Register from www.fca.org.uk to
see if the person and firm contacting you is authorised by the
FCA
-- Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details
-- Use the firm's contact details listed on the Register if you want to call it back
-- Call the FCA on 0800 111 6768 if the firm does not have
contact details on the Register or you are told they are out of
date
-- Search the list of unauthorised firms to avoid at www.fca.org.uk/scams
-- Consider that if you buy or sell shares from an unauthorised
firm you will not have access to the Financial Ombudsman Service or
Financial Services Compensation Scheme.
-- Think about getting independent financial and professional
advice before you hand over any money
-- Remember: if it sounds too good to be true, it probably is!
5,000 people contact the Financial Conduct Authority about share
fraud each year, with victims losing an average of GBP20,000.
Report a scam
If you are approached by fraudsters, please tell the FCA using
the share fraud reporting form at fca.org.uk /scams, where you can
find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111
6768.
If you have already paid money to share fraudsters, you should
contact Action Fraud on 0300 123 2040.
Definitions
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 Net asset value represents the total value
value (NAV) of the Company's assets less the total
value of its liabilities. For valuation
purposes, it is common to express the
net asset value on a per share basis.
============== ======================================================
Ongoing Total expenses (excluding finance costs
charges and taxation) incurred by the Company
as a percentage of average net asset values.
============== ======================================================
Premium If the share price of the Company is higher
than the net asset value per share, the
Company's shares are said to be trading
at a premium. The premium is shown as
a percentage of the net asset value.
============== ======================================================
Discount If the share price of the Company is lower
than the net asset value per share, the
Company's shares are said to be trading
at a discount. The discount is shown as
a percentage of the net asset value.
============== ======================================================
Registrar An entity that manages the Company's shareholder
register. The Company's registrar is Computershare
Investor Services PLC.
============== ======================================================
AIFM An Alternative Investment Fund Manager,
as defined in the AIFM Directive. Pollen
Street Capital Limited undertakes this
role on behalf of the Company.
============== ======================================================
Hedging An investment to reduce the risk of adverse
price movements in an asset.
============== ======================================================
-Ends-
Enquiries:
Apex Fund Services (UK) Ltd
Company Secretary
Priya Dhaliah / Robert Kelly
020 3697 5368
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR PGUBWCUPMGQM
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