TIDMHONY
RNS Number : 4738M
Honeycomb Investment Trust PLC
30 April 2018
30 April 2018
FOR IMMEDIATE RELEASE
THE BOARD OF DIRECTORS OF HONEYCOMB INVESTMENT TRUST PLC
ANNOUNCES THE ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR
THE YEARED 31 DECEMBER 2017.
Copies of the Company's Annual Report and Audited Financial
Statements are available from the Company Secretary, Apex Fund
Services (UK) Ltd at 6(th) Floor, London Wall, London, EC2Y 5DN 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") and its subsidiary (together, the "Group") 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 31 December
2017 2016
============================ ============ ============
NET ASSET VALUE
NET ASSET VALUE (CUM
INCOME) (GBP'000) (1) 304,759 202,051
NET ASSET VALUE (EX
INCOME) (GBP'000) (2) 300,252 196,969
MARKET CAPITALISATION
(GBP'000)(3) 346,395 203,346
============================ ============ ============
PER SHARE METRICS
SHARE PRICE (AT CLOSE)
(4) 1,157.5p 1,020.5p
NAV PER SHARE (CUM INCOME) 1,018.4p 1,014.0p
NAV PER SHARE (EX INCOME) 1,003.3p 988.5p
SHARES IN ISSUE 29,926,110 19,926,110
============================ ============ ============
PERFORMANCE INDICATORS
AND KEY RATIOS
PREMIUM / (DISCOUNT)
(5) 13.7% 0.6%
ITD TOTAL NAV PER SHARE
RETURN (6) (7) 17.2% 7.8%
DEBT TO EQUITY 29.4% -%
REVENUE RETURN (8) 7.7% 8.8%
DIVID RETURN (9) 8.4% 8.0%
ONGOING CHARGES (10) 1.3% 1.5%
============================ ============ ============
(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 year, plus dividends declared during
the year, divided by NAV (Cum Income) calculated on a per share
basis at the start of the year. There was a 1.06 per cent uplift on
the inception to date total NAV per share return due to the effect
of shares being issued at a premium during May-17 capital
raise.
(8) REVENUE RETURN: based on revenue account net income divided
by average Net Asset Value during the year.
(9) DIVID RETURN: is calculated as the total declared dividends
for the year divided by average Net Asset Value during the
year.
(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 Company believes that consumer and SME loans are an asset
class that has the potential to provide attractive
returns for investors on a risk-adjusted basis. The market for
lending to SMEs and consumers is large and growing with GBP1.6
trillion() lent annually.
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 Pollen
Street 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 cent per ordinary share per
annum on the issue price for the Company's IPO placing, payable in
quarterly instalments (the "Target Dividend") based upon the
average number of shares in issue during a given period. Investors
should note that the Target Dividend, including its declaration and
payment dates, is a target only and not a profit forecast.
How the Business Works
Credit Assets
The Investment Manager, on behalf of the Group, actively
identifies sub-segments of the large consumer, property 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
Group'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.
The Group, either directly or via the Origination Partner, has
arrangements with a number of referral partners, including the
Example Platforms below, through which the Group either acquires
Credit Assets, either individually, as portfolios or via structured
investments. The Directors believe that the Group has access to
diverse investment opportunities across its market segments of
Property, Consumer and SME, each with different borrower profiles
and different risk return characteristics. Through access to
multiple referral partners and other counterparties, the Group will
reduce its dependence on any one single source of opportunities to
acquire Credit Assets and expects to gain a strong visibility of
high quality assets.
The Group believes it is important to provide best-in-class loan
servicing to ensure that Credit Assets forming part of the
portfolio are managed efficiently throughout their lifecycle. As
such, the Group appoints servicers best placed to service the
investment asset.
The arrangements above can be summarised in the following
diagram:
Equity Assets
The Group's may invest in Equity Assets that are aligned with
the Group strategy and that present opportunities to enhance the
Group's returns from its investments. The Group expects, that most
of its investments in Equity Assets will take the form of minority
interests in referral partners, in pursuit of the Group'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 Group'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 second Annual Report for Honeycomb
Investment Trust plc (the "Company") which covers the year ended 31
December 2017.
The Board has been pleased with the continued progress made by
the Company. Investment asset growth has been achieved while
maintaining a stable return. At the start of 2017 we had
successfully completed three share offerings raising a total of
GBP200 million of gross proceeds. In May 2017 we raised a further
GBP105 million excluding issue costs. These gross proceeds were
deployed by the end of July 2017, with further investment asset
growth driven by the utilisation and extension of the Company's
debt facility.
Performance
The Company has performed well in the year driven by the
performance of investments made in 2016 and the careful selection
of new attractive risk-adjusted assets. A detailed assessment of
the progress of the Company follows in the Investment Manager's
review. At 31 December 2017, the Company's net assets were GBP304.8
million (cumulative of income), with market capitalisation at
GBP346.4 million. NAV per share (cumulative of income) was 1,018.4
pence, with the share price (at close) 1,157.5 pence, representing
a premium of 13.7 per cent. Total NAV per share return was 17.2 per
cent since inception. This includes the 1.03 per cent benefit of
the May share placing being completed at a premium to NAV.
Dividend
The Q1 2017 dividend increased from 23.50 pence per share in Q4
2016 to 24.50 pence per share in Q1 2017. This provided an above
target yield on an annualised dividend of 9.8 per cent compared
with 9.4 per cent (undiluted 12.5 per cent) in Q4 2016. The
dividend remained at 20.00 pence per share for Q2 and Q3 2017 to
provide the target annualised dividend.
Gearing
The Group has GBP88.2 million drawn debt at year end of which
GBP56.5 million relates to the Company's debt facility, which on 21
June 2017 had the committed limit upsized to GBP80.0 million, the
term extended and another European bank bought in to the lending
syndicate. The facility was further extended to a committed
facility of GBP150 million in the first half of 2018, in order to
fund further investment opportunities.
Outlook
Despite the competitive consumer finance marketplace, the
Company has deployed capital ahead of schedule. We believe that the
retrenchment of mainstream lenders from specialist markets
continues to present an opportunity to engage with customers in
markets which are underserved by traditional lenders and platforms.
We further believe that through our differentiated approach and by
targeting verticals that require specialist understanding, more
detailed underwriting, or which pre-select higher quality
borrowers, attractive risk-adjusted returns can be delivered with
low volatility throughout the cycle.
We have a clear strategy to protect, improve and extend this
successful model, and continue to closely monitor the political and
economic uncertainty created by Brexit. Although current market
conditions remain benign, the longer-term economic outlook and
impact of Brexit on our customers and wider markets remain
uncertain. There remains competition, whilst credit losses within
the portfolio have remained stable. We remain vigilant.
The supervisory framework remains an ever-present factor as
consumer credit regulation continues to develop. The Company
continues to take a prudent approach to managing its business and
its regulatory responsibilities and the continued focus on good
customer outcomes, income verification, affordability and
forbearance, are all subjects which are at the heart of our
business. Developments in these areas have the potential to require
changes to the way the industry transacts business, but we welcome
oversight which encourages good customer outcomes. We will continue
to closely monitor the impact of the removal of the Term Funding
Scheme ("TFS") by the Bank of England in February 2018, and while
we are not directly impacted by this, it may have some impact on
the overall liquidity and competitive dynamics in the market:
opportunities as well as risks may exist.
On 1 January 2018 the Company implemented and transitioned to
IFRS 9 "Financial Instruments" with a GBP2.3 million impact on
reserves, equating to 0.75 per cent of year-end NAV. More details
can be found on pages 61 to 65.
We have had another excellent year and the Board remains
confident of the long-term prospects for the Company. The
Investment Manager continues to exercise strong discipline in
assessing risk adjusted returns and is well positioned to manage a
range of different market conditions, and to make the most of any
opportunities which may arise.
Robert Sharpe
Chairman
27 April 2018
Investment Manager's Report
The Group 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.
The Investment Manager has significant experience in specialist
lending, providing the Group 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.
After the Company completed its initial public offering on 23
December 2015, and subsequently raised a further total gross
proceeds of GBP100.0 million during 2016, the Company raised
further gross proceeds of GBP105.0 million in May 2017. This was in
conjunction with the Company increasing the size of its debt
facility to GBP80.0 million, extending the term and bringing in
another European bank to the lending syndicate.
The Group focused on building a strong portfolio of assets in
line with our investment mandate and at the end of the year, had
built a total portfolio of investment assets of GBP377.1 million,
with a strong pipeline of further opportunities to provide an
attractive mix of assets combining both strong yields with low bad
debt rates.
In Q1 2017, we focused on deploying the GBP50 million total
gross proceeds from the December 2016 capital raise, and, as part
of this, in January 2017 the Company provided financing of GBP40
million, which included the acquisition of a loan book from, and
taking an equity stake in, Hiber Limited (formerly The Green Deal
Finance Company). This portfolio contains an attractive mix of
assets combining both strong yields with low bad debt rates.
Through the remainder of 2017 the Company purchased five further
portfolios of consumer loans. Three were portfolios of secured
loans and the other two were unsecured.
One of these secured portfolios was purchased on 20 December
2017 when the Company acquired certain interests of Commercial
First DAC Limited which gave it accounting control of Business
Mortgage Finance 3 plc. This is a special purpose vehicle ("SPV")
holding commercial mortgages. As a result, the financial statements
have been prepared on a consolidated basis.
At acquisition, the other four portfolios comprised in aggregate
over 45,500 loans with an average balance of GBP2,600. Together
with the portfolios we purchased in 2016, these provide a strong
underpinning of results in 2017, with a total of GBP200.5 million
investment remaining at the end of the year. All portfolios have
performed in line or ahead of expectations.
In Q4 2017 the Company focused on the organic origination
channels. With a backdrop of higher levels of consumer indebtedness
and increasing competition in mainstream markets, we elected to
grow our holdings of structured facilities, with six new facilities
drawn down. 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 have performed well.
In an evolving and often challenging market and regulatory
environment, we remain committed to our established business model.
Our ability to build deep and sustainable relationships has helped
the Company's Origination Partner to continue to develop. It has
further developed its relationship with its referral partners and
has seen continued steady growth of origination volumes during the
year. Further referral partners have been on-boarded which have
supported this growth with the profile of risk and return that is
in line with expectations.
In aggregate, the organic channels have grown by GBP95.3 million
in the last 12 months to give a total investment of GBP145.1
million at 31 December 2017.
The financial performance of the Group has been strong.
Investment income during 2017 was GBP31.8 million (2016: GBP17.8
million), an increase of 78 per cent, which has been driven by
balances of investment assets increasing to GBP356.8 million at the
year-end (2016: GBP162.6 million). Earnings for the year were
GBP21.0 million (2016: GBP11.8 million), an increase of 77 per cent
which is reflective of low levels of impairments and leverage of
the fixed cost base. This translated into basic earnings per share
of 81.2 pence (2016: 94.0 pence), and NAV return of 9.11 per cent
(2016: 7.80 per cent) for the year, which benefited by 1.03 per
cent from the issuance of shares at a premium in May 2017. This
reflects the high levels of deployment and of the underlying assets
having performed in line with expectations.
In our initial guidance issued at the time of the Company's
initial public offering, we stated that we were targeting a
dividend yield of at least 8 per cent (based on issue price). As
shown in the charts, we have outperformed this guidance.
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. The Company has continued to see NAV per share
(cumulative of income) grow and by 31 December 2017 it reached
1,018 pence, which, including dividends declared or paid, is
equivalent to a NAV return of 17.2 per cent since inception.
Additionally, the share price of the Company at 31 December 2017
was 1,157.5 pence per share, representing a 13.7 per cent 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 so far this year.
Performance and dividend history can be seen in the table
below.
On 1 January 2018 the Group implemented and transitioned to IFRS
9. The Investment Manager implemented a comprehensive programme
that focused on the key areas affected. The impact equates to 0.75
per cent of year-end NAV. More details can be found on pages 61 to
65.
To date, we have seen minimal direct impact from the UK
referendum vote to leave the European Union. However, looking
ahead, we continue to position ourselves to address the economic
challenges and opportunities that may arise as the long-term
effects of Brexit become clearer. In the current more competitive
mainstream unsecured lending environment it is particularly
important to maintain the prudence and discipline of our lending.
In addition, with household borrowing at high levels, we intend to
proceed with caution. That said, we believe that the Group'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 structured facilities, combined with
our focus on specialist markets where we expect enhanced credit
performance, will allow us to continue to deploy the Group's funds
and deliver strong returns. We continue to view the future with
confidence.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD ITD(1)
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total
NAV Return 2016 0.04% 0.13% 0.19% 0.92% 0.60% 0.79% 0.68% 0.70% 0.88% 0.89% 0.92% 0.94% 7.85% 7.83%
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total
NAV Return 2017 0.69% 0.69% 0.78% 0.62% 1.80%(2) 0.55% 0.65% 0.62% 0.63% 0.61% 0.61% 0.79% 9.11% 17.24%
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Share
Price
Performance
(3) 2016 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 2.05% 2.05% 2.05%
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Share
Price
Performance
(3) 2017 6.05% 10.00% 10.50% 12.50% 11.50% 17.00% 20.25% 20.75% 19.25% 18.25% 17.50% 15.75% 15.75% 15.75%
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Dividend
Per
Share
(Pence)
(4) 2016 - - - - 2.11 - - - 19.66 - 23.13 - 44.90 44.90
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
Dividend
Per
Share
(Pence)
(4) 2017 - - 23.50 - 24.50(5) - - - 20.00 - - 20.00 88.00 132.90
============ ===== ===== ====== ====== ====== ======== ====== ====== ====== ====== ====== ====== ====== ====== ======
(1) ITD: inception to date - excludes IPO Issue Costs
(2) NAV return excluding effect of capital raise and issuance at
a premium would have been 0.77%
(3) Based on IPO issue price of 1000p
(4) Recognised in the month when marked ex-dividend date
(5) Based upon the number of shares at the ex-dividend date.
Top Ten Holdings
Country Value of holding Percentage
at year-end of assets
(GBPm) (1)
=== ===================== ========= ================= ===========
1st Stop Group United
1 Limited (2) Kingdom 18.0 4.79%
=== ===================== ========= ================= ===========
United
2 IWOCA Limited Kingdom 14.7 3.91%
=== ===================== ========= ================= ===========
Amigo Loans Limited United
3 Bond Security Kingdom 10.3 2.73%
=== ===================== ========= ================= ===========
Hiber Limited United
4 (3) (4) Kingdom 8.5 2.24%
=== ===================== ========= ================= ===========
Amicus Finance United
5 plc Kingdom 5.8 1.54%
=== ===================== ========= ================= ===========
Freedom Finance United
6 Limited (2) (4) Kingdom 2.7 0.72%
=== ===================== ========= ================= ===========
United
7 TMLSHC Limited Kingdom 2.6 0.68%
=== ===================== ========= ================= ===========
Pay4Later Limited
trading as Deko United
8 (4) Kingdom 2.0 0.53%
=== ===================== ========= ================= ===========
United
9 Sancus Loans Limited Kingdom 1.4 0.38%
=== ===================== ========= ================= ===========
United
10 D&B Finance Limited Kingdom 1.1 0.29%
=== ===================== ========= ================= ===========
(1) Percentage of total investment assets of the Group
(investment assets calculated as the carrying balance of all credit
assets and related investments).
(2) 1st Stop Group Limited and Freedom Finance Limited are also
portfolio companies of funds managed or advised by the Investment
Manager.
(3) Value of holding is a combination of debt and equity
investment.
(4) Indicates equity investment. Hiber Limited was formerly The
Green Deal Finance Company.
Portfolio Composition
The composition
of the Company's
portfolio as
at 31 December
2017 is set
out below: Portfolio
Split by Sector
(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 21 has been prepared to help
shareholders assess how the Group works and how it has performed.
The strategic report has been prepared in accordance with the
requirements of Section 414A to 414D of the Companies Act 2006 (the
"Act"). The business review section of the strategic report
discloses the Group's risks and uncertainties as identified by the
Board, the key performance indicators used by the Board to measure
the Group's performance, the strategies used to implement the
Group's objectives, the Group's environmental, social and ethical
policy and the Group's anticipated future developments.
Principal activity
The Company carries on business as an investment trust and its
principal activity is investing in Credit Assets and Equity Assets
(each as defined below), with a view to achieving the 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 on investment companies, please see:
http://www.theaic.co.uk/guide-to-investment-companies.
Strategic and investment policy
The Group's investment objective is to provide shareholders with
an attractive level of dividend income 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 Group's strategy and that present opportunities to enhance
the Group's returns from its investments ("Equity Assets").
Once the Group has incurred borrowings in line with its
borrowing policy, the Group will target the payment of dividends
which equate to a yield of 8.0 per cent per ordinary share per
annum on the issue price for the IPO placing, based upon the
average number of shares in issue for the period, payable in
quarterly instalments (the "Target Dividend"). Investors should
note that the Target Dividend, including its declaration and
payment dates, is a target only and not a profit forecast.
The Group believes that certain sub-segments of the consumer
loan market have the potential to provide attractive returns for
investors on a risk-adjusted basis, and that changes in the focus
of mainstream lenders, together with the implementation of new
models that make the best use of data, analytics and technology,
provide an opportunity to deliver attractive products to borrowers
while generating attractive returns for the Group.
The 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 into agreements with several referral
partners to source such lending opportunities. The Group and the
Investment Manager will also actively seek opportunities to acquire
portfolios from third parties and make investments in loans to
specialist lenders.
Asset allocation and risk diversification
Credit Assets invested in by the Group consist of 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 structured finance for consumer
and SME lending.
The Company's investment in Credit Assets encompasses 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 seasoned portfolios of Credit Assets from third parties; and
3. the investment in loans to specialist lenders for the
purposes of providing structured finance to those specialist
lenders, secured against (amongst other things) granular portfolios
of consumer and SME 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 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 Group also invests in Equity Assets. The Company shall
invest no more than 10 per cent of the aggregate net proceeds of
any issue of shares in Equity Assets, calculated, in each case, at
the time of acquisition of any relevant Equity Assets based on the
consideration payable for those Equity Assets and the aggregate
consideration paid for all previous investments in Equity Assets
which form part of the portfolio. This restriction shall not apply
to any consideration paid by the Group for the issue to it of any
Equity Assets that are convertible securities. However, it will
apply to any consideration payable by the Company at the time of
exercise of any such convertible securities or any warrants issued.
The Group may invest in Equity Assets indirectly via other
investment funds (including those managed by the Investment Manager
or its affiliates).
Investment restrictions
The Group will invest in Credit Assets originated across various
sectors and across credit risk bands to ensure diversification and
to seek to mitigate concentration risks. The following investment
limits and restrictions apply to the Group to ensure that the
diversification of the portfolio is maintained, that concentration
risk is limited and that limits are placed on risk associated with
borrowings
The Group will not invest, in aggregate, more than 10 per cent
of the aggregate value of total assets of the Group ("Gross
Assets"), at the time of investment, in other investment funds that
invest in Credit Assets.
The Group will not invest, in aggregate, more than 50 per cent
of Gross Assets, at the time of investment, in Credit Assets
comprising investments in loans alongside or in conjunction with
Shawbrook Bank ("Shawbrook") or referred to the Origination Partner
by Shawbrook.
The following restrictions apply, in each case at the time of
the investment by the Group:
-- no single Credit Asset comprising a consumer credit asset
shall exceed 0.15 per cent of Gross Assets;
-- no single SME or corporate loan, or trade receivable, shall
exceed 5.0 per cent of Gross Assets; and
-- no single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any borrowing
ring-fenced within any SPV which would be without recourse to the
Company) shall exceed 20 per cent of Gross Assets. For the
avoidance of doubt, this restriction shall not prevent the Group
from directly acquiring portfolios of Credit Assets which comply
with the other investment restrictions described in this section.
The Group will not invest in Equity Assets to the extent that such
investment would, at the time of investment, result in the Group
controlling more than 35 per cent of the issued and voting share
capital of the issuer of such Equity Assets.
Other restrictions
The Group may invest in cash, cash equivalents, money market
instruments, money market funds, bonds, commercial paper or other
debt obligations with banks or other counterparties having single-A
(or equivalent) or higher credit rating as determined by an
internationally recognised agency or systemically important bank,
or any "governmental and public securities" (as defined for the
purposes of the Financial Conduct Authority's Handbook of rules and
guidance) for cash management purposes and with a view to enhancing
returns to shareholders or mitigating credit exposure.
The Group will not invest in Collateralised Loan Obligations
("CLO") or Collateralised Debt Obligations ("CDO"). CLO's are a
form of securitisation whereby payments from multiple loans are
pooled together and passed on to different classes of owners in
various tranches. CDO's are pooled debt obligations where pooled
assets serve as collateral.
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 per cent 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 includes investments
made by the Company on a subordinated basis. The Company targets
borrowings in the range of 50 per cent to 75 per cent 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 securitised 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 Group's control and can adversely affect the Group's results,
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 Group has between the income generated by its Credit
Assets, on the one hand, and the liabilities in respect of its
borrowings, on the other hand, may be managed, in part, by matching
any floating rate borrowings with investments in Credit Assets that
are also subject to a floating rate of interest. The Group may use
derivative instruments, including interest rate swaps, to reduce
its exposure to fluctuations in interest rates.
To the extent that the Group does rely on derivative instruments
to hedge interest rate risk, it will be subject to counterparty
risk. Any failure by a hedging counterparty of the Group to
discharge its obligations could have a material adverse effect on
the Company's results, operations and/or and financial
condition.
Cash management
Whilst it is intended that the Group will be close to fully
invested in normal market conditions, the Group may invest surplus
capital in cash deposits, cash equivalent instruments and fixed
income instruments. There is no restriction on the amount of cash
or cash equivalent instruments that the Group may hold and there
may be times when it is appropriate for the Group to have a
significant cash position instead of being fully or near fully
invested. As at 31 December 2017 the Group held GBP16.9 million of
its assets in cash.
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 per cent of Net Asset Value in aggregate (calculated
at the time of draw down under any facility that the Company has
entered into) as detailed in the Company's prospectuses dated 18
December 2015 and 25 May 2017 (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 can also call upon the advice of the
company secretary. In 2015 the Board appointed Slaughter and May to
provide ongoing legal services to the Company.
The Board have acted in a way that they consider, in good faith,
would be most likely to promote the success of the Company for the
benefit of its shareholders as a whole, and in doing so have regard
(amongst other matters) to:
-- the likely consequences of any decision in the long-term;
-- the impact of the Company's operations on the community and the environment;
-- the desirability of the Company maintaining a reputation for
high standards of business conduct; and
-- the need to act fairly to avoid conflicts between the
interests of the Directors and those of the Company.
Future developments
The Group's anticipated future developments and outlook are
discussed in more detail in the Chairman's Statement on page 8 and
the Investment Manager's Report on pages 9 to 10.
Premium/Discount management
The Board closely monitors the premium or discount at which the
Company's ordinary shares trade in relation to the Company's
underlying Net Asset Value and takes action accordingly. During the
year under review the Company's ordinary shares traded at a premium
to its underlying Net Asset Value throughout the year. 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 year the Board authorised
the issue of 10 million shares.
On 18 December 2015, the Board was granted authority to issue up
to 20 million 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's authority to allot ordinary
shares was renewed and increased at the Company's first AGM on 2
June 2017 where the board was granted authority to allot and issue
up to 40 million ordinary shares (on a non-pre-emptive basis). This
authority applies until the end of the Company's second AGM (or, if
earlier, until the close of business on 31 August 2018).
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,
shareholders have authorised the Company to buy back ordinary
shares (up to a maximum of 14.99 per cent of the shares in issue as
at 21 April 2017). This authority was granted at the Company's
first AGM and applies until the end of next year's AGM (or, if
earlier, until the close of business on 31 August 2018). As the
Company's shares traded at a premium to Net Asset Value throughout
the year under review, no repurchases were made. At the forthcoming
AGM the Board will seek to renew the Company's powers to buy back
ordinary shares.
The full text of the proposed resolutions authorising the
Company to buy back shares or allot shares can be found in the
Notice of the Company's forthcoming AGM.
Corporate and operational structure
Corporate Structure
On 20 December 2017 the Company acquired certain interests of
Commercial First DAC Limited which gave it accounting control of
Business Mortgage Finance 3 plc, a special purpose vehicle ("SPV")
holding commercial mortgages. As a result, the financial statements
have been prepared on a consolidated basis.
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 (the "Secretary") and administrator
(the "Administrator");
-- Indos Financial Limited has been appointed to act as the
Company's depositary (the "Depositary");
-- Sparkasse Bank Malta plc has been appointed to act as the
Company's Custodian (the "Custodian");
-- Computershare Investor Services plc has been appointed as the
Company's registrar (the "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 ("AIFMD")
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. The Company has appointed Indos Financial
Limited as depositary. In addition, the Company entered into an
amended Depository Agreement enabling it to delegate certain
custody functions as required by the AIFMD to Sparkasse Bank Malta
plc (the "Custodian") on 17 November 2017.
Donations
The Company made no political or charitable donations during the
year under review to organisations either within or outside the EU
(2016: None).
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 internal operations and therefore no
greenhouse gas emissions to report nor does it have responsibility
for any other emissions producing sources under the Companies Act
2006 (Strategic Report and Directors' Reports) Regulations 2013,
including those within its underlying investment portfolio.
However, the 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.
Modern Slavery Act
The Company is not within the scope of the Modern Slavery Act
2015 because it has insufficient turnover and is therefore not
obliged to make a human trafficking statement.
Board diversity
During the year to 31 December 2017 the Board of Directors
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 Company is exposed to a number of potential risks and
uncertainties. The risks and uncertainties faced by the Group are
deemed to be the same as those faced by the Company. These risks
could have a material impact on financial performance and position
and could cause actual results to differ materially from expected
and historical results.
The Company faces a number of risks in the normal course of
business and as a result the management of the risks we face is
central to everything we do. 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 risk register was last reviewed by the
Board on 27 April 2018. 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, Custodian, 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 the Company's shares
The market price of the Company's shares may fluctuate widely in
response to different factors and there can be no assurance that
the Company's shares will be repurchased by the Company even if
they trade materially below their Net Asset Value. Similarly, the
shares may trade at a premium to Net Asset Value whereby the shares
can trade on the open market at a price that is higher than the
value of the underlying assets. There can be no assurance, express
or implied, that shareholders will receive back the amount of their
investment in the Company's shares.
Mitigation
The Investment Manager and the Board closely monitor the level
of discount or premium at which the Company's shares trade on the
open market. The Company may purchase the shares in the market with
the intention of enhancing the Net Asset Value per ordinary share.
However, there can be no assurance that any repurchases will take
place or that any repurchases will have the effect of narrowing any
discount to Net Asset Value at which the ordinary shares may trade.
When the Company's shares trade at a premium the Company may issue
shares to reduce the premium at which shares trade. As at 31
December 2017 the Company's 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 Company's issued 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 to 75 per cent of Net Asset Value and had
GBP56.5 million drawn representing 18.5 per cent of NAV.
Exposure to Credit Risk
As a lender to small businesses and individuals, the Company is
exposed to credit losses if customers are unable to repay loans and
outstanding interest and fees. 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. The Company also provides structured lending facilities
to Corporate entities which can be larger value loans.
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. For structured lending facilities the Company
undertakes a robust detailed process. Facilities are secured and
typically structured with minimum asset coverage ratios and
covenants to provide early warning of credit deterioration and
adequate asset cover in the event of stress. The Company operates
within the Investment policy guidelines and lends on a secured
basis against identifiable and accessible assets.
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
Section 1158 of the Corporation Tax Act 2010. Both the Board and
the Investment Manager are aware of the requirements which are to
be fulfilled in any accounting period for the 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 legislative and regulatory regimes, including, but not
limited to, the Consumer Credit Act and the Data Protection Act.
Any breach of applicable legislative and/or regulatory 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 for the Company to
terminate the arrangements with each of these counterparties with
limited notice should such counterparty continually or materially
breach any of their legislative obligations, or their obligations
to the 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
27 April 2018 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 68)
Robert has over 35 years' experience in retail banking. He is
currently chairman at Al Rayan Bank plc, Hampshire Trust Bank plc
and Bank of Ireland UK plc. He has had an extensive number of
Non-Executive Director appointments both in the UK and the Middle
East including Aldermore Bank plc, George Wimpy plc, Barclays Bank
UK Retirement Fund, Vaultex Limited, LSL Properties plc and several
independent NED roles at banks in the UAE, Oman and Turkey. Robert
was previously Chief Executive Officer at West Bromwich Building
Society, a role he took to chart and implement its rescue plan.
Prior to this, he was Chief Executive Officer at Portman Building
Society and Bank of Ireland in the UK.
Jim Coyle (1)
Chairman of the Audit Committee and member of the Management
Engagement Committee
Jim Coyle (independent) (aged 61)
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, non-executive Director and Chairman of
Audit and Risk Committee at Scottish Water, non-executive Director,
Chairman of Audit and Risk Committee at Worldfirst and
non-executive Director at Marks & Spencer Bank plc. He was
previously a non-executive Director at the Scottish Building
Society, and Group Financial Controller at Lloyds Banking Group,
having earlier held a role as Divisional Finance Director, Group
Operations. Prior to this, Jim was Group Chief Accountant for the
Bank of Scotland, having joined the bank in 1991. He qualified as a
Chartered Accountant with KPMG before spending 10 years in the oil
industry, holding senior positions with BP. Jim is a Fellow of the
Chartered Institute of Bankers in Scotland, a former member of the
Council of the Institute of Chartered Accountants of Scotland, and
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 52)
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 2015
Statutory Information
The Directors of Honeycomb Investment Trust plc (Registered:
09899024) present their report and audited financial statements of
the Company and its subsidiary (together, the "Group") for the year
ended 31 December 2017. The shares are listed on the Specialist
Fund Segment of the London Stock Exchange.
Board members, and directors' and officers' insurance
The names and biographical details of the Board members who
served on the Board as at the year-end can be found on page 23.
During the year under review the Company 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
Section 1158 of the Corporation Tax Act 2010 and the Investment
Trust (Approved Company) (Tax) Regulations 2011. HM Revenue &
Customs approved the Company as an investment trust upon its
listing on 23 December 2015. In the opinion of the Directors, the
Company has conducted its affairs so that it is able to maintain
its status as an investment trust.
The Company is an externally managed closed-ended investment
company with an unlimited life and has no employees (2016: 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 21 and details of the
Company's internal controls can be found on pages 33 to 34. 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 2017, the Company had 29,926,110 ordinary
shares in issue. There are no other classes of shares in issue and
no shares are held in Treasury.
On 2 June 2017, at the Company's first AGM, the Board was
granted authority to allot the Company's ordinary shares or grant
rights to subscribe for, or convert any security into ordinary
shares in the Company up to a maximum nominal amount of GBP400,000
representing 40,000,000 ordinary shares. The authority will expire
(unless previously renewed, varied or revoked) on the conclusion of
the 2018 annual general meeting of the Company (or, if earlier, at
the close of business on 31 August 2018).
During the year under review a total of 10,000,000 ordinary
shares were issued as detailed below:
Price Premium
Shares paid to net
issued per share asset
(pence) value
(%) (1)
======= ========== ========== ========
31 May
2017 10,000,000 1,050.0 3.0%
======= ========== ========== ========
(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
prospectuses dated 18 December 2015 and 25 May 2017 (the
"Prospectus"). The dividends paid or payable in respect of the year
ended 31 December 2017 are set out Note 9 to the financial
statements. A reconciliation of movements in reserves is presented
in the Consolidated Statement of Changes in Shareholders' Funds on
page 55 of the financial statements. The Company may make
distributions from the Revenue Reserve, the Special Distributable
Reserve or from realised capital gains. There were no unrealised
gains in the year.
Substantial share interests
As at 31 December 2017, the Company had been notified in
accordance with Disclosure Guidance and Transparency Rule 5 of the
following interests in the voting rights attaching to the Company's
issued share capital.
Holder Ordinary Percentage
shares of total
voting
rights
=================== =========== ===========
Invesco
Ltd 10,857,945 36.28%
Old Mutual
Global Investors
(UK) Ltd 7,350,064 24.56%
Woodford
Investment
Management
LLP 5,449,373 18.21%
M&G Investments 1,697,857 5.67%
=================== =========== ===========
Following the year-end, the Company received a further
notification that Woodford Investment Management Limited had
increased its shareholding to 5,757,254 ordinary shares on 23
January 2018. This increased the percentage of voting rights to
19.23 per cent.
Independent auditors
The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC"), were re-appointed at the Company's first AGM and have
expressed willingness to continue to act as the Company's auditors
for the forthcoming financial year. The Audit Committee has
carefully considered the auditors' appointment, as required in
accordance with its Terms of Reference, and, having regard to its
effectiveness and the services it has provided the Company during
the year under review, has recommended to the Board that the
independent auditors be appointed at the forthcoming 2018 AGM. At
the 2018 AGM resolutions are therefore to be proposed for the
appointment of the independent auditors and to authorise the
Directors to agree its remuneration for the forthcoming financial
year. In reaching its decision, the Audit Committee considered the
points detailed on pages 35 to 37 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 are unaware and each
Director has taken all the steps required of a Director to make
themselves aware of any relevant audit information and to establish
that the Company's auditor are aware of that information.
Articles of Association
Any amendments to the Company's Articles of Association must be
made by special resolution.
Going concern
The Directors have reviewed the financial projections of the
Company and the Group from the date of this report, which shows
that the Company and Group 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 and the Group also has detailed policies
and processes for managing the risk, set out in the Strategic
Report on pages 18 to 20.
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 April 2016 (the "Code"), the
Directors have assessed the prospects of the Company over a
three-year period ending December 2020. The Board believes this
period to be appropriate taking into account the current trading
position and the potential impact of the principal risks that could
affect the viability of the Group.
At the year-end, the Group had cash balances of GBP16.9 million,
giving it GBP12.1 million excess cash to current liabilities. The
Company also has GBP289.2 million excess of non-current assets to
non-current liabilities. There are therefore limited risks to the
viability of the Group.
To prepare the viability statement the Board has considered the
prospects of the Group in light of its current position and have
reviewed the principal risks. Taking the current performance as a
base, the projection considers the Group's income, underlying Net
Asset Value and the cash flows over the three-year period selected.
The projection is not a business plan in itself, but rather is a
prudent view of how the Group may evolve, based principally upon
its growth to date, in order to demonstrate its viability. Analysis
to assess viability has focused on the risks in delivery of the
growth of the business and a series of projections have been
considered changing funding levels, origination volumes and the
performance of the assets acquired.
The analysis indicates that due to the stability and cash
generating nature of the portfolios and structured agreements, as
well as the debt facilities in place, the Group 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
Group, the Board confirms that they have reasonable expectation
that the Group will be able to continue operation and meet its
liabilities as they fall due over the three-year period ending
December 2020. The Board also continuously monitors the financial
performance of the Group against key financial ratios ensuring a
strict discipline in the financial management of the business.
Management and administration
Company Secretary
The Company's Company Secretary is Apex Fund Services (UK) Ltd
(the "Company Secretary"). 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
The Company's Administrator is Apex Fund Services (UK) Ltd (the
"Administrator"), a company authorised and regulated by the
Financial Conduct Authority ("FCA"). The Administrator provides the
day-to-day administration of the 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) GBP5,305 per month (increased by 3 per
cent on 1 January in each year); and (ii) an amount equal to the
sum of 1/12 of 0.06 per cent of the portion of Net Asset Value up
to GBP150 million, and 1/12 of 0.05 per cent of the excess of Net
Asset Value above GBP150 million. The 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 is based on 1.0
per cent of the Gross Assets. Further details on the management fee
and the performance fee can be found in Note 6 to the financial
statements. The management agreement can be terminated by either
party providing twelve months' written notice.
For as long as the Origination Partner is part of the same group
as the Investment Manager the fees payable to the Origination
Partner, which are calculated as a percentage of the purchase price
for each Credit Asset acquired by the 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 2017 and 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.
The Company entered into an amended Depository Agreement
enabling it to delegate certain custody functions to Sparkasse Bank
Malta plc (the "Custodian") on 17 November 2017. The Depositary is
primarily liable to the Company and investors for losses of
financial instruments held by the by the Custodian, however, the
Company and Investment Manager have permitted the transfer of that
obligation to the Custodian in compliance with articles 21(13) or
21(14) of the AIFMD. The Depositary has transferred such obligation
and therefore the Custodian, and not the Depositary, will be liable
to the Company for a loss of financial instruments held in custody,
but the Depositary must take reasonable steps to pursue and enforce
any associated claim on behalf of the Company.
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. 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 to which the Company is party that might
be affected by a change of control of the Company except for the
agreement in relation to the Company's debt facility. Pursuant to
the terms of that agreement, on a change of control of the Company,
the Company shall promptly notify the lender. The lender is not
obliged to fund a utilisation except in relation to a rollover loan
and if negotiations to continue the facility are not concluded
within 30 days, the liability may be repayable.
Subsequent events
Save as noted below, there have been no events to disclose since
the year end under review.
On 15 January 2018 the Company gave notice to call the external
note holders of BMF 3 one month prior to the quarterly interest
payment date. Subsequently, on 15 February 2018, the Company
redeemed all external note holders and as a consequence purchased
the residual loan values and released the security over the loans.
The effect of this is the underlying assets have been purchased by
the Company and bought onto the Company's Statement of Financial
Position. BMF 3 will no longer be consolidated as the Company will
no longer have control of BMF 3.
On 8 March 2018 the Company announced a supplementary prospectus
in connection with the publication of the Company's interim report
and financial statements.
The Company increased the size of its debt facility on 21 March
2018 to a committed GBP150 million within the existing syndicate.
The 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.
On 29 March 2018, a dividend of 20.0 pence per ordinary share
was paid.
On 12 April 2018, a dividend of 20 pence per ordinary share was
declared, payable on 29 June 2018.
On 19 April 2018, the Company announced its intention to proceed
with a placing of 9,523,809 ordinary shares at a price per share of
1,050 pence per share. That placing closed the same day, with
admission becoming effective on 23 April 2018.
Donations
The Company made no political or charitable donations during the
year under review to organisations either within or outside the EU
(2016: None).
Future developments
Indications of likely future developments in the business of the
Company are set out in the Strategic Report on pages 3 to 21.
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 year under review.
interest
======================= ============================================
9.8.4(2) - unaudited The Company published a supplementary
financial information prospectus approved by the UK Listing
Authority on 8 March 2018. The publication
of the Supplementary Prospectus
is a regulatory requirement under
the Prospectus Rules following the
publication of the Company's interim
report and unaudited financial statements
for the period from 1 January 2017
to 30 June 2017. It does not constitute
a profit forecast or profit estimate
in accordance with listing rule
9.2.18.
======================= ============================================
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 year under review, the
and (9) Company issued a total of 10,000,000
ordinary shares with a nominal value
of GBP100,000 and an average price
of 1,050.0 pence per share for a
total consideration of GBP105,000,000.
Further details can be found on
page 24.
======================= ============================================
9.8.4 (8) and These Listing Rules do not apply
9.8.4 (9) - to the Group.
relate to companies
that are part
of a group of
companies
======================= ============================================
9.8.4 (10) - During the year under review, there
contract of 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 year under review, there
(13) - were no arrangements under which
waiving dividends 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
27 April 2018
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 the Company's shares are not admitted to the UK Listing
Authority's Official List, the UK Listing Rules applicable to
closed-ended investment companies which are listed on the premium
listing segment of the UK Listing Authority do not apply to the
Company. However, as set out in the Prospectus, the Company has
voluntarily adopted certain key provisions of the UK Listing Rules.
Pursuant to the Listing Rules as voluntarily adopted by the
Company, the Company must "comply or explain" against each of the
provisions of the 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 www.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 Company
is not a member of the AIC but has voluntarily adopted reporting
against the AIC Code and follows the AIC Guide to meet its
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 www.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
Group.
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 Committee.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers the role of the chief executive,
Executive Director's remuneration and the need for a senior
Independent Director as being not relevant to the Company, being a
small board with only three members and an externally managed
investment company. In particular, all of the Company's day-to-day
management and administrative functions are outsourced to third
parties. As a result, the Company has no executive Directors,
employees or internal operations. The Company has therefore not
reported further in respect of these provisions.
The Board has decided that the systems and procedures employed
by the Investment Manager and the other third-party providers in
relation to the Group give sufficient assurance that a sound system
of internal control, which safeguards the Group's assets, is
maintained, without the need for an internal audit function. An
internal audit function specific to the Group is therefore
considered unnecessary.
The Board does not, at present, consider that separate
Nomination Committee would be appropriate at this stage in the
Company's life and given the Board's size, being three members in
total. Currently, decisions concerning the Board's nomination and
Board appraisals are undertaken by the Board as a whole. However,
the need for a separate Nomination Committee and an internal audit
function will be considered on an annual basis.
The Board of Directors
The Board consists of three Directors, all of whom are
independent non-executive Directors. Biographies of the Directors
are shown on page 23 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 Company's articles of association and without
compensation. There are no agreements between the Company and any
Director which provide for compensation for loss of office in the
event that there is a change of control of the Company.
Copies of the letters of appointment are available on request
from the Company Secretary and will be available at the Company's
2018 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 23.
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 during the year under review, against the
number of meetings each Board or Audit Committee member was
eligible to attend during the year under review. All Directors
attended the annual Management Engagement Committee meeting held
prior to the publication of this Annual Report.
Director Board Audit Remuneration
Committee Committee
========= ===== ========== ============
Robert
Sharpe 5/5 4/4 1/1
Jim
Coyle 5/5 4/4 1/1
Ravi
Takhar 5/5 4/4 1/1
========= ===== ========== ============
There was no new appointment or resignation of Directors during
the year under review.
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;
-- Reviewing and approving Board changes;
-- Considering and authorising Board conflicts of interest;
-- Reviewing and approving the Company's annual accounts and
half yearly accounts including accounting policies;
-- Reviewing Investment Manager's conflicts of interest and whistleblowing policies;
-- Reviewing and approving the Company's level of gearing;
-- The review and approval of terms of reference and membership of Board Committees; and
-- Reviewing and approving liability insurance.
There is a procedure in place for the Directors to take
independent professional advice at the expense of the Company.
Professional advice has been taken by the Directors during the year
under review in relation to the Power of Attorney granted to the
Investment Manager. This did not amend the scope of what the
Investment Manager was already set out to be able to do, in line
with the powers delegated by the Board to the Investment Manager
under the Investment Management Agreement.
The Company has taken out directors' and officers' liability
insurance, such cover to be maintained for the full term of each
Director's appointment.
Independence of Directors
Each of the Directors was considered, on appointment, to be
independent of the Investment Manager and free from any business or
other relationship that could materially interfere with the
exercise of his independent judgement and remained so throughout
the year. There are no relationships or circumstances relating to
the Company that are likely to affect the judgement of any of the
Directors.
Care will be taken at all times to ensure that the Board is
composed of members who, as a whole, have the required knowledge,
abilities and experience to properly fulfil their role and are
sufficiently independent.
Directors' interests
No Director holds shares in the Company.
Board evaluation
The performance of the Board, its committees and Directors was
reviewed by the Remuneration Committee in February 2018. Any
training needs identified as part of the Board evaluation process
will be added to the agenda of the next Board meeting.
Board training and induction
The Company Secretary, the Board or the Investment Manager upon
request of the Board or any Director individually, will offer
induction training to new Directors about the Company, its key
service providers, the Directors' duties and obligations and other
matters as may be relevant from time to time.
The Board members are encouraged to keep up to date and attend
training courses on matters which are directly relevant to their
involvement with the Company.
Board appointment, election and tenure
The rules concerning the appointment and replacement of
Directors are contained in the Company's articles of association
and the Companies Act 2006.
None of the Directors consider length of service as an
impediment to independence or good judgement but, if they felt that
this had become the case, the relevant Director would stand
down.
The Chairman of the Company acts as Chairman of the Management
Engagement Committee. The Terms of Reference of all committees are
available from the Company Secretary's office and the Company's
website at www.honeycombplc.com
The Board considers that all of the current Directors contribute
effectively to the operation of the Board and the strategy of the
Company. The Board has considered each Board member's independence
from the Company and Investment Manager. As such the Board believes
that it is in the best interests of shareholders that each of the
Directors be re-elected at the forthcoming AGM. The next AGM will
be held at 8 June 2018.
Management agreement and continuing appointment
Details of the Investment Manager's agreement and fees are set
out in Note 6 to the financial statements on page 68.
The Board keeps the performance of the Investment Manager under
continual review. The Company's Management Engagement Committee
undertook its annual appraisal of the manager during the year under
review on 20 February 2018. The Management Engagement Committee
recommended to the Board that the appointments of all the Company's
third-party service providers continue. It was felt that their
appointment was in the best interests of the shareholders as the
Investment Manager had performed in line with expectations and the
Board is of the opinion that the continuing appointment of the
Investment Manager on the terms agreed is in the interests of the
Company's shareholders as a whole.
Conflicts of interest
The Company's articles of association provide that the Directors
may authorise any actual or potential conflict of interest that a
Director may have, with or without imposing any conditions that
they consider appropriate on the Director in question. Directors
are not able to vote in respect of any contract, arrangement or
transaction in which they have a material interest, and, in such
circumstances, they are not counted in the quorum at the relevant
Board meeting. A process has been developed to identify any of the
Directors' potential or actual conflicts of interest. This includes
declaring any potential new conflicts before the start of each
Board meeting. A schedule is maintained of each Director's
potential conflicts of interest.
Audit 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 year 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 auditors 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 35 to 37.
Management Engagement Committee
The Management Engagement 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.
Relations with shareholders
All shareholders have the opportunity to attend and vote, in
person or by proxy, at the AGM and any general meetings of
shareholders.
The notice of the AGM, which is sent out at least 21 days in
advance of the AGM, sets out the business of the meeting and any
item not of an entirely routine nature is explained in the
Directors' report. Separate resolutions are proposed in respect of
each substantive issue.
Shareholders are encouraged to attend the AGM and to participate
in proceedings. The Chairman of the Board and the Directors,
together with representatives of the Investment Manager, will be
available to answer shareholders' questions at the AGM. Proxy
voting figures are available to shareholders at the AGM.
The Investment Manager holds regular discussions with major
shareholders, the feedback from which is provided to and greatly
valued by the Board. The Directors are available to enter into
dialogue and correspondence with shareholders regarding the
progress and performance of the Company. Further information about
the Company can be found on the Company's website
www.honeycombplc.com.
Internal control review
The Board has elected not to have an internal audit function as
the Company delegates its operations to third-party service
providers and does not employ any staff. Instead it has been agreed
that the Company will rely on the internal controls which exist
within its third-party providers.
The Administrator, Depositary and Investment Manager have
established internal control frameworks to provide reasonable
assurance on the effectiveness of the internal controls operated on
behalf of their clients. The Investment Manager, the Administrator,
the Depositary and the Company Secretary will report on any
breaches of law or regulation, if and when they arise, periodically
in scheduled Board reports. The Audit 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 confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced by
the Company and for reviewing the effectiveness of the Company's
system of internal controls including financial, operational,
compliance and risk management. The Board has in place a robust
process to assess and monitor the risks of the Company. The Board
has reviewed the effectiveness of the Administrator and the
Investment Manager's systems of internal control and risk
management. During the year under review, the Board has not
identified any significant failings or weaknesses in the internal
control systems of its service providers.
The 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 18 to 20 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 GBP13.5
million, split GBP8.2 million in variable and GBP5.3 million in
fixed remuneration. During the year, the average number of
beneficiaries at the Group which includes the AIFM were 38 and the
aggregate amount of remuneration paid in relation to the Senior
Management of the firm was GBP5.7 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 changes of information. The AIFMD requires certain
information to be made available to investors in the Company before
they invest and requires that material changes to this information
be disclosed in the Annual Report.
Periodic disclosure (FUND 3.2.5 and 3.2.6)
There are no assets subject to special arrangements due to their
illiquid nature and no new arrangements for the managing of the
liquidity of the Group.
There is no change to the arrangements, as set out in the
Prospectus, for managing the Group's liquidity.
The current risk profile of the Group is set out in the
Strategic Report: Principal Risks and Uncertainties on pages 18 to
20 and in note 25 Financial Risk Management on pages 79 to 81.
The Company and Group is permitted to be leveraged and has
borrowing restrictions in place. In accordance with the Company's
prospectuses dated 18 December 2015 and 25 May 2017 (the
"Prospectus"), the Group has a maximum limit of 100 per cent of
NAV, the actual leverage employed by the Group as a percentage of
NAV was 28.9 per cent. There have been no breaches of the permitted
leverage limits within the year and no changes to maximum level of
leverage employed by the Group.
The table below sets out the current maximum permitted and
actual leverage under the gross and commitment method in accordance
with Annex IV Article 8 of the AIFMD. This differs from the Group's
borrowing restriction, which is an absolute measure. The gross and
commitment method are ratios between the Group's gross assets and
NAV. The gross method represents the sum of the Group's positions
(total assets) after deducting cash balances. The commitment method
represents the sum of the Group's positions without deducting cash
balances. The Group is required to state its maximum and actual
leverage levels, calculated as prescribed by the AIFMD as at 31
December 2017, and are as follows:
As a percentage Gross Commitment
of net method method
asset value
================ ======= ==========
Maximum
level of
leverage 200% 200%
Leverage
as at 31
December
2017 121% 126%
================ ======= ==========
Other matters
The Investment Manager can confirm that required reporting to
the FCA has been undertaken in accordance with FUND 3.4.
Approval
This Directors' Report was approved by the Board of Directors on
27 April 2018.
On behalf of the Board
Robert Sharpe
Chairman
27 April 2018
Report of the Audit Committee
As Chairman of the Audit Committee I am pleased to present the
Audit Committee report for the year ended 31 December 2017.
Membership of the Audit Committee
The Audit Committee comprises all Directors and is chaired by
Jim Coyle. Please see page 23 for the members biography's. All
members of the Committee have recent and relevant financial
experience, as a result of their involvement in financial services
and other industries.
As Chairman of the Audit Committee, I can confirm that I am a
Chartered Accountant and I maintain my membership of the Institute
of Chartered Accountants of Scotland. As such, I have relevant
financial experience. The Corporate Governance Code stipulates that
the Chairman of the Company should not be a member of the Audit
Committee. However, given the size of the Board and Mr Sharpe's
relevant financial experience gained through his involvement with
other businesses during his career and given our opinion that the
Chairman is independent, it is considered appropriate that he is a
member of the Audit Committee.
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 auditors and to approve its remuneration
and terms of engagement;
-- To review and monitor the external auditors' independence and objectivity; and
-- To review and consider on an annual basis the need for an internal audit function.
Matters considered during the year
The Audit Committee has met four times during the year under
review (please see page 31 for members attendance) and considered
the following items:
-- The Group's Audited Annual Report and Financial Statements
for the year ended 31 December 2017 and advised the Board
accordingly;
-- The Company's half-year financial statements for the period
ended 30 June 2017 and advised the Board accordingly;
-- The Group's audit plan with the external auditors;
-- The policy on non-audit services;
-- Monitored the Investment Manager's preparation for the
revised impairment approach required by IFRS 9;
-- In order to support the Board's approval of the viability
statement on page 26 as to the longer-term viability of the Group,
the Committee reviewed papers from the Investment Manager
supporting the viability statement;
-- The Company's 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;
-- The Group's risk matrix and the internal controls implemented to manage those risks; and
-- The appropriateness of the Group's accounting policies and
whether appropriate estimates and judgements have been made.
UK non-audit services
In relation to non-audit services, the Audit Committee has
reviewed and implemented a policy on the engagement of the auditors
to supply non-audit services and this is reviewed on an annual
basis. All requests or applications for other services to be
provided by the auditors are submitted to the Audit Committee and
will include a description of the services to be rendered and an
anticipated cost. The Group'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 auditors to provide under the
revised Ethical Standard.
During the year, the auditors provided reporting accountant
services on the prospectus dated 25 May 2017 in relation to the
Company's subsequent further issuance of ordinary shares. These
non-audit fees amounted to GBP54,915 (2016: GBP95,000).
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 20 April 2018 to review the report
and accounts for the year ended 31 December 2017. 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
audit, all of which were satisfactorily addressed:
Issue considered How the issue was addressed
========================= ================================================
Risk of misappropriation The Audit Committee reviews reports
of assets and ownership from its service providers on key
of investments controls over the assets of the
Group. Any significant issues are
reported to the Board by the Investment
Manager or the Company's Depositary.
The Investment Manager has put
in place procedures to ensure that
investments can only be made to
the extent that the appropriate
contractual and legal arrangements
are in place to protect the Group's
assets. The Company's Depositary
issues a quarterly report on the
status of the assets to the Directors
for review.
========================= ==============================================
The risk that income The Board regularly reviews income
is overstated, statements from the Investment
incomplete or inaccurate Manager. The Investment Manager
through failure reviews income performance against
to recognise proper budget on a monthly basis and reviews
income entitlements its recognition policies for appropriateness
or to apply the and accuracy on a regular basis
appropriate accounting to ensure they meet the accounting
treatment policy set out in Note 2 of the
for recognition financial statements.
of income.
========================= ==============================================
The risk that impairment The Board regularly reviews impairment
losses are understated, losses prepared by the Investment
incomplete or inaccurate Manager. The Investment Manager
through failure reviews impairment performance
to implement proper on a monthly basis and reviews
impairment policies its impairment policy for appropriateness
or to apply the and accuracy on a regular basis
appropriate accounting to ensure they meet the accounting
treatment policy set out in Note 2 of the
financial statements.
========================= ==============================================
The risk of material The roll out of the IFRS 9 implementation
misstatement of programme was a key focus of the
expected credit Committee with the bulk of the
losses under IFRS testing and implementation taking
9 Financial instruments place in 2017. During the year
the Committee received regular
reports on the progress of this
project and challenged the Investment
Manager to ensure its implementation
runs smoothly. The Committee received
regular updates through the year
on the Investment Manager's progress
in preparation for the introduction
of IFRS 9 which will require provisioning
methodology to take into account
future expected losses. As the
group enters the 2018 financial
year, the Committee will continue
to monitor progress closely. Further
disclosure around the progress
is outlined in Note 1 of the financial
statements.
========================= ==============================================
Retention of Investment The Audit Committee receives a
Trust Status report 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.
========================= ==============================================
External auditors
The Company's external auditors, PricewaterhouseCoopers LLP
("PwC"), were appointed on 16 May 2016 and re-appointed on 2 June
2017 at the Company's first AGM. Under the Financial Reporting
Council's transitional arrangements, the Company is required to
re-tender, at the latest, by 2025. The Audit Committee intends to
re-tender within the timeframe set by the Financial Reporting
Council. 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. In accordance with UK legislation,
the audit partner must rotate at least every five years. As this is
Mr McGuire's second year as audit partner, he will be due to rotate
out of this role during 2021 at the latest.
The audit fees for the year under review can be found in Note 7
to the financial statements on page 69.
The Audit Committee monitors the auditors' objectivity and
independence on an ongoing basis. In determining PwC's
independence, the Audit Committee has assessed all relationships
with PwC and received confirmation from PwC that it is independent
and that no issues of conflicts arose during the year. The Audit
Committee is therefore satisfied that PwC is independent.
The Audit Committee monitors and reviews the effectiveness of
the external audit process on an annual basis and makes
recommendations to the Board on its re-appointment, remuneration
and terms of engagement of the auditors. 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 auditors'
remuneration, the quality of its work including the quality of the
audit report, the quality of the audit partner and audit team, the
expertise of the audit firm and the resources available to it, the
identification of audit risk, the planning and execution of the
audit and the terms of engagement. Accordingly, the Audit Committee
has recommended to the Board that it proposes to shareholders via
an ordinary resolution that PwC be re-appointed as auditors at the
AGM. PwC has confirmed its willingness to continue in office.
The Audit Committee has direct access to the Company's auditors
and provides a forum through which the auditor's report 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.
Approval
This Report was approved by the Audit Committee on 27 April
2018.
Jim Coyle
Chairman of the Audit Committee
27 April 2018
Directors' Remuneration Report
Statement from the Chairman
The Remuneration Committee comprises all Directors and is
chaired by Robert Sharpe. Please see page 23 for the members
biography's, and page 31 for members attendance.
I am pleased to present the Directors' remuneration report for
the year ended 31 December 2017, 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 auditors are required to verify certain information
within this report subject to statutory audit by the Companies Act
2006. Where information set out below has been audited it is
indicated as such.
We are required to seek shareholder approval of the Directors'
remuneration policy at least every third year and the remuneration
report annually. Any changes to the Directors' remuneration policy
will require shareholder approval. An ordinary resolution was
passed to approve the Directors' remuneration policy at the
Company's first AGM held on 2 June 2017. This policy was adopted at
that meeting with effect from the date of the AGM and remained in
force for the year ended 31 December 2017 and will remain in force
for the two subsequent years. An ordinary resolution to approve the
Directors' remuneration policy will be put to shareholders at least
once every three years. At the 2018 AGM, shareholders will also be
asked to consider an advisory resolution on the contents of the
Directors' remuneration report.
As at 31 December 2017, the Board comprised three non-executive
Directors, all of whom are independent of the Investment
Manager.
Given the size of the Board, and as the Company has no
employees, it is not considered appropriate for the Company to
establish a separate Nomination Committee. It is the responsibility
of the Remuneration Committee to consider and approve Directors'
remuneration. At the start of the year the Directors remuneration
was set at a rate of GBP30,000 per annum for the Chairman and
GBP25,000 per annum for the other Directors. During the year the
Remuneration Committee considered the time commitment required to
carry out their duties and approved an increase of the Board's fees
from 1 April 2017. The Directors remuneration was set 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. The Remuneration Committee met
on 20 February 2018 and considered the continued time commitment
required to carry out their duties and has approved an increase of
the Board's fees by GBP5,000 per member from 1 March 2018. The
Directors remuneration was set at a rate of GBP45,000 per annum for
the Chairman and GBP38,000 per annum for the other Directors. A
further GBP5,000 per annum 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 each Board member and the time commitment
required by Board members to carry out their duties and is
determined with reference to the appointment of Directors of
similar investment companies. The level of remuneration has been
set with the aim of promoting the future success of the 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. 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
The Directors' Remuneration Report for the year ended 31
December 2016 and the Directors' Remuneration Policy were approved
by shareholders at the Annual General Meetings held on 2 June 2017.
The votes cast by proxy were as follows:
Directors' Directors'
Remuneration Remuneration
Report Policy
========== ================== ==================
Number of % of Number % of
Votes votes of Votes votes
cast cast
========== ========== ====== ========== ======
For 17,226,166 100.00 17,226,166 100.00
Against - - - -
Total
votes
cast 17,226,166 100.00 17,226,166 100.00
Number - - - -
of
votes
withheld
========== ========== ====== ========== ======
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 2018 AGM on the
advisory resolutions will be disclosed in the remuneration report
for the year to 31 December 2018.
Directors' fees (audited)
Single total aggregate Directors' remuneration for the year
under review was GBP103,250 (2016: GBP93,593). The Directors who
served during the year under review received the following
emoluments:
Fees paid
during the
year under Taxable Non-taxable 31 December 31 December
Director review (1) benefits benefits 2017 2016
============= ============ ========== ============ ============ ============
Robert GBP37,500 - - GBP37,500 GBP31,844
Sharpe
(Chair)
============= ============ ========== ============ ============ ============
Jim Coyle GBP34,750 - - GBP34,750 GBP26,537
============= ============ ========== ============ ============ ============
Ravi Takhar GBP31,000 - - GBP31,000 GBP26,537
============= ============ ========== ============ ============ ============
Mark Huggins - - - - GBP8,675
(2)
============= ============ ========== ============ ============ ============
Total GBP103,250 - - GBP103,250 GBP93,593
============= ============ ========== ============ ============ ============
(1) Fees paid to the Directors during the year under review does
not include any employment taxes or valid business expenses. Prior
period comparatives include fees paid from 2 December 2015 (date of
incorporation).
(2) Mark Huggins was appointed on 14 December 2015 and resigned
13 April 2016.
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
on page 8 and Investment Manager's review on pages 9 to 10.
The graph below shows the total return to ordinary shareholders
compared to the total shareholder returns of the FTSE All Share
Index during the year. 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 year ended 31 December 2017. The
table shows the remuneration paid to Directors for the year under
review, compared to the distribution payments to shareholders.
31 December Period
2017 Since
GBP'000 incorporation
(2 December
2015)
to 31
December
2016
GBP'000
========================== =========== ==============
Total remuneration
paid to Directors 103 94
Shareholder distributions
- dividends
or share buybacks 21,535 6,735
========================== =========== ==============
Directors' interests (audited)
The Company does not have any requirement for any Director to
own shares in the Company.
As at 31 December 2017, the Directors do not hold shares in the
Company.
There have been no changes to any holdings between 31 December
2017 and the date of this report.
Approval of the Annual Report
on remuneration and the Directors' remuneration policy
The Annual Report on remuneration was approved by the Board on
27 April 2018 and signed on behalf of the Board by:
Robert Sharpe
Chairman of the Remuneration Committee
27 April 2018
Statement of Directors' responsibilities in respect of the
financial statements
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulation.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the Group and Company financial statements in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union. Under company law 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
Group and Company and of the profit or loss of the Group for that
period. In preparing the financial statements, the directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable IFRSs as adopted by the European
Union have been followed for the Group and Company financial
statements, subject to any material departures disclosed and
explained in the financial statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Company
will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Group and Company and enable
them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS
Regulation.
The Directors are also responsible for safeguarding the assets
of the Group and Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
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 accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group and
Company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed in
Directors' Report confirm that, to the best of their knowledge:
-- the Group and Company financial statements, which have been
prepared in accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial
position and profit of the company; and
-- the Directors' Report includes a fair review of the
development and performance of the business and the position of the
group and company, together with a description of the principal
risks and uncertainties that it faces.
In the case of each Director in office at the date the
Directors' Report is approved:
-- so far as the Director is aware, there is no relevant audit
information of which the Group and 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 Group and Company's
auditors are aware of that information.
Signed on behalf of the Board by
Robert Sharpe
Chairman
27 April 2018
Independent Auditors' Report to the members of Honeycomb
Investment Trust plc
Report on the audit of the financial statements
Opinion
In our opinion, Honeycomb Investment Trust plc's Group financial
statements and Company financial statements (the "financial
statements"):
-- give a true and fair view of the state of the Group's and of
the Company's affairs as at 31 December 2017 and of the Group's
profit and the Group's and the Company's cash flows for the year
then ended;
-- have been properly prepared in accordance with IFRSs as
adopted by the European Union and, as regards the Company's
financial statements, as applied in accordance with the provisions
of the Companies Act 2006; and
-- have been prepared in accordance with the requirements of the
Companies Act 2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation.
We have audited the financial statements, included within the
Annual Report and Audited Financial Statements (the "Annual
Report"), which comprise: the Consolidated and Company Statements
of Financial Position as at 31 December 2017; the Consolidated
Statement of Comprehensive Income, the Consolidated and Company
Statements of Cash Flows, and the Consolidated and Company
Statements of Changes in Equity for the year then ended; and the
notes to the financial statements, which include a description of
the significant accounting policies.
Our opinion is consistent with our reporting to the Audit
Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our
responsibilities under ISAs (UK) are further described in the
Auditors' responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC's Ethical
Standard, as applicable to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance
with these requirements.
To the best of our knowledge and belief, we declare that
non-audit services prohibited by the FRC's Ethical Standard were
not provided to the Group or the Company.
Other than those disclosed in the Report of the Audit Committee
on pages 35 to 36, we have provided no non-audit services to the
Group or the Company in the period from 1 January 2017 to 31
December 2017.
Our audit approach
Overview
Materiality Overall Group materiality: GBP3.0 million
(2016: GBP2.0 million), based on 1% of
net assets.
Overall Company materiality: GBP3.0 million
(2016: GBP2.0 million), based on 1% of
net assets.
=========== ===========================================================
Audit scope The Group and Company engages Pollen
Street Capital Limited (the "Investment
Manager") to manage its assets.
The Group and Parent Company invests
in consumer and small business loans
as well as other counterparties, together
with related investments ("Credit Assets"),
acquires interests in seasoned portfolios
of Credit Assets from third parties and
invests in loans to specialist lenders
for the purposes of providing structured
finance to those specialist lenders.
The Group and Company also makes equity
investments in lending platforms which
are typically not listed.
We tailored the scope of our audit taking
into account the types of investments
within the Group, the involvement of
the Investment Manager, the accounting
processes and controls, and the industry
in which the Group operates.
=========== ===========================================================
Key audit
matters * Valuation of investments reported at amortised cost
less provisions for impairment (Group and Company);
* Valuation of unlisted investments reported at fair
value (Group and Company);
* Investment interest income (Group and Company);
* Disclosure of the impact of the new IFRS 9 standard
(Group and Company); and
* Assessment of accounting control for the purposes of
consolidation (Group).
=========== ===========================================================
The scope of our audit
As part of designing our audit, we determined materiality and
assessed 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.
We gained an understanding of the legal and regulatory framework
applicable to the Group and the industry in which it operates and
considered the risk of acts by the Group which were contrary to
applicable laws and regulations, including fraud. We designed audit
procedures at Group and Company level to respond to the risk,
recognising that the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion.
We focused on laws and regulations that could give rise to a
material misstatement in the Group financial statements, including
but not limited to, the Companies Act 2006, and section 1158 of the
Corporation Tax Act 2010. Our tests included, but were not limited
to, review of the financial statement disclosures to underlying
supporting documentation, review of correspondence with regulators,
and enquiries of the Investment Manager and testing the Company's
compliance with section 1158 in the current year. We also tested
the tax disclosures in Note 8. There are inherent limitations in
the audit procedures described above and the further removed
non-compliance with laws and regulations is from the events and
transactions reflected in the financial statements, the less likely
we would become aware of it.
We did not identify any key audit matters relating to
irregularities, including fraud. As in all of our audits we also
addressed the risk of management override of internal controls,
including testing journals and evaluating whether there was
evidence of bias by the Directors that represented a risk of
material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors'
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters. This is not a complete list of all risks identified
by our audit.
Key audit matter How our audit addressed
the key audit matter
================================ ============================================================
Valuation of investments We understood and assessed
reported at amortised the methodology and assumptions
cost less provisions applied by the Group in
for impairment determining the amortised
Refer to page 59 to cost of investments, by
61 (Principal Accounting reference to accounting
Policies), pages 65 standards and industry practice.
and 67 (Significant We understood and evaluated
Accounting Judgements, the internal controls relating
Estimates and Assumptions), to the reconciliation, accounting
pages 71 to 73 (Note and reporting of loans and
11) and page 36 (Report receivables recorded at
of the Audit Committee). amortised cost less provisions
Investments are recorded for impairment.
at amortised cost in We tested the techniques
the Consolidated Statement used, in determining the
of Financial Position amortised cost amount and
and amounted to GBP369.3 the recognition of any impairment
million as at 31 December loss. Our testing included:
2017, the amount is * obtaining supporting information and analysis for the
net of impairment provision loan impairment assumptions used in the impairment
of GBP9.7 million (shown assessment which were derived from historical data
in note 11 of the financial and the performance of the Group's loan portfolios;
statements). The amount
reported by the Company
was GBP345.6m, net of * performing testing on a sample basis to confirm the
impairment provision accuracy of the status of loans reported by the
of GBP9.7m. servicers by agreeing payments of principal and
The impairment assessment interest to underlying transactions with borrowers;
requires estimates and and
significant judgements
to be applied by the
Directors such that * testing the calculation of impairment provision by
changes to key inputs agreeing loan inputs to servicers' reports and
to the estimates and/or re-performing the calculation using the assumptions
judgements made can determined by the Investment Manager.
result in a material
change to the valuation.
We found that the recording
of investments at amortised
cost was consistent with
the accounting policies
and that the assumptions
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
Refer to pages 60 and industry practice and applicable
61 (Principal Accounting accounting standards, and
Policies), page 67 (Significant tested the techniques used
Accounting Judgements, by the Investment Manager
Estimates and Assumptions) in determining the fair
and pages 73 to 74 (Note value of the unlisted investments.
12). We understood and evaluated
The fair value of the the internal controls surrounding
unlisted investments valuation of unlisted investments
("investee companies"), reported at fair value.
which are the investments We performed the following:
reported by the Group * Agreed the price of recent investment to supporting
at fair value through documentation such as purchase agreements or bank
profit or loss, is GBP7.7 statements.
million as at 31 December
2017 and reported by
the Parent Company is * Held meetings with the Investment Manager to
GBP11.2 million as at understand the performance of each investee company
31 December 2017. and the rationale for the valuation methodology
Unlisted investments applied. We obtained supporting financial information
do not have readily from the investee companies that corroborated the
determinable prices. discussions we held with the Investment Manager.
The valuation methodology
primarily used by the
Group and Company is We found that the valuations
based on the 'price of unlisted investments
of recent investment'. were supported by the audit
The price of recent evidence we obtained.
investment approach
refers to any investment
into that investee by
the Group and Company
that would give an indication
of fair value. As such,
the valuation of unlisted
investments is judgemental,
increasing the risk
of material misstatement
based on the size of
the investments held
in relation to the overall
financial statements.
================================ ============================================================
Investment Interest We understood and evaluated
Income the design and implementation
Refer to page 59 (Principal of controls surrounding
Accounting Policies), income reconciliation, accounting
page 67 (Significant and reporting of interest
Accounting Judgements, income.
Estimates and Assumptions), Our testing procedures included
page 68 (Note 5) and the following:
page 36 (Report of the * We assessed the accounting policy for income
Audit Committee). recognition and determined that it was in compliance
The accuracy and occurrence with IFRSs as adopted by the European Union;
of investment interest
income is an area of
focus for our audit * We tested that income had been recognised in
given the objective accordance with the accounting policy;
of the Group to provide
shareholders with an
attractive level of * We performed sample testing on loan interest income,
dividend income. agreeing interest rates and maturities to supporting
documentation, including loan agreements, and to cash
received; and
* 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.
================================ ============================================================
Disclosure of the impact We have assessed the Investment
of the new IFRS 9 standard Manager's IFRS 9 impairment
Refer to page 62 to assessment by performing
65 (Principal Accounting the following procedures:
Policies), and page * Conducted a detailed review of the Investment
36 (Report of the Audit Manager's methodology, including key assumptions and
Committee). parameters to ensure it is in line with IFRS 9, and
Under IAS 8, the Group appropriate given our understanding of the portfolio;
is required to disclose
the impact of new accounting
standards where this * Validated the key parameters within the models such
is expected to be material. as the probabilities of default, loss given default,
IFRS 9 requires loans and exposure at default;
to be assessed for impairment
over the course of their
expected lives. The * Tested the integrity, completeness and accuracy of
standard is effective the credit loss models; and
for periods beginning
1 January 2018 and the
expected impact of GBP2.3 * Tested the integrity of the data used in the models
million is disclosed and its completeness and accuracy.
in note 1 on page 65
of the financial statements.
The models and assumptions We found that disclosures
used to develop the in relation of adoption
impairment expectations of IFRS 9 were supported
are inherently judgemental by appropriate evidence.
and complex, heightening
the risks of a material
error.
================================ ============================================================
Assessment of accounting
control for the purposes * We evaluated the conclusions of the Investment
of consolidation Manager's assessment regarding identification and
Refer to page 58 (Principal control of investee entities under IFRS 10,
Accounting Policies), challenging the underlying judgements where
page 65 (Significant appropriate.
Accounting Judgements,
Estimates and Assumptions),
and page 67 (Note 4). * We obtained and inspected the legal and operating
The Company has prepared documents to corroborate the conclusions reached, and
consolidated financial agreed that the assessment of control undertaken by
statements as of 31 the Investment Manager is in line with our
December 2017 as it understanding of how the Group currently operates.
has accounting control
over Business Mortgage
Finance 3 plc ("BMF
3"), its subsidiary
(together "the Group").
The determination of
control as defined in
IFRS 10, Consolidated
Financial Statements,
in relation to this
entity is judgmental
as it may not be related
to voting rights, and
needs to be considered
in relation to the entitlement
to variable economic
returns and the power
to influence those returns.
Any omissions of an
entity for consolidation
may result in a significant
impact to the presentation
and disclosure of the
Group's financial statements.
================================ ============================================================
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
Group and the Company, the accounting processes and controls, and
the industry in which they operate.
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)").
The Group engages Pollen Street Capital Limited (the "Investment
Manager") to manage its assets. In establishing the overall
approach to the audit of the Group, we considered our assessment of
the risk of material misstatement. We determined that the Company
generated significant activities or balances to the results of the
Group through the consideration of factors such as its contribution
to the Group's net assets and performed over each line item in the
Company's financial statements. We supplemented this with
additional testing over certain balances (such as loans at
amortised cost, cash, borrowings, income and finance costs)
recognised within BMF 3.
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 in aggregate on
the financial statements as a whole.
Based on our professional judgement, we determined
materiality for the financial statements as a whole
as follows:
Group and Company financial statements
================================================================
Overall materiality GBP3.0 million (2016: 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 Group and
Company operate.
=================== ===========================================
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.2 million
(2016: GBP0.1 million) as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting Obligation
===========================================================
We are required to report if we have anything material
to add or draw attention to in respect of the Directors'
statement in the financial statements about whether
the Directors considered it appropriate to adopt
the going concern basis of accounting in preparing
the financial statements and the Directors' identification
of any material uncertainties to the Group's and
the Company's ability to continue as a going concern
over a period of at least twelve months from the
date of approval of the financial statements.
===============================================================
Outcome
===============================================================
We have nothing material to add or to draw attention
to. However, because not all future events or conditions
can be predicted, this statement is not a guarantee
as to the Group's and the Company's ability to
continue as a going concern.
===============================================================
reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our auditors'
report thereon. The Directors are responsible for the other
information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit
opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we
identify an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report and Directors' Report, we
also considered whether the disclosures required by the UK
Companies Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
(CA06) and ISAs (UK) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless otherwise
stated).
Strategic Report and Directors' Report
In our opinion, based on the work undertaken in the course of the audit, the information given
in the Strategic Report and Directors' Report for the year ended 31 December 2017 is consistent
with the financial statements and has been prepared in accordance with applicable legal requirements.
(CA06)
In light of the knowledge and understanding of the Group and Company and their environment
obtained in the course of the audit, we did not identify any material misstatements in the
Strategic Report and Directors' Report. (CA06)
======================================================================================================
The Directors' assessment of the prospects of the Group and of the principal risks that would
threaten the solvency or liquidity of the Group
As a result of the Directors' voluntary reporting on how they have applied the UK Corporate
Governance Code (the "Code"), we are required to report to you if we have anything material
to add or draw attention to regarding:
* The Directors' confirmation on page 18 of the Annual
Report that they have carried out a robust assessment
of the principal risks facing the Group, including
those that would threaten its business model, future
performance, solvency or liquidity.
* The disclosures in the Annual Report that describe
those risks and explain how they are being managed or
mitigated.
* The Directors' explanation on page 26 of the Annual
Report as to how they have assessed the prospects of
the Group, over what period they have done so and why
they consider that period to be appropriate, and
their statement as to whether they have a reasonable
expectation that the Group 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.
We have nothing to report in respect of this responsibility.
======================================================================================================
Other Code Provisions
As a result of the Directors' voluntary reporting on how they have applied the Code, we are
required to report to you if, in our opinion:
* The statement given by the Directors, on page 42,
that they consider the Annual Report taken as a whole
to be fair, balanced and understandable, and provides
the information necessary for the members to assess
the Group's and Company's position and performance,
business model and strategy is materially
inconsistent with our knowledge of the Group and
Company obtained in the course of performing our
audit.
* The section of the Annual Report on pages 35 to 37
describing the work of the Audit Committee does not
appropriately address matters communicated by us to
the Audit Committee.
We have nothing to report in respect of this responsibility.
======================================================================================================
Directors' Remuneration
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly
prepared in accordance with the Companies Act 2006. (CA06)
======================================================================================================
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial
statements
As explained more fully in the Statement of Directors'
responsibilities set out on page 42 the Directors are responsible
for the preparation of the financial statements in accordance with
the applicable framework and for being satisfied that they give a
true and fair view. The Directors are also responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group's and the Company's ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the
Group or the Company or to cease operations, or have no realistic
alternative but to do so.
Auditors' responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors' report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors' report.
Use of this report
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.
Other required reporting
Companies Act 2006 exception reporting
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 by the
Company, or returns adequate for our audit have not
been received from branches not visited by us; or
* certain disclosures of Directors' remuneration
specified by law are not made; or
* the Company 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.
===================================================================================
Appointment
Following the recommendation of the Audit Committee, we were
appointed by the Directors on 16 May 2016 to audit the financial
statements for the period ended 31 December 2016 and subsequent
financial periods. The period of total uninterrupted engagement is
2 years, covering the period ended 31 December 2016 and to 31
December 2017.
Other voluntary reporting
Going concern
The Directors have requested that we review the statement on
page 25 in relation to going concern as if the Company were a
premium listed Company. We have nothing to report having performed
our review.
The Directors' assessment of the prospects of the Group and of
the principal risks that would threaten the solvency or liquidity
of the Group
The Directors have requested that we perform a review of the
Directors' statements on pages 18 and 26 that they have carried out
a robust assessment of the principal risks facing the Group and in
relation to the longer-term viability of the Group, as if the
Company were a premium listed Company. Our review was substantially
less in scope than an audit and only consisted 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 and understanding of the Group and
Company and their environment obtained in the course of the audit.
We have nothing to report having performed this review.
Other Code provisions
The Directors have prepared a corporate governance statement and
requested that we review it as though the Company were a premium
listed Company. We have nothing to report in respect of the
requirement for the auditors of premium listed companies to report
when the Directors' statement relating to the Company's compliance
with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules,
for review by the auditors.
Richard McGuire (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 April 2018
Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
For the year ended For the period from
31 December 2017 2 December 2015
to 31 December 2016
=============== ===== ============================ ============================
Notes Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=============== ===== ======== ======== ======== ======== ======== ========
Income
Investment
interest 5 31,771 - 31,771 17,847 - 17,847
Other income 5 2 2 13 13
=============== ===== ======== ======== ======== ======== ======== ========
31,773 - 31,773 17,860 - 17,860
Expenses
Management
fee 6 (2,841) (81) (2,922) (1,164) (44) (1,208)
Performance
fee 6 (2,329) - (2,329) (1,314) - (1,314)
Impairment
of loans 11 (2,783) - (2,783) (2,322) - (2,322)
Other expenses 7 (1,046) - (1,046) (674) - (674)
=============== ===== ======== ======== ======== ======== ======== ========
(8,999) (81) (9,080) (5,474) (44) (5,518)
Profit /
(loss) before
finance costs
and taxation 22,774 (81) 22,693 12,386 (44) 12,342
Finance costs 16 (1,732) - (1,732) (525) - (525)
Profit /
(loss) before
taxation 21,042 (81) 20,961 11,861 (44) 11,817
Taxation
on ordinary
activities 8 - - - - - -
Profit /
(loss) after
taxation 21,042 (81) 20,961 11,861 (44) 11,817
=============== ===== ======== ======== ======== ======== ======== ========
Earnings
per share
(basic and
diluted) 10 81.5p (0.3)p 81.2p 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 AIC. All items in
the above statement derive from continuing operations.
No operations were discontinued during the year.
The Group does not have any income or expense that is not
included in net profit for the year. Accordingly, the net profit
for the year is also the Total Comprehensive Income for the year,
as defined in IAS1 (revised). There is no other comprehensive
income for the year.
The notes on pages 58 to 84 form an integral part of the
financial statements.
Consolidated Statement of Financial Position
As at 31 December 2017
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
========================== ===== =========== ===========
Non-current assets
Investments at amortised
cost 11 369,329 157,845
Investments held
at fair value through
profit or loss 12 7,730 4,730
Fixed assets 13 342 369
========================== ===== =========== ===========
377,401 162,944
Current assets
Receivables 14 3,488 3,723
Cash and cash equivalents 16,893 38,877
========================== ===== =========== ===========
20,381 42,600
Total assets 397,782 205,544
Current liabilities
Management fee payable (592) (136)
Performance fee
payable (2,329) (1,314)
Other payables 15 (1,900) (2,030)
========================== ===== =========== ===========
(4,821) (3,480)
Total assets less
current liabilities 392,961 202,064
Interest bearing
borrowings 16 (88,202) (13)
Total net assets 304,759 202,051
========================== ===== =========== ===========
Shareholders' funds
Ordinary share capital 17 299 199
Share premium 201,852 98,670
Revenue reserves 5,133 5,126
Capital reserves (125) (44)
Special distributable
reserves 18 97,600 98,100
========================== ===== =========== ===========
Total shareholders'
funds 304,759 202,051
========================== ===== =========== ===========
Net asset value
per share 22 1,018.4p 1,014.0p
========================== ===== =========== ===========
The notes on pages 58 to 84 form an integral part of the
financial statements.
The financial statements on pages 52 to 84 were approved by the
Board of Directors of Honeycomb Investment Trust plc (a public
limited company incorporated in England and Wales with company
number 09899024) and authorised for issue on 27 April 2018. They
were signed on its behalf by:
Robert Sharpe, Chairman
Company Statement of Financial Position
As at 31 December 2017
31 December
2017 31 December
Notes GBP'000 2016GBP'000
============================ ===== =========== ============
Non-current assets
Investments at amortised
cost 11 345,566 157,845
Investments held at
fair value through profit
or loss 12 11,227 4,730
Fixed assets 13 342 369
============================ ===== =========== ============
357,135 162,944
Current assets
Receivables 14 3,477 3,723
Cash and cash equivalents 5,730 38,877
============================ ===== =========== ============
9,207 42,600
Total assets 366,342 205,544
Current liabilities
Management fee payable (592) (136)
Performance fee payable (2,329) (1,314)
Other payables 15 (1,875) (2,030)
============================ ===== =========== ============
(4,796) (3,480)
Total assets less current
liabilities 361,546 202,064
Interest bearing borrowings 16 (56,787) (13)
Total net assets 304,759 202,051
============================ ===== =========== ============
Shareholders' funds
Ordinary share capital 17 299 199
Share premium 201,852 98,670
Revenue reserves 5,133 5,126
Capital reserves (125) (44)
Special distributable
reserves 18 97,600 98,100
============================ ===== =========== ============
Total shareholders'
funds 304,759 202,051
============================ ===== =========== ============
Net asset value per
share 22 1,018.4p 1,014.0p
============================ ===== =========== ============
Advantage has been taken of the exemption under section 408 of
the Companies Act 2006 and accordingly the Company has not
presented a Statement of Comprehensive Income for the Company
alone. The net profit on ordinary activities after taxation of the
Company for the year ended 31 December 2017 was GBP20,961,188
(2016: GBP11,816,424).
The notes on pages 58 to 84 form an integral part of the
financial statements.
The financial statements on pages 52 to 84 were approved by the
Board of Directors of Honeycomb Investment Trust plc (a public
limited company incorporated in England and Wales with company
number 09899024) and authorised for issue on 27 April 2018. They
were signed on its behalf by:
Robert Sharpe, Chairman
Consolidated and Company Statement of Changes in Shareholders'
Funds
For the year ended 31 December 2017
Ordinary Special
Share Share Revenue Capital Distributable Total
Capital Premium Reserves Reserves Reserves Equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================ ======== ======== ========= ========= ============== ========
Shareholders'
funds at 1
January 2017 199 98,670 5,126 (44) 98,100 202,051
================ ======== ======== ========= ========= ============== ========
Ordinary shares
issued 100 104,900 - - - 105,000
================ ======== ======== ========= ========= ============== ========
Ordinary shares
issue costs - (1,718) - - - (1,718)
================ ======== ======== ========= ========= ============== ========
Profit / (loss)
after taxation - - 21,042 (81) - 20,961
================ ======== ======== ========= ========= ============== ========
Dividends
paid in the
year - - (21,035) - (500) (21,535)
================ ======== ======== ========= ========= ============== ========
Shareholders'
funds at 31
December 2017 299 201,852 5,133 (125) 97,600 304,759
================ ======== ======== ========= ========= ============== ========
As at 31 December 2017 the Company had distributable reserves of
GBP102.61 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP5.13
million), realised capital reserves (-GBP0.13 million) and the
special distributable reserves (GBP97.60 million).
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
GBP103.18 million for the payment of future dividends. The
distributable reserves are the net of the revenue reserves (GBP5.13
million), realised capital reserves (-GBP0.04 million) and the
special distributable reserves (GBP98.10 million).
The notes on pages 58 to 84 form an integral part of the
financial statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2017
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
============================= ===== =========== ===========
Cash flows from operating
activities:
Profit after taxation 20,961 11,817
Adjustments for:
Impairment of loans 11 2,783 2,322
Finance costs 1,732 -
Amortisation 13 240 99
Decrease/(Increase)
in receivables 14 246 (3,723)
Increase in payables 1,316 3,480
Net cash inflow from
operating activities 27,278 13,995
Cash flows from investing
activities:
Purchase Investments
at amortised cost (190,504) (160,167)
Purchase of investments 12 (6,497) (4,730)
Net cash acquired
on investment in subsidiary 4 11,163 -
Purchase of fixed
assets 13 (213) (468)
Net cash (outflow)
from investing activities (186,051) (165,365)
Cash flows from financing
activities:
Proceeds from issue
of ordinary shares 17 105,000 200,000
Share issue costs (1,718) (3,031)
Proceeds from issue
of management shares 17 - 50
Redemption of management
shares 17 - (50)
Interest bearing borrowings 16 122,500 19,013
Repayments of interest
bearing borrowings 16 (66,000) (19,000)
Interest paid on financing
activities (1,458) -
Dividends declared
and paid 9 (21,535) (6,735)
Net cash inflow from
financing activities 136,789 190,247
Net change in cash
and cash equivalents (21,984) 38,877
Cash and cash equivalents
at the beginning of
the year 38,877 -
=========== ===========
Net cash and cash
equivalents 16,893 38,877
============================= ===== =========== ===========
The notes on pages 58 to 84 form an integral part of the
financial statements.
Company Statement of Cash Flows
For the year ended 31 December 2017
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
============================ ===== =========== ===========
Cash flows from operating
activities:
Profit after taxation 20,961 11,817
Adjustments for:
Impairment of loans 11 2,783 2,322
Finance costs 1,732
Amortisation 13 240 99
Decrease/(Increase)
in receivables 14 246 (3,723)
Increase in payables 1,316 3,480
Net cash inflow from
operating activities 27,278 13,995
Cash flows from investing
activities:
Purchase of Investments
at amortised cost (190,504) (160,167)
Purchase of investments 12 (6,497) (4,730)
Purchase of fixed
assets 13 (213) (468)
Net cash (outflow)
from investing activities (197,214) (165,365)
Cash flows from financing
activities:
Proceeds from issue
of ordinary shares 17 105,000 200,000
Share issue costs (1,718) (3,031)
Proceeds from issue
of management shares 17 - 50
Redemption of management
shares 17 - (50)
Interest bearing borrowings 16 122,500 19,013
Repayments of interest
bearing borrowings 16 (66,000) (19,000)
Interest paid on financing
activities (1,458) -
Dividends declared
and paid 9 (21,535) (6,735)
Net cash inflow from
financing activities 136,789 190,247
Net change in cash
and cash equivalents (33,147) 38,877
Cash and cash equivalents
at the beginning of
the year 38,877 -
=========== ===========
Net cash and cash
equivalents 5,730 38,877
============================ ===== =========== ===========
The notes on pages 58 to 84 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"), IFRS
Interpretations Committee ("IFRS IC") 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 financial statements have been prepared in accordance with
the Companies Act 2006 as applicable to companies using IFRS.
The consolidated financial statements have been prepared on a
going concern basis and under the historic cost convention modified
by the revaluation of financial assets held at fair value through
profit and loss as applicable. The Directors consider that the
Group has adequate financial resources to enable it to continue
operations for a period of no less than 12 months from the
reporting date. Accordingly, the Directors believe that it is
appropriate to continue to adopt the going concern basis in
preparing the consolidated financial statements.
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.
The accounting policies have been applied consistently year on
year.
Consolidation
Subsidiaries are investees controlled by the Company. The
Company controls an investee if it is exposed to, or has the rights
to, variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the
investee. The Company reassesses whether it has control if there
are changes to one or more elements of control. Subsidiaries are
valued at fair value. The Company does not consider itself to be an
investment entity for the purposes of IFRS 10, as it does not hold
substantially all of its investments at fair value. Consequently,
it consolidates its subsidiaries rather than holding at fair value
through profit or loss.
As at 31 December 2017 the Company controls one subsidiary
(together "the Group").
The Company is deemed to control Business Mortgage Finance 3 plc
("BMF 3"), a public limited company incorporated under the Laws of
England and Wales. The company is registered at Asticus Building
2nd Floor 21 Palmer Street, London, SW1H 0AD. BMF 3 is a
securitisation vehicle for UK commercial mortgages and operates in
a pre-determined manner. The Company is considered to control BMF 3
from 20 December 2017 by virtue of having exposure to the variable
returns of the vehicle through the holding of a subordinated note
issued by it. The rights of the subordinated loan include all
monies payable and rights of action and security as well as the
rights to the residual revenue.
Intra-group balances and transactions, and any unrealised income
and expenses arising from intra-group transactions, are eliminated
in preparing the consolidated financial statements.
Foreign Currency
The financial statements are prepared in Pounds Sterling because
that is the currency of all of the transactions during the year, so
has been selected as the presentational currency. The primary
objective of the Company and Group 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 year 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 the Consolidated 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 Consolidated Statement
of comprehensive income between items of a revenue and capital
nature has been presented alongside the Consolidated Statement of
comprehensive income.
Advantage has been taken of the exemption under section 408 of
the Companies Act 2006 and accordingly the Company has not
presented a Statement of Comprehensive Income for the Company
alone.
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 Consolidated 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 Consolidated 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 year has been allocated 97.9 per
cent to revenue and 2.1 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 year. The taxable profit differs from profit before
tax as reported in the Statement of Comprehensive Income because it
excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable
or deductible. The Group's liability for current tax is calculated
using a blended rate as applicable throughout the year.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the
Consolidated 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
Consolidated Statement of Financial Position liability method.
Deferred tax liabilities are recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent
that it is probable that taxable profits will be available against
which deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised. Deferred tax is charged or credited in the revenue return
column of the Statement of comprehensive income, except when it
relates to items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.
Investment trusts which have approval under Section 1158 of the
Corporation Tax Act 2010 are not liable for taxation on capital
gains. The Company has been approved as an Investment Trust by
HMRC.
Irrecoverable withholding tax is recognised on any overseas
dividends on an accruals basis using the applicable rate for the
country of origin.
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.
Classification
Under IAS 39 the Group can classify its financial assets into
the following measurement categories: (i) financial assets held at
fair value through profit or loss ("FVPL"); (ii) loans and
receivables; (iii) held-to-maturity; and (iv) available for sale.
Financial liabilities can be classified as either held at fair
value through profit or loss, or at amortised cost using the
EIRM.
Financial assets and liabilities are classified at initial
recognition.
Financial assets and liabilities held at fair value through
profit or loss
This category has two sub-categories: Financial assets and
liabilities held for trading, and those designated at fair value
through profit or loss at inception.
A financial asset or liability is classified as trading if
acquired principally for the purpose of selling in the short-term,
this does not apply to the Group.
Financial assets and liabilities may be designated at fair value
through profit or loss when:
-- the designation eliminates or significantly reduces a
measurement or recognition inconsistency that would otherwise arise
from measuring assets or liabilities on a different basis;
-- a group of financial assets and/or liabilities is managed and
its performance evaluated on a fair value basis; or
-- the assets or liabilities include embedded derivatives and
such derivatives are required to be recognised separately.
Financial assets and liabilities held at fair value through
profit or loss are subsequently carried at fair value, with gains
and losses arising from changes in fair value taken directly to the
consolidated income statement.
Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market and it is expected that substantially all of the initial
investment will be recovered, other than because of credit
deterioration. Loans and receivables are subsequently carried at
amortised cost using the EIRM and recorded net of provisions for
impairment losses.
Held-to-maturity
Held-to-maturity assets are those assets purchased with the
intention of holding to the investment maturity. This is reported
at amortised cost using the EIRM. All bonds held by the Group are
currently held-to-maturity.
Available for sale
Available for sale assets are those non-derivative financial
assets intended to be held for an indefinite period of time, which
may be sold in response to liquidity requirements or changes in
interest rates, exchange rates or equity prices. Available for sale
financial assets are subsequently carried at fair value, with gains
and losses arising from changes in fair value taken to a separate
component of equity until the asset is sold, or is impaired, when
the cumulative gain or loss is transferred to the consolidated
statement of comprehensive income. The Group has no AFS.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
group has transferred substantially all risks and rewards of
ownership. If substantially all the risks and rewards have been
neither retained nor transferred and the group has retained
control, the assets continue to be recognised to the extent of the
group's continuing involvement. Financial liabilities are
derecognised when they are extinguished.
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 11).
Equity Investments
All equity investments held have been designated at 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 one to three years. Residual values
are assumed to be nil.
Receivables
Receivables do not carry any interest and are short term in
nature. They are initially stated at their nominal value and
reduced by appropriate allowances for estimated irrecoverable
amounts (if any).
Cash and cash equivalents
Cash and cash equivalents (which are presented as a single class
of asset on the Consolidated Statement of Financial Position)
comprise cash at bank and in hand and deposits with an original
maturity of three months or less. The carrying value of these
assets approximates their fair value.
Financial liabilities
Financial liabilities are classified according to the substance
of the contractual arrangements entered into.
Payables
Payables are non-interest bearing. They are initially stated at
their nominal value.
Interest bearing borrowings
Interest bearing borrowings are initially recognised at a
carrying value equivalent to the proceeds received net of issue
costs associated with the borrowings. After initial recognition,
interest bearing borrowings are subsequently measured at amortised
cost using the effective interest rate method.
Dividends
Interim dividends to shareholders are recognised in the year in
which they are paid.
Associates
Associates are entities over which the Group has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 per cent and 50 per cent of the voting
rights.
No associates are presented on the Statement of Financial
Position as the Group elects to hold such investments at fair value
through profit and loss. This treatment is permitted by IAS 28
Investment in Associates and Joint Ventures, which permits
investments held by entities that are venture capital
organisations, mutual funds or similar entities to be excluded from
its measurement methodology requirements where those investments
are designated, upon initial recognition, as at fair value through
profit or loss and accounted for in accordance with IAS 39
Financial Instruments: Recognition and Measurement. Changes in fair
value of associates are recognised in the Statement of
Comprehensive Income in the period in which the change occurs.
The disclosures required by Section 409 of the Companies Act
2006 for associated undertakings are included in Note 21 to the
financial statements.
Accounting standards effective
Amendments to IAS 7, "Statement of cash flows", effective 1
January 2017. These amendments require an entity to provide
disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including
both changes arising from cash flows and non-cash changes. Please
refer to Note 16 for further details.
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 contains a new classification and measurement approach
for financial assets that reflects the business model in which
assets are managed and their cash flow characteristics. IFRS 9
introduces a principal based approach and 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).
IFRS 9 includes three principal classification categories for
financial assets which must be designated at initial recognition.
Financial assets are measured at fair value through profit or loss
("FVTPL"), fair value through other comprehensive income ("FVOCI")
or amortised cost based on the nature of the cash flows of the
assets and an entity's business model. These categories replace the
existing IAS 39 classifications of fair value through profit and
loss ("FVTPL"), available for sale ("AFS"), loans and receivables,
and held-to-maturity.
A financial asset is measured at amortised cost if it meets both
of the following conditions and is not designated as at FVTPL: (a)
it is held within a business model whose objective is to hold
assets to collect contractual cash flows; and (b) its contractual
terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding.
A financial asset is measured at FVOCI if it meets both of the
following conditions and is not designated as at FVTPL: (a) it is
held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and
(b) its contractual terms give rise on specified dates to cash
flows that are solely payments of principal and interest on the
principal amount outstanding.
Equity instruments are measured at FVTPL, unless they are not
held for trading purposes, in which case an irrevocable election
can be made on initial recognition to measure them at FVOCI with no
subsequent reclassification to profit or loss. This election is
made on an investment by investment basis.
All financial assets not classified as measured at amortised
cost or FVOCI as described above are measured at FVTPL. In
addition, on initial recognition the company may irrevocably
designate a financial asset that otherwise meets the requirements
to be measured at amortised cost or at FVOCI as FVTPL if doing so
eliminates or significantly reduces an accounting mismatch that
would otherwise arise. For financial liabilities, most of the
pre-existing requirements for classification and measurement
previously included in IAS 39 were carried forward unchanged into
IFRS 9.
Business model assessment
The Company will make an assessment of the objective of the
business model in which a financial asset is held at a portfolio
level because this best reflects the way the business is managed
and information is provided to the Investment Manager.
The information that will be considered includes:
-- The stated policies and objectives for the portfolio and the
operation of those policies in practice, including whether the
strategy focuses on earning contractual interest revenue,
maintaining a particular interest rate profile, matching duration
of the financial assets to the duration of the liabilities that are
funding those assets or realising cash flows through the sale of
assets;
-- How the performance of the portfolio is evaluated and reported to the Investment Manager;
-- The risks that affect the performance of the business model
(and the financial assets held within that business model) and how
those risks are managed; and
-- The frequency, volume and timing of sales in prior periods,
the reasons for such sales and expectations about future sales
activity. However, information about sales activity is not
considered in isolation, but as part of an overall assessment of
how the Investment Manager's stated objective for managing the
financial assets is achieved and how cashflows are realised.
Assessment whether contractual cash flows are solely payments of
principal and interest
For the purposes of this assessment, 'principal' is defined as
the fair value of the financial asset on initial recognition.
'Interest' is defined as consideration for the time value of money,
for the credit risk associated with the principal amount
outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely
payments of principal and interest, the contractual terms of the
instrument will be considered. This will include assessing whether
the financial asset contains a contractual term that could change
the timing or amount of contractual cash flows such that it would
not meet this condition. In making the assessment the following
features will be considered:
-- Contingent events that would change the amount and timing of cash flows;
-- Leverage features;
-- Prepayment and extension terms;
-- Terms that limit the Company's claim to cash flows from
specified assets e.g. non-recourse asset arrangements; and
-- Features that modify consideration for the time value of
money, e.g. periodic reset of interest rates.
Impairment
The 'incurred loss model' under IAS 39 is replaced with a new
forward looking '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.
The new impairment model applies to the following financial
instruments that are not measured at FVTPL:
-- financial assets that are debt instruments; and
-- loan commitments and financial guarantee contracts issues
(previously, impairment was measured under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets).
Under IFRS 9, no impairment loss is recognised on equity
investments. IFRS 9 requires a loss allowance to be recognised at
an amount equal to either 12 month expected credit loss ("ECL"), or
lifetime ECL. Lifetime ECLs are the ECLs that result from all
possible default events over the expected life of the financial
instrument, whereas 12-month ECLs are the portion of the ECL that
result from default events that are possible within 12 months after
the reporting date.
Under IFRS 9, credit loss allowances will be measured on each
reporting date according with a three-stage ECL impairment
model:
-- Stage 1 - from initial recognition of a financial asset to
the date on which the asset has experienced a significant increase
in credit risk relative to its initial recognition, a loss
allowance is recognised equal to the 12-month ECL.
-- Stage 2 - Following a significant increase in credit risk
relative to the initial recognition of the financial asset, a loss
allowance is recognised equal to the lifetime ECL.
-- Stage 3 - When a financial asset is considered to be
credit-impaired, a loss allowance equal to the lifetime ECL will be
recognised. Interest revenue is calculated based on the carrying
amount of the asset, net of the loss allowance, rather than on its
gross carrying amount.
Stage 1 and Stage 2 effectively replace the
collectively-assessed allowance for loans not yet identified as
impaired recorded under IAS 39, while Stage 3 effectively replaces
the individually and collectively assessed allowances for impaired
loans. Under IFRS 9, the population of financial assets and
corresponding allowances disclosed as Stage 3 will not necessarily
correspond to the amounts of financial assets currently disclosed
as impaired in accordance with IAS 39. Consistent with IAS 39,
loans are written off when there is no realistic probability of
recovery.
Given all financial assets within the scope of the IFRS 9
impairment model will be assessed for at least 12-months of ECLs,
and the population of financial assets to which full lifetime ECLs
applies is larger than the population of impaired loans for which
there is objective evidence of impairment in accordance with IAS
39, loss allowances will be higher under IFRS 9 relative to IAS
39.
Changes in the required credit loss allowance, including the
impact of movements between Stage 1 and Stage 2, will be recorded
in profit or loss. The impact of moving between 12 month and
lifetime ECLs and the application of forward looking information,
means provisions are expected to be more volatile under IFRS 9 than
IAS 39 due to the Group's continued origination of new assets.
The measurement of ECLs will primarily be based on the product
of the instrument's probability of default ("PD"), loss given
default ("LGD"), and exposure at default ("EAD"), discounted to the
reporting date. The main difference between Stage 1 and Stage 2 is
the respective PD horizon. Stage 1 estimates will use a maximum of
a 12-month PD while Stage 2 estimates will use a lifetime PD. Stage
3 estimates will continue to leverage existing processes for
estimating losses on impaired loans, however, these processes will
be updated to reflect the requirements of IFRS 9, including the
requirement to consider multiple forward-looking scenarios.
Movements between Stage 1 and Stage 2 are based on whether an
instrument's credit risk as at the reporting date has increased
significantly relative to the date it was initially recognised.
Movements between Stage 2 and Stage 3 are based on whether
financial assets are credit-impaired as at the reporting date. The
determination of credit-impairment under IFRS 9 will be similar to
the individual assessment of financial assets for objective
evidence of impairment under IAS 39. Assets can move in both
directions through the stages of the impairment model.
In assessing whether a borrower is credit impaired the following
indicators will be considered:
-- Qualitative; e.g. breaches of covenant;
-- Quantitative; e.g. overdue status; and
-- Based on data developed internally and obtained from external sources.
Inputs into the assessment of whether a financial instrument is
in default and their significant may vary over time to reflect
changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the
risk of default) on a financial instrument has increased
significantly since initial recognition, reasonable and supportable
information that is relevant and available without undue cost or
effort, including both quantitative and qualitative information and
analysis based on historical experience, credit assessment and
forward-looking information.
The criteria for determining whether credit risk has increased
significantly will vary by portfolio and will include a backstop
based on delinquency. The measurement of expected credit losses for
each stage and the assessment of significant increases in credit
risk must consider information about past events and current
conditions as well as reasonable and supportable forward-looking
information. A 'base case' view of the future direction of relevant
economic variables and a representative range of other possible
forecasts scenarios. The process will involve developing two or
more additional economic scenarios and considering the relative
probabilities of each outcome.
The base case will represent a most likely outcome and be
aligned with information used for other purposes, such as strategic
planning and budgeting. The other scenarios will represent more
optimistic and more pessimistic outcomes.
The estimation and application of forward-looking information
requires significant judgment. PD, LGD and EAD inputs used to
estimate Stage 1 and Stage 2 credit loss allowances are modelled
based on the macroeconomic variables (or changes in macroeconomic
variables) that are most closely correlated with credit losses in
the relevant portfolio. The Bank of England macroeconomic scenarios
as well as baseline upside and downside economic scenarios have
been used in the expected credit loss calculation by the Group.
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 Group does not currently undertake any hedge accounting.
Transition
To manage the transition to IFRS 9, the Company implemented a
comprehensive program that focused on the key areas of impact,
including financial reporting, data, systems and processes.
Throughout the project the Audit Committee has been provided with
updates, to ensure escalation of key issues and risks. As part of
the implementation of IFRS 9 the Company has:
-- reviewed the classification and measurement of financial instruments under the requirements of
IFRS 9;
-- developed and validated 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.
The new classification and measurement and impairment
requirements will be applied by adjusting the Consolidated
Statement of Financial Position on 1 January 2018, the date of
initial application. The Group will take advantage of the exemption
allowing it not to restate comparative information for prior
periods with respect to financial information. Differences in the
carrying amounts of financial assets and financial liabilities
resulting from the adoption of IFRS 9 will be recognised in
retained earnings and reserves as at 1 January 2018.
Loans and advances that are classified as loans and receivables
and measured at amortised cost under IAS 39 will in general also be
measured at amortised cost under IFRS 9. While held to maturity
investment securities measured at amortised cost under IAS 39 will
in general also be measured at amortised cost under IFRS 9.
The implementation will result in a reduction to retained
earnings of approximately GBP2.3 million (0.75 per cent of year end
NAV) as at 1 January 2018. The impact is primarily attributable to
increases in the allowance for credit losses under the new
impairment requirements. This is made up of GBP1.6 million on
unsecured exposures and GBP0.7 million on secured exposures.
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, given the nature of the Group's business.
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. Please refer to Note 11 and Note 12
respectively for more detail in relation to these.
Estimates and assumptions used in preparing the consolidated
financial statements are reviewed on an ongoing basis and are based
on historical experience and various other factors that are
believed to be reasonable under the circumstances. Revisions to
accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
Consolidation
Determining whether the Group has control of an entity is
generally straightforward based on ownership of the majority of the
voting capital. However, in certain instances, this determination
will involve significant judgement, particularly in the case of
structured entities where voting rights are often not the
determining factor in decisions over the relevant activities. This
judgement may involve assessing the purpose and design of the
entity. It will also often be necessary to consider whether the
Group, or another involved party with power over the relevant
activities, is acting as a principal in its own right or as an
agent on behalf of others. Please refer to Note 4 for more
information.
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 structured facilities.
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 three 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
GBP0.02 million (2016: 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 PD multiplied by the EAD multiplied by the 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 per cent then the provision at 31
December 2017 would have increased by GBP0.5 million (2016: 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 EAD was increased by 25 per
cent then the provision at 31 December 2017 would have increased by
GBP2.3 million (2016: 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 2017, the impairment charge would increase by
approximately GBP0.7 million (2016: GBP0.6 million) in respect of
secured loans within the investment assets.
Structured - Structured facilities 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 structured
facilities (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 2017 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; and
-- 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. The specific techniques used
typically include earnings multiples, discounted cash flow
analysis, the value of recent transactions, and, where appropriate,
industry rules of thumb. The valuations often reflect a synthesis
of a number of different approaches in determining the final fair
value estimate. The individual approach for each investment will
vary depending on relevant factors that a market participant would
take into account in pricing the asset. These might include the
specific industry dynamics, the 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 Group, being the sole purpose for its existence. No
other activities are performed.
Whilst visibility over originations, portfolios, structured
facilities and equity assets is afforded at an operational level,
all are considered 'routes to market' for acquiring interests in
credit assets, and thus act merely as indicators of the key drivers
of financial performance and position of the Group.
The four routes to market are not determinants of resource
allocations, rather each investment opportunity is considered on
its own merits. Additionally, there are no segment managers
directly accountable for the individual routes to market.
The Directors are of the opinion that the Group is engaged in a
single segment of business and operations of the Company are wholly
in the United Kingdom.
4. BUSINESS COMBINATION
As at 20 December 2017 the Company is deemed to have gained
accounting control of Business Mortgage Finance 3 plc ("BMF 3").
Control was gained by virtue of having exposure to the variable
returns of the vehicle through the holding of a junior note issued
by it. BMF 3 is consolidated as at 20 December 2017. The Company
paid GBP3.5 million of cash consideration to acquire this interest.
The contractual value of loans acquired was GBP28.6 million.
The fair value of the assets and liabilities of BMF 3 at the
date control was gained was as follows:
20 December
2017
GBP'000
=================== ===========
Assets
Cash and cash
equivalents 11,163
Receivables 11
Loans at amortised
cost 23,763
Total Assets 34,937
=================== ===========
20 December
2017
GBP'000
================== ===========
Liabilities
Other Payables (25)
Interest bearing
borrowings (31,415)
Total Liabilities (31,440)
================== ===========
20 December
2017
GBP'000
================== ===========
Net assets 3,497
Fair value
of consideration (3,497)
Goodwill -
================== ===========
5. Income
31 December Period
2017 since
GBP'000 incorporation
(2 December
2015) to
31 December
2016
GBP'000
============ =========== ==============
Investment
income
Interest
income 31,138 17,594
Commitment
fee income 296 157
Arrangement
fee income 337 96
Total
investment
income 31,771 17,847
Other
income
Deposit
interest 2 13
=========== ==============
Total
income 31,773 17,860
============ =========== ==============
6. Management and
Performance Fee
Management Fee
The management fee is calculated and payable monthly in arrears
at a rate equal to 1/12 of 1.0 per cent per month of Gross Asset
Value (the "Management Fee"). The aggregate fee payable on this
basis must not exceed 1.0 per cent of the gross assets of the
Company and its group in any year. The Management Fee is allocated
between the revenue and capital accounts based on the prospective
split of the Gross Asset Value between revenue and capital.
In respect of any issue of Ordinary Shares or C Shares, until
the date on which 80 per cent of the net proceeds of such issue
have been invested or committed to be invested in Credit Assets or
Equity Assets, the Net Asset Value attributable to such Ordinary
Shares or C Shares shall, for the purposes of the Management Fee,
exclude any portion of the issue proceeds in cash, or invested in
cash deposits or cash equivalent investments. Where there are C
Shares in issue, the Management Fee will be calculated separately
on the gross assets attributable to the Ordinary Shares and the C
Shares.
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 2017 (2016: nil).
7. Other Expenses
31 December Period
2017 since
GBP'000 incorporation
(2 December
2015)
to
31 December
2016
GBP'000
======================= ==============
Directors'
fees 118 103
Administrator's
fees 146 92
Amortisation 240 99
Other expenses 542 380
===== ==============
Total other
expenses 1,046 674
================= ===== ==============
All expenses are inclusive of VAT where applicable. Directors'
fees above include GBP103,250 (2016: GBP93,593) paid to Directors'
and GBP14,796 (2016: GBP9,521) of employment taxes and valid
business expenses. Further details on Directors' fees can be found
in the Directors' remuneration report on pages 38 to 41.
The auditors' remuneration for the audit of the Company and
Group was GBP110,000 (2016: GBP65,000). During the year, the
auditors provided reporting accountant services on the Company's
prospectus in relation to its further issuance of ordinary shares
in May 2017. These non-audit fees amounted to GBP54,915 (2016:
GBP95,000). These costs have been deducted from the proceeds from
the issuance of ordinary shares in line with IAS 32. In 2016, the
auditors 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.
8. Taxation
It is the intention of the Directors to conduct the affairs of
the Company so as to satisfy the conditions for approval as an
investment trust. As an investment trust the Company is exempt from
corporation tax on capital gains. The Company's revenue income from
loans is subject to tax, but offset by any interest distribution
paid, which has the effect of reducing that corporation tax to nil.
This means the interest distribution may be taxable in the hands of
the Company's shareholders.
Any change in the Company's tax status or in taxation
legislation generally could affect the value of investments held by
the Company, affect the Company's ability to provide returns to
shareholders, lead the Company to lose its exemption from UK
Corporation tax on chargeable gains or alter the post-tax returns
to shareholders. It is not possible to guarantee that the Company
will remain a non-close company, which is a requirement to maintain
status as an investment trust, as the ordinary shares are freely
transferable. The Company, in the event that it becomes aware that
it is a close company, or otherwise fails to meet the criteria for
maintaining investment trust status, will as soon as reasonably
practicable, notify shareholders of this fact.
The following table presents the tax chargeable on the Group and
Company for the period ended 31 December 2017.
Revenue Capital Total
GBP'000 GBP'000 GBP'000
================= ======== ======== ========
Corporation - - -
tax
================= ======== ======== ========
Total current - - -
tax charge
Deferred - - -
tax movement
Deferred - - -
tax movement
PYA
========
Total tax - - -
charge in
income statement
================= ======== ======== ========
The following table presents the tax chargeable on the Group and
Company for the year 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 19.25 per cent (2016: 20.00 per cent). A
reconciliation of the 2017 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 21,042 (81) 20,961
================== ======== ======== ========
Return on
ordinary
activities
before taxation
multiplied
by the
standard
rate of
UK corporation
tax of 19.25% 4,051 (16) 4,035
Effects
of:
Excess management
expenses
not utilised 164 16 180
Interest
distributions
paid in
respect
of
the year (4,215) - (4,215)
========
Total tax - - -
charge in
income statement
================== ======== ======== ========
A reconciliation of the 2016 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.
9. Ordinary Dividends
31 December 31 December
2017 2016
GBP'000 GBP'000
==================== =========== ===========
2.11p Interim
dividend
for the period
ended 31 March
2016
(paid on
30 June 2016) - 316
19.66p Interim
dividend
for the period
ended 30 June
2016
(paid on
22 September
2016) - 2,949
23.13p Interim
dividend
for the period
ended 30 September
2016 (paid
on 16 December
2016) - 3,470
23.50p Interim
dividend for
the period
ended 31 December
2016 (paid
on 28 March
2017) 4,683 -
24.50p Interim
dividend for
the period
to 31 March
2017 (paid
on 16 June
2017) 4,882 -
20.00p Interim
dividend for
the period
to 30 June
2017 (paid
29 September
2017) 5,985 -
20.00p Interim
dividend for
the period
to 30 September
2017 (paid
29 December
2017) 5,985 -
=========== ===========
Total dividend
paid in period 21,535 6,735
==================== =========== ===========
23.50p Interim
dividend for
the period
ended 31 December
2016 (paid
on 28 March
2017) - 4,683
20.00p Interim
dividend for
the period
to 31 December
2017 (paid
29 March 2018) 5,985 -
==================== =========== ===========
Total dividend
paid in relation
to period 22,837 11,418
==================== =========== ===========
The 31 December 2017 interim dividend of 20.00 pence was
approved and paid before the approval of the financial
statements.
On 12 April 2018, a dividend of 20 pence per ordinary share was
declared, payable on 29 June 2018.
10. Earnings per Share
31 December 31 December
2017 2016
============== =========== ===========
Revenue 81.5p 94.4p
Capital (0.3)p (0.4)p
============== =========== ===========
Earnings
per ordinary
share 81.2p 94.0p
============== =========== ===========
The calculation at 31 December 2017 is based on revenue returns
of 21.042 million, capital returns of GBP(0.081) million and total
returns of GBP20.961 million and a weighted average number of
ordinary shares of 25,816,521.
The calculation at 31 December 2016 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.
11. INVESTMENTS at Amortised Cost
(a) Assets not carried at fair value but for which fair value is
disclosed
The table below provides details of the investments at amortised
cost held by the Group as at 31 December 2017. Fair value is
disclosed on page 82.
Investments 31 December 31 December
at amortised 2017 2016
cost GBP'000 GBP'000
=================== ============ ============
Held-to-maturity 10,314 -
bond investments
Amortised
cost before
impairment 368,758 164,032
Cumulative
Impairment
Provision (9,743) (6,187)
Carrying
Value 369,329 157,845
=================== ============ ============
All impairments are in relation to loans at amortised cost with
no impairment against held to maturity investments.
The table below provides details of the investments at amortised
cost held by the Company as at 31 December 2017. Fair value is
disclosed on page 83.
Investments 31 December 31 December
at amortised 2017 2016
cost GBP'000 GBP'000
=================== ============ ============
Held-to-maturity 10,314 -
bond investments
Amortised
cost before
impairment 344,995 164,032
Cumulative
Impairment
Provision (9,743) (6,187)
Carrying
Value 345,566 157,845
=================== ============ ============
All impairments are in relation to loans at amortised cost with
no impairment against held to maturity investments
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 year is reported in
impairment of loans in the Statement of Comprehensive Income. As at
31 December 2017 the cumulative impairment provision consisted of
GBP3.416 million of incurred losses and GBP6.327 million of
impairment provision recognised in the year.
As at 31 December 2016 the cumulative impairment provision
consisted of GBP3.864 million of incurred losses and GBP2.823
million of impairment provision recognised in the period.
(b) Impairment provision
The Company segments its assets into two categories when
considering impairment provisions; Secured and Structured
facilities. 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 65 to 67.
The following impairment amounts have been recorded in the
Statement of Financial Position relating to loans at amortised cost
for both the Group and Company:
31
December 31 December
2017 2016
GBP'000 GBP'000
======================= ========== ============
Loans with
no payments
past due (collective
provision for
losses not
reported) 1,374 1,234
Loans with
up to 1 payment
past due 96 68
Loans with
1-2 payments
past due 279 297
Loans with
2-3 payments
past due 351 292
Loans with
3-4 payments
past due 603 347
Loans with
more than 4
payments
past due 7,040 3,949
========== ============
Cumulative
impairment 9,743 6,187
======================= ========== ============
The following table shows the provision split between secured
and unsecured for the year ended 31 December 2017 which have been
recorded in the Statement of Financial Position relating to loans
at amortised cost for both the Group and Company.
31 December
2017 Secured Unsecured
======================= ======== ==========
Loans with
no payments
past due (collective
provision for
losses not
reported) 1,121 252
Loans with
up to 1 payment
past due 51 45
Loans with
1-2 payments
past due 96 184
Loans with
2-3 payments
past due 144 207
Loans with
3-4 payments
past due 276 327
Loans with
more than 4
payments
past due 3,380 3,660
======== ==========
Cumulative
impairment 5,068 4,675
======================= ======== ==========
The following table shows the provision split between secured
and unsecured for the period ended 31 December 2016 which have been
recorded in the Statement of Financial Position relating to loans
at amortised cost for both the Group and Company.
31 December
2016 Secured Unsecured
======================= ======== ==========
Loans with
no payments
past due (collective
provision for
losses not
reported) 1,020 214
Loans with
up to 1 payment
past due 43 25
Loans with
1-2 payments
past due 188 109
Loans with
2-3 payments
past due 166 126
Loans with
3-4 payments
past due 182 165
Loans with
more than 4
payments
past due 2,941 1,008
======== ==========
Cumulative
impairment 4,540 1,647
======================= ======== ==========
There is no impairment of Structured facilities at the year-end
(2016: none). Structured facilities are a portfolio of higher
value, low volume lending with credit quality assessed on an
individual loan by loan basis. Loans are continually monitored to
determine whether they are performing satisfactorily. In Structured
facilities performing loans with elevated levels of credit risk may
be placed on watch lists depending on the perceived severity of the
credit risk. The table below sets out the movement of the
impairment provision during year ended 31 December 2017.
Total
GBP'000
========================== =========
At 1 January 2017 6,187
Incurred Losses
(Portfolio Acquisition) 772
Charge for the
year 2,423
Amounts written
off during the
year 361
Amounts recovered -
during the year
========================== =========
Cumulative impairment 9,743
========================== =========
The table below sets out the movement of the impairment
provision for the period ended 31 December 2016.
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.
12. Investments at Fair Value Through Profit or Loss
(a) Movements in the year
The table below sets out the movement in Investments at fair
value through profit or loss for the Group for the year ended 31
December 2017.
2017
GBP'000
===================================== =========
Opening cost 4,730
Opening fair value 4,730
Purchases at cost 3,000
Closing fair value at
31 December 2017 7,730
Comprising:
Closing cost as at 31 December 2017 7,730
Closing fair value as at
31 December 2017 7,730
===================================== =========
The table below sets out the movement in Investments at fair
value through profit or loss for the Company for the year ended 31
December 2017.
2017
GBP'000
===================================== =========
Opening cost 4,730
Opening fair value 4,730
Purchases at cost 6,497
Closing fair value at
31 December 2017 11,227
Comprising:
Closing cost as at 31 December 2017 11,227
Closing fair value as at
31 December 2017 11,227
===================================== =========
The fair value of the investment in the subsidiary was GBP3.497
million.
The table below sets out the movement in Investments at fair
value through profit or loss for the Group and Company for the
period ended 31 December 2016.
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 sets out the classifications used as at 31
December 2017 in valuing the Group and Company's investments:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
============== ========== ========== ========= =========
Unquoted
equity
assets - - 11,227 11,227
Closing
fair
value
as at
31 December
2017 - - 11,227 11,227
============== ========== ========== ========= =========
The following sets out the classifications used as at 31
December 2016 in valuing the Group and 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.
13. Fixed Assets
The tables below set out the movement in Fixed Assets for the
Group and Company.
Year ended IT Development
31 December and Software Total
2017 GBP'000 GBP'000
================== ============== ========
Opening net
book amount 369 369
Additions 213 213
Depreciation
charge (240) (240)
Closing net
book amount 342 342
As at 31 December
2017
Cost 680 680
Accumulated
depreciation (338) (338)
================== ============== ========
Net book amount 342 342
================== ============== ========
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
================== ============== ========
14. Receivables
The table below set out a breakdown of the Group
receivables.
31 December 31 December
2017 2016
GBP'000 GBP'000
============= =========== ===========
Prepayments 2,326 1,249
Other
receivables 1,162 2,474
============= =========== ===========
Total
receivables 3,488 3,723
============= =========== ===========
The table below set out a breakdown of the Company
receivables.
31 December 31 December
2017 2016
GBP'000 GBP'000
============= =========== ===========
Prepayments 2,326 1,249
Other
receivables 1,151 2,474
============= =========== ===========
Total
receivables 3,477 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.
15. Other Payables
The table below set out a breakdown of the Group payables.
31 December 31 December
2017 2016
GBP'000 GBP'000
============== =========== ===========
Accruals
and deferred
income 1,900 1,578
Withholding
taxation - 452
============== =========== ===========
Total
other
payables 1,900 2,030
============== =========== ===========
The table below set out a breakdown of the Company payables.
31 December 31 December
2017 2016
GBP'000 GBP'000
============== =========== ===========
Accruals
and deferred
income 1,875 1,578
Withholding
taxation - 452
============== =========== ===========
Total
other
payables 1,875 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. There is no withholding tax payable by the Company at
31 December 2017 due to the changes made in 2017 Finance Act
whereby all interest distributions will be paid gross of tax,
therefore withholding tax is retained by the Company and paid
directly to HMRC.
16. Interest Bearing Borrowings
The table below set out a breakdown of the Group interest
bearing borrowings.
31 December 31 December
2017 2016
GBP'000 GBP'000
================== =========== ===========
Credit
facility 56,500 -
Mortgage
backed
Notes 28,308 -
Liquidity
facility 850 -
Interest
and commitment
fees payable 2,544 13
================== =========== ===========
Total
interest-bearing
borrowings 88,202 13
================== =========== ===========
The table below set out a breakdown of the Company interest
bearing borrowings.
31 December 31 December
2017 2016
GBP'000 GBP'000
================== =========== ===========
Credit
facility 56,500 -
Interest
and commitment
fees payable 287 13
================== =========== ===========
Total
interest-bearing
borrowings 56,787 13
================== =========== ===========
As part of the original BMF 3 securitisation it issued notes as
part of the securitisation of loans. The loan notes are secured
over the portfolio of commercial mortgage loans, which are in turn
secured by first charges on commercial property in the United
Kingdom. The loan notes are subject to mandatory redemption at each
interest repayment date. The amount redeemed is equal to the
principal collected on the mortgage loans in the preceding
collection year. The loan notes will become due and payable on the
interest payment date falling in August 2038 if they have not been
redeemed or cancelled beforehand. BMF 3 also has a liquidity
facility provided by Barclays Bank plc in the event that it is
unable to meet certain financial commitments. This facility was
GBP0.8 million drawn at year end (2016: GBP1.0 million).
The Company's two-year revolving credit facility that was
initially signed on 17 June 2016 with Royal Bank of Scotland plc
had its 2-year term reset on 21 June 2017. Along with this the
Company increased the size of its debt facility to GBP80 million
and brought in another European bank to the syndicate. The 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. This facility was GBP56.5 million drawn at year end (2016:
nil).
As at the 31 December 2017 the below related debt costs had been
incurred by the Company and Group.
31 December Period
2017 since
GBP'000 incorporation
(2 December
2015) to
31 December
2016
GBP'000
================ =========== ==============
Interest
and commitment
fees
payable 886 228
Other
finance
charges 846 297
================ =========== ==============
Total
finance
costs 1,732 525
================ =========== ==============
As part of the amendments made to IAS 7, "Statement of cash
flows", effective 1 January 2017, an entity is required to disclose
changes in liabilities arising from financing activities, including
both changes arising from cash flows and non-cash changes.
As at the 31 December 2017 the below changes occurred for the
Group:
Total
GBP'000
======================== =========
At 1 January 2017 13
Interest bearing
borrowings 122,500
Repayments of interest
bearing borrowing (66,000)
Finance costs 1,732
Interest paid on
financing activities (1,458)
Non-cash - BMF
3 31,415
At 31 December
2017 88,202
======================== =========
As at the 31 December 2017 the below changes occurred for the
Company:
Total
GBP'000
======================== =========
At 1 January 2017 13
Interest bearing
borrowings 122,500
Repayments of interest
bearing borrowing (66,000)
Finance costs 1,732
Interest paid on
financing activities (1,458)
At 31 December
2017 56,787
======================== =========
The below table analyses the Group's financial liabilities into
relevant maturity groupings based on the remaining period at the
Statement of Financial Position date to the final scheduled
maturity date.
2017 < 1 1 - > 5
Financial year 5 years years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ====== ========
Credit
facility - 56,500 - 56,500
Mortgage
backed
Notes - - 28,308 28,308
Liquidity
facility 850 - - 850
Interest
and commitment
fees
payable 2,544 - - 2,544
================ ======== ======== ====== ========
Total
exposure 3,394 56,500 28,308 88,202
================ ======== ======== ====== ========
2016 < 1 1 - > 5
Financial year 5 years years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ====== ========
Credit - - - -
facility
Mortgage - - - -
backed
Notes
Liquidity - - - -
facility
Interest
and commitment
fees
payable 13 - - 13
================ ======== ======== ====== ========
Total
exposure 13 - - 13
================ ======== ======== ====== ========
The below table analyses the Company's financial liabilities
into relevant maturity groupings based on the remaining period at
the Statement of Financial Position date to the final scheduled
maturity date.
2017 < 1 1 -
Financial year 5 years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ========
Credit
facility - 56,500 56,500
Interest
and commitment
fees payable 287 - 287
================ ======== ======== ========
Total
exposure 287 56,500 56,787
================ ======== ======== ========
2016 < 1 1 -
Financial year 5 years Total
instrument GBP'000 GBP'000 GBP'000
================ ======== ======== ========
Credit - - -
facility
Interest
and commitment
fees payable 13 - 13
================ ======== ======== ========
Total
exposure 13 - 13
================ ======== ======== ========
17. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the date of the Financial Statements.
31 December 31 December
2017 2016
=============== =========== ===========
No. Issued,
allotted
and fully
paid ordinary
shares of
GBP0.01 each 29,926,110 19,926,110
GBP'000 299 199
=============== =========== ===========
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.
During 2016 a further 9,926,109 ordinary shares were issued. The
price paid per share ranged from 1,000 pence to 1,015 pence and the
total paid for the shares during the period amounted to GBP98.8
million.
On 31 May 2017 the Company announced the successful completion
of a placing of a further 10,000,000 ordinary shares. The price
paid per share was 1,050p and the total paid for the shares during
the year amounted to GBP103.3 million net of issue costs.
18. Special Distributable Reserve
At a general meeting of the Company held on 14 December 2015,
special resolutions were passed approving the cancellation of the
amount standing to the credit of the Company's share premium
account as at 23 December 2015.
Following the approval of the Court and the subsequent
registration of the Court order with the Registrar of Companies on
21 March 2016, the reduction became effective. Accordingly, GBP98.1
million, previously held in the share premium account, has been
transferred to the special distributable reserve as disclosed in
the Statement of Financial Position.
During the year GBP0.5 million of the special distributable
reserve was used to pay the Q4 2016 Dividend which was paid on 28
March 2017.
19. STRUCTURED ENTITIES
A structured entity is an entity in which voting or similar
rights are not the dominant factor in deciding control. Structured
entities are generally created to achieve a narrow and well-defined
objective with restrictions around their ongoing activities.
Structured entities are consolidated when the substance of the
relationship indicates control.
Structured entities are assessed for consolidation in accordance
with the accounting policy set out in note 2. The following
structured entity is consolidated in the Group's results.
Business Mortgage Finance 3 plc ("BMF 3"), a public limited
company incorporated under the Laws of England and Wales.
Further details on the activities of this consolidated
structured entity is set out in Note 2 and 4.
20. Investments in SUBSIDIARIES
The Company has invested in a structured entity, and by virtue
of having accounting control, has to consolidate this entity.
Details of this can be found in note 2,4 and 19.
The Company is deemed to control Business Mortgage Finance 3 plc
("BMF 3"), a public limited company incorporated under the Laws of
England and Wales. The company is registered at Asticus Building
2nd Floor 21 Palmer Street, London, SW1H 0AD. BMF 3 is a
securitisation vehicle for UK commercial mortgages and operates in
a pre-determined manner. The Company is considered to control BMF 3
from 20 December 2017 by virtue of having exposure to the variable
returns of the vehicle through the holding of a junior note issued
by it.
21. Investments in associates
As at 31 December 2017, the Company has a single associate,
being a 28.57 per cent investment in Hiber Limited (formerly The
Green Deal Finance Company Limited). This is a UK platform
responsible for setting-up, financing and administering Green Deal
Plans in The Green Deal programme. As permitted by IAS 28
'Investment in Associates' and in accordance with the Company's
accounting policy the investment is accounted for at fair value
through profit or loss. No dividends were declared during the year
in respect of the investment. The Company holds Hiber Limited at a
fair value of GBP3 million.
The unaudited net assets as at 31 December 2017 were GBP3.6
million, and the profit after tax was GBP24.5 million.
Hiber Limited is incorporated in England and Wales.
The Company has also provided GBP5.0 million of debt funding to
the platform.
The Company has entered into an agreement which gives it the
right to participate in qualifying loans originated by the
platform.
There are no significant restrictions on the ability of the
associate from repaying loans from, or distributing dividends to,
the Company.
22. Net Asset Value per Ordinary Share
31 December 31 December
2017 2016
============== =========== ===========
Net asset
value
per
ordinary
share
pence 1,018.4p 1,014.0p
Net assets
attributable
GBP'000 304,749 202,051
============== =========== ===========
The net asset value per ordinary share as at 31 December 2017 is
based on net assets at the year-end of GBP304.759 million and on
29,926,110 ordinary shares in issue at the year-end.
The net asset value per ordinary share as at 31 December 2016 is
based on net assets at the period-end of GBP202.051 million and on
19,926,110 ordinary shares in issue at the year-end.
23. Contingent Liabilities and Capital Commitments
As at 31 December 2017 and 31 December 2016 there were no
contingent liabilities or capital commitments for the Company. The
Company did have GBP39.4 million (2016: GBP14.6 million) of undrawn
committed structured credit facilities at 31 December 2017.
24. Related Party Transactions and Transactions with the
Investment Manager
IAS 24 'Related party disclosures' requires the disclosure of
the details of material transactions between the Company and any
related parties. Accordingly, the disclosures required are set out
below:
Associates - at 31 December 2017 outstanding loan balance of
GBP5.0 million and accrued interest of GBP459,384.
Directors - The remuneration of the Directors is set out in the
Directors' Remuneration Report on pages 38 to 41. 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 2017, there was GBPnil (2016: 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
page 68.
During the year the Company paid GBP5.25 million (2016: GBP2.52
million) of fees and at 31 December 2017, there was GBP2.92 million
(2016: 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 Holdings Limited, the parent company of the
Investment Manager. Details of the services provided by the
Origination Partners are given on page 69.
During the year that the Origination Partner was part of the
same group as the Investment Manager, the fees payable to the
Origination Partner by the Company were deducted from the
management fee payable to the Investment Manager and totalled
GBP64,000 (2016: GBP40,000), and at 31 December 2017, there was
GBPnil (2016: GBPnil) payable to the Origination Partner.
25. Financial Risk Management
The Group and 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
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair value of
financial instruments.
The 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, the Company has a debt facility of GBP80 million. As at
31 December 2017 the Company had GBP56.5 million drawn-down under
this facility (2016: nil).
Exposure of the Group's financial assets and liabilities to
floating interest rates (giving cash flow interest rate risk when
rates are reset) and fixed interest rates (giving fair value risk)
as at 31 December 2017 is shown below:
Fixed
or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ======== ============= ========
Investments
at amortised
cost 39,706 329,623 369,329
Cash and
cash equivalents 16,893 - 16,893
Mortgage
backed
notes (28,308) (28,308)
Interest
bearing
borrowings (57,349) - (57,349)
================== ======== ============= ========
Total
exposure (29,058) 329,623 300,565
================== ======== ============= ========
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 2017 is shown below:
Fixed
or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ======== ============= ========
Investments
at amortised
cost 39,706 305,860 345,566
Cash and
cash equivalents 5,730 - 5,730
Interest
bearing
borrowings (56,500) - (56,500)
================== ======== ============= ========
Total
exposure (11,064) 305,860 294,796
================== ======== ============= ========
Exposure of the Company's and Group's financial assets and
liabilities to floating interest rates (giving cash flow interest
rate risk when rates are reset) and fixed interest rates (giving
fair value risk) as at 31 December 2016 is shown below:
Fixed
or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ======== ============= ========
Investments
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 per cent change in interest rates impacts income on the
assets with a floating rate by GBP0.3 million (2016: GBP36,000). A
1 per cent change in interest rates impacts debt expense on the
liabilities with a floating rate by GBP0.2 million (2016: nil).
(c) Currency risk
Currency risk is the risk that the value of net assets will
fluctuate due to changes in foreign exchange rates. None of the
Group's assets, liabilities or income is denominated in currencies
other than Pounds Sterling (the Group's functional currency, in
which it reports its results). Thus, the Group is not exposed to
currency risk.
26. 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
Group's credit assets split by the type of loan and the credit risk
band as at 31 December 2017:
Credit Unsecured Secured Total
Risk GBP'000 GBP'000 GBP'000
Band
======= ========= ======== ========
A &
B 129,845 216,502 346,347
C 17,200 301 17,501
D &
E 10,398 - 10,398
======= ========= ======== ========
Total 157,443 216,803 374,246
======= ========= ======== ========
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 2017:
Credit Unsecured Secured Total
Risk GBP'000 GBP'000 GBP'000
Band
======= ========= ======== ========
A &
B 129,845 192,739 322,584
C 17,200 301 17,501
D &
E 10,398 - 10,398
======= ========= ======== ========
Total 157,443 193,040 350,483
======= ========= ======== ========
Set out below is the analysis of the closing balances of the
Company's and Group'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 11,247 37 11,284
D & E 3,330 - 3,330
======= ========= ======== ========
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/E Elevated credit
risk, 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 committed debt facility totalling GBP80.0
million (details of which is disclosed in note 16).
Assets and liabilities not carried at fair value but for which
fair value is disclosed
For the Group for the year ended 31 December 2017:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================= ======== ======== ======== ========
Assets
Held-to-maturity
loans 10,314 - - 10,314
Loans
at amortised
cost - - 359,015 359,015
Receivables - 3,488 - 3,488
Cash
and cash
equivalents 16,893 - - 16,893
================= ======== ======== ======== ========
Total
assets 27,207 3,488 359,015 389,710
================= ======== ======== ======== ========
Liabilities
Management
fee payable - 592 - 592
Performance
fee payable - 2,329 - 2,329
Other
payables - 1,900 - 1,900
Interest
bearing
borrowings - 88,202 - 88,202
================= ======== ======== ======== ========
Total
liabilities - 93,023 - 93,023
================= ======== ======== ======== ========
For the Company for the year ended 31 December 2017:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================= ======== ======== ======== ========
Assets
Held-to-maturity
loans 10,314 - - 10,314
Loans
at amortised
cost - - 335,252 335,252
Receivables - 3,477 - 3,477
Cash
and cash
equivalents 5,730 - - 5,730
================= ======== ======== ======== ========
Total
assets 16,044 3,477 335,252 354,773
================= ======== ======== ======== ========
Liabilities
Management
fee payable - 592 - 592
Performance
fee payable - 2,329 - 2,329
Other
payables - 1,875 - 1,875
Interest
bearing
borrowings - 56,787 - 56,787
================= ======== ======== ======== ========
Total
liabilities - 61,583 - 61,583
================= ======== ======== ======== ========
For the Company and Group for the period ended 31 December
2016:
Level Level Level
1 2 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 12
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 1.
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 has met these objectives through a successful share
offering where the company raised GBP105 million excluding issue
costs and through increasing the size of the Company debt facility
to GBP80.0 million. The Group's debt to equity ratio was 29.6 per
cent at 31 December 2017 and the Company's was18.9 per cent.
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 year.
27. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
28. Subsequent Events
Save as noted below, there have been no events to disclose since
the year end under review.
On 15 January 2018 the Company gave notice to call the external
note holders of BMF 3 one month prior to the quarterly interest
payment date. Subsequently, on 15 February 2018, the Company
redeemed all external note holders and as a consequence purchased
the residual loan values and released the security over the loans.
The effect of this is the underlying assets have been purchased by
the Company and bought onto the Company's Statement of Financial
Position. BMF 3 will no longer be consolidated as the Company will
no longer have control of BMF 3.
On 8 March 2018 the Company announced a supplementary prospectus
in connection with the publication of the Company's interim report
and financial statements.
The Company increased the size of its debt facility on 21 March
2018 to a committed GBP150 million within the existing syndicate.
The 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.
On 29 March 2018, a dividend of 20.0 pence per ordinary share
was paid.
On 12 April 2018, a dividend of 20 pence per ordinary share was
declared, payable on 29 June 2018.
On 19 April 2018, the Company announced its intention to proceed
with a placing of 9,523,809 ordinary shares at a price per share of
1,050 pence per share. That placing closed the same day, with
admission becoming effective on 23 April 2018.
Shareholders' Information
Directors, Portfolio Manager and Advisers
Directors Administrator and Company Secretary
Robert Sharpe Apex Fund Services (UK) Ltd
Jim Coyle 6th Floor
Ravi Takhar 140 London Wall
London EC2Y 5DN
all at the registered office below England
Registered Office Registrar
6th Floor Computershare Investor Services PLC
140 London Wall The Pavilions, Bridgewater Road
London EC2Y 5DN Bristol BS99 6ZZ
England England
Investment Manager and AIFM Depositary
Pollen Street Capital Limited Indos Financial Limited
8 Hanover Street 5(th) Floor 54 Fenchurch Street
London W1S 1YF London EC3M 3JY
England England
Financial Adviser and Broker Independent Auditors
Liberum Capital Limited PricewaterhouseCoopers LLP
Level 12, Ropemaker Place 7 More London Riverside
25 Ropemaker Place London SE1 2RT
London EC2Y 9LY England
England
Custodian
Sparkasse Bank Malta PLC
101 Townsquare
Sliema SLM3112
Malta
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: GB00BYQDNR86
Sedol: BYZV3G2
Ticker: HONY
Website
The Company's website can be found at www.honeycombplc.com. The
site provides visitors with Company information and literature
downloads.
The Company's profile is also available on third-party sites
such as www.trustnet.com and www.morningstar.co.uk.
Annual and half-yearly reports
Copies of the annual and half-yearly reports may be obtained
from the Company Secretary by calling 0203 697 5368 or by visiting
www.honeycombplc.com.
Share prices and Net Asset Value information
The Company's ordinary shares of 1p each are quoted on the
London Stock Exchange:
-- SEDOL number: BYZV3G2
-- ISIN number: GB00BYQDNR86
-- EPIC code: HONY
The codes above may be required to access trading information
relating to the Company on the internet.
Electronic communications with the Company
The 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 (NAV) value 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 charges Ongoing charges 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.
================== ================================================
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.
================== ================================================
Fair Value The amount for which an asset could
be exchanged, or a liability settled,
between willing parties in an arm's
length transaction.
================== ================================================
Registrar An entity that manages the Company's
shareholder register. The Company's
registrar is Computershare Investor
Services PLC.
================== ================================================
AIF An Alternative Investment Fund, as defined
in the AIFM Directive 2011/61/EU on
Alternative Investment Fund Managers
================== ================================================
LIBOR (London The interest rate participating banks
Inter-Bank offer to other banks for loans on the
Offered Rate) London market.
================== ================================================
AIFM An Alternative Investment Fund Manager,
as defined in the AIFM Directive. Pollen
Street Capital Limited undertakes this
role on behalf of the Company.
================== ================================================
Neither past Loans that are not in arrears and which
due nor impaired do not meet the impaired asset definition.
This segment can include assets subject
to forbearance solutions.
================== ================================================
Consumer An amount of money lent to an individual
Loan for personal, family, or household purposes.
================== ================================================
Term Funding The Bank of England launched the TFS
Scheme (TFS) in 2016 to allow banks and building
societies to borrow from the Bank of
England at rates close to Bank base
rate. This is designed to increase lending
to businesses by lowering interest rates
and increasing access to credit.
================== ================================================
Servicers Comprehensive loan servicing to support
the full loan lifecycle, from origination,
through account servicing to arrears
management.
================== ================================================
Hedging An investment to reduce the risk of
adverse price movements in an asset.
================== ================================================
-Ends-
Enquiries:
Apex Fund Services (UK) Ltd
Company Secretary
Priya Dhaliah / Stephan Claridge
020 3697 5368
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR KKLBLVZFEBBV
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