TIDMHONY
RNS Number : 7685Z
Honeycomb Investment Trust PLC
05 September 2018
Honeycomb Investment Trust plc
Interim Report and Unaudited Financial Statements
For the period from 1 January 2018 to 30 June 2018
5 September 2018 - Honeycomb Investment Trust plc today
announces its Interim Report and Unaudited Financial Statements for
the period ended 30 June 2018.
Copies of the interim report can be obtained from the following
website: www.honeycombplc.com
1 Strategic Report
Investment Objective
The investment objective of Honeycomb Investment Trust plc (the
"Company") is to provide shareholders with an attractive level of
dividend income 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
30 June 2018 30 June 2017 31 December
(Unaudited) (Unaudited) 2017 (Audited)
============================ ============= ============= ================
NET ASSET VALUE (GBP'000)
NET ASSET VALUE (CUM
INCOME)(1) 400,867 304,749 304,759
NET ASSET VALUE (EX
INCOME)(2) 394,407 300,320 300,252
MARKET CAPITALISATION(3) 439,867 350,135 346,395
============================ ============= ============= ================
PER SHARE METRICS
SHARE PRICE (AT CLOSE)(4) 1,115.0p 1,170.0p 1,157.5p
NAV PER SHARE (CUM INCOME) 1,016.1p 1,018.3p 1,018.4p
NAV PER SHARE (EX INCOME) 999.8p 1,003.5p 1,003.3p
SHARES IN ISSUE 39,449,919 29,926,110 29,926,110
============================ ============= ============= ================
PERFORMANCE INDICATORS
AND KEY RATIOS
PREMIUM / (DISCOUNT)(5) 9.7% 14.9% 13.7%
ITD TOTAL NAV PER SHARE
RETURN(6)(7) 21.1% 13.2% 17.2%
DEBT TO EQUITY RATIO 25.4% 10.0% 29.4%
REVENUE RETURN(8) 7.6% 7.6% 7.7%
DIVID RETURN(9) 6.8% 8.0% 8.4%
ONGOING CHARGES(10) 1.2% 1.2% 1.3%
============================ ============= ============= ================
(1) NET ASSET VALUE (CUM INCOME): will include all income not
yet moved to reserves (both revenue and capital income), less the
value of (i) any dividends paid in respect of that income and (ii)
any dividends in respect of that income which have been declared
and marked ex dividend but not yet paid.
(2) NET ASSET VALUE (EX INCOME): will be the NAV (Cum Income)
excluding net income (both revenue and capital income) that is yet
to be transferred to reserves as described below. For this purpose
net income will comprise all income not yet moved to reserves (both
revenue and capital income), less the value of (i) any dividends
paid in respect of that income and (ii) any dividends in respect of
that income which have been declared and marked ex dividend but not
yet paid. Any income in respect of a financial year, which is
intended to remain undistributed will be moved to reserves on the
first business day of the immediately following year, meaning that
each figure for NAV (Ex-Income) reported during a financial year
will equate to the NAV (Cum Income) less undistributed income which
has not been moved to reserves.
(3) MARKET CAPITALISATION: the closing mid-market share price
multiplied by the number of shares outstanding at month end.
(4) SHARE PRICE (AT CLOSE): closing mid-market share price at
month end (excluding dividends reinvested).
(5) PREMIUM / (DISCOUNT): the amount by which the price per
share of an investment trust is either higher (at a premium) or
lower (at a discount) than the net asset value per share (cum
income), expressed as a percentage of the net asset value per
share.
(6) ITD: inception to date - excludes issue costs.
(7) TOTAL NAV PER SHARE RETURN: is calculated as Net Asset Value
(Cum Income) at the end of the period, plus dividends declared
during the period, divided by NAV (Cum Income) calculated on a per
share basis at the start of the period. There was a 1.06% 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 period annualised.
(9) DIVID RETURN: is calculated as the total of the dividends
for the period divided by average Net Asset Value during the period
annualised.
(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.
Chairman's Statement
I am delighted to present the 2018 interim results for Honeycomb
Investment Trust plc (the "Company"), covering the period 1 January
2018 to 30 June 2018. This is the first set of results that will be
reported under IFRS 9 "Financial Instruments" after the Company
implemented and transitioned to this new accounting standard on 1
January 2018.
The Board has been pleased with the continued progress during
the first half of 2018. At the start of the period the Company had
successfully completed four share offerings raising a total of
GBP305 million of gross proceeds and raised a further GBP100.0
million in April 2018. These latest gross proceeds were deployed
quickly with a purchase of a small and medium sized entity ("SME")
portfolio and several secured structured facilities.
Performance
The Company has performed well in the first 6 months of the year
driven by the performance of investments made in the first two full
years of trading which have been the subject of 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 30 June 2018, the Company's net assets were GBP400.9
million (cumulative of income), with market capitalisation of
GBP439.9 million. NAV per share (cumulative of income) was 1,016.1
pence, with the share price (at close) 1,115.0 pence, representing
a premium of 9.73 per cent. Total NAV per share return was 21.1 per
cent since inception. This has been impacted by a 0.65 per cent
reduction in NAV per share due to the recognition of the new
expected credit loss model introduced by IFRS 9. The inception to
date figure also includes 1.50 per cent benefit of the May 2017 and
April 2018 share placings being completed at a premium to NAV.
Dividend
The dividend has remained at 20.00 pence per share for Q4 2017,
Q1 2018 and Q2 2018 to provide the targeted 8 per cent annualised
dividend.
Gearing
The Company has GBP100.0 million drawn debt at 30 June with the
existing facility extended to a committed facility of GBP150
million and the term extended in the first half of 2018.
Outlook
Despite the continued competition in specialist lending markets,
the Company has deployed capital quickly. We believe that the
retrenchment of mainstream lenders from our target markets
continues to present attractive opportunities. We further believe
that through our differentiated approach and by targeting verticals
that require specialist understanding, more detailed underwriting,
or which require information technology integration and enablement,
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. We remain vigilant.
The principal risks and uncertainties affecting the Company
remain largely unchanged from the Annual Report as at 31 December
2017 - these can be found on pages 12 to 15.
The Company is in a strong position after another excellent
first half of 2018 and the Board remains confident of the long-term
prospects for the Company with the Investment Manager continuing 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
4 September 2018
Investment Manager's Report
The Company was established in December 2015 to provide
investors with access to UK lending opportunities which Pollen
Street Capital Limited (the "Investment Manager") believes have
potential to provide attractive and consistent risk-adjusted
returns throughout the cycle. These returns are delivered through
the Investment Manager's focus on high-quality underwriting of
borrowers in markets that are underserved by mainstream finance
providers and platforms through direct origination through
specialist channels, secured structured facilities to specialist
lenders and the acquisition by the Company of interests in
portfolios of Credit Assets from third parties.
Equity raise
After the Company completed its initial public offering on 23
December 2015, and subsequently raised a further total gross
proceeds of GBP205.0 million during 2016 and 2017, the Company has
raised further gross proceeds of GBP100.0 million in April 2018.
This was in conjunction with the Company increasing the size of its
debt facility to GBP150.0 million, as well as extending the
term.
The Company is focused on building a strong portfolio of assets
in line with our investment mandate and at the end of the period,
we have built a total portfolio of gross investment assets of
GBP499.3 million, with a strong pipeline of further opportunities
to provide an attractive mix of assets combining both strong yields
with low bad debt rates.
IFRS 9
On 1 January 2018 the Company transitioned to IFRS 9 and fully
implemented a comprehensive program that focused on the key areas
of impact, including financial reporting, data, systems and
processes. As part of the implementation 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 ("ECL") on the
Company's loan portfolios and implemented appropriate internal
governance processes.
Under IFRS 9 the recognition and measurement of expected credit
losses differs from the approach under IAS 39. The new
classification and measurement and impairment requirements have
been recognised in retained earnings and reserves as at 1 January
2018, the date of initial application. The key initial impact on
adoption was GBP2.3 million increase in provision driven by the
introduction of stage 1 expected credit losses, of which GBP1.7
million related to Consumer lending. The Company has elected to
utilise the exemption allowing it not to restate comparative
information for prior periods with respect to financial
information. As prior periods have not been restated, changes in
impairment of financial assets in the comparative periods remain in
accordance with IAS 39 and are therefore not necessarily comparable
to ECL recorded for the current period. IFRS 9 has had a 0.65 per
cent impact on NAV since inception in December 2015. Stage 3 loans
as a proportion of total loans and advances to customers has
increased to 2.93 per cent (1 January 2018: 2.77 per cent). Stage 3
ECL allowance as a percentage of Stage 3 drawn balances has reduced
to 69.6 per cent (1 January 2018: 71.6 per cent).
H1 2018 Highlights
The Company performed well in the period to date driven by the
continued strong performance of the portfolio with annualised NAV
returns of 9.02 per cent (benefited by 0.73 per cent from the
issuance of shares). Underlying investment asset income yield and
bad debt performance of 11.42 per cent and 1.23 per cent with risk
adjusted yield of 10.19 per cent provides the Company with
significant coverage of bad debts and a stable and attractive
portfolio from which it can continue to grow. This strong
performance is as a result of the successful implementation of the
strategy to focus on specialist markets and loans with either
downside protection or seasoning which exhibit stable
performance.
In Q1 2018, the Company upsized its debt facilities to GBP150
million as well as reducing the margin and extending the term. The
debt upsize allowed the Company to maintain its strong originations
across the three sectors the Company focuses on; Consumer, Property
and SME. Q1 saw the Company acquire a seasoned portfolio of
commercial mortgages and 2 new structured facilities secured on
consumer portfolios.
In Q2 2018, the Company focused on deploying the GBP100.0
million total gross proceeds from the April 2018 capital raise. By
the end of Q2 all the proceeds had been deployed however due to the
timing of deployment the overall results were still impacted by the
drag of carrying undeployed cash for part of the period and limited
gearing during the first part of Q2. The Company deployed the raise
by acquiring a small seasoned portfolio of SME loans and new
structured facilities in both the SME and consumer sectors.
Consumer loans represent 60 per cent of the credit assets.
Within the Consumer portfolio 66 per cent of the total represent
loans which either have structural protection from platforms,
having first loss equity ahead of our loan or where a seasoned
portfolio exhibiting predictable cashflows has been acquired. The
remainder of the portfolio is loans which have been organically
originated through selected partners underwritten using proprietary
scorecards with a predictable flow of opportunities. The Consumer
portfolio mix is expected to remain weighted towards structured and
seasoned loans which should provide lower volatility in a more
challenging economic environment.
Property loans represent 33 per cent of the credit assets. The
Property portfolio primarily consists of second charge mortgages
that are significantly seasoned and were acquired from banks and /
or other specialist lenders. The Property portfolio has performed
well as the loans have the benefit of the underlying property
security which can be realised in a default scenario to repay a
significant proportion (if not all) of the outstanding balance.
Cash collection from borrowers has been stable as the loans were
originated several years ago and borrowers have been paying the
instalments for some time.
SME loans only represent 7 per cent of the portfolio but it is a
segment in which the Company believe there is an attractive
opportunity in which it will seek to grow its exposure
To further enhance investor returns, the Company has made
selected investments in companies which are aligned with the
Company's strategy, such as brokers and originators of loans and
strategic providers of data and technology related to consumers and
SME's. The Company purchased an equity stake in a small SME
software provider in Q2 2018. All four businesses which the Company
has equity stakes in have faced different challenges in the first
half of 2018 but continue to see new partnerships develop as well
as continued investments in technology and management capabilities.
The Investment Manager continues to selectively assess potential
additional equity stakes in key suppliers to allow for growth in
originations.
Financial Performance
The financial performance of the Company has been strong. In the
first half, investment income was GBP21.7 million (FY17 H1: GBP13.3
million), an increase of 63 per cent, which has been driven by
balances of net investment assets increasing to GBP483.3 million at
the period end (FY17 H1: GBP300.2 million). Earnings for the first
half were GBP12.6 million (FY17 H1: GBP8.9 million), an increase of
42 per cent on the same period last year which has been driven by
low levels of impairments and leverage of the fixed cost base. This
translated into earnings per share of 37.6 pence (FY17 H1: 41.2
pence), and NAV return of 4.51 per cent, which benefited by 0.73
per cent from the issuance of shares but was reduced by 0.65 per
cent for the introduction of IFRS 9, (FY17 H1: 5.16 per cent, which
benefited by 1.03 per cent from the issuance of shares at a premium
in May-17). This reflects the high levels of deployment and strong
underlying asset performance.
In initial guidance, a dividend yield of at least 8 per cent
(based on issue price) was indicated, this target yield has been
achieved in 2018 so far.
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 1,016.1 pence per ordinary share
at 30 June 2018, which, including dividends declared or paid, is
equivalent to a NAV return of 21.1 per cent since inception
(considering 0.65 per cent reduction for the introduction of IFRS
9). Additionally, the share price of the Company at 30 June 2018
was 1,115.0 pence per share, representing a 9.7 per cent premium to
NAV (cumulative of income). We are pleased that the Company is
trading ahead of its net asset position, which we feel reflects the
strong underlying performance seen so far this year. Performance
and dividend history can be seen on page 9.
Outlook
Looking ahead, we continue to position ourselves to address the
economic challenges and opportunities that may arise as the
long-term effects of the UK leaving the European Union becomes
clearer. In addition, with household borrowing at high levels and
increased competition in mainstream unsecured lending, we intend to
continue to proceed with caution. That said, we believe that the
Company's business model, combined with our approach to risk, puts
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 Company'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)
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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%
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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%
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Total NAV
Return
IAS 39 2018 0.66% 0.63% 0.79% 1.15% 0.54% 0.55% - - - - - - 4.33% 21.73%
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Total NAV
Return
IFRS 9 2018 0.66% 0.59% 0.72% 1.36% 0.56% 0.60% - - - - - - 4.51% 21.08%
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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%
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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%
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Share Price
Performance
(3) 2018 13.50% 13.50% 13.50% 11.50% 11.50% 11.50% - - - - - - 11.50% 11.50%
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Dividend
Per
Share
(Pence)
(4) 2016 - - - - 2.11 - - - 19.66 - 23.13 - 44.90 44.90
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Dividend
Per
Share
(Pence)
(4) 2017 - - 23.50 - 24.50(5) - - - 20.00 - - 20.00 88.00 132.90
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Dividend
Per
Share
(Pence)
(4) 2018 - - 20.00 20.00 - - - - - - - - 40.00 172.90
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(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 Asset Type Sector Value of Percentage
holding of assets(1)
at 30
June 2018
(GBP'm)
=== ===================== ========= =========== ========= =========== ==============
United
1 Creditfix Limited Kingdom Structured Consumer 33.6 6.95%
=== ===================== ========= =========== ========= =========== ==============
United
2 IWOCA Limited Kingdom Structured SME 25.4 5.25%
=== ===================== ========= =========== ========= =========== ==============
1st Stop Group United
3 Limited(2) Kingdom Structured Consumer 24.7 5.11%
=== ===================== ========= =========== ========= =========== ==============
Sancus Loans United
4 Limited Kingdom Structured Property 22.9 4.74%
=== ===================== ========= =========== ========= =========== ==============
Madison CF UK United
5 Limited Kingdom Structured Consumer 19.4 4.01%
=== ===================== ========= =========== ========= =========== ==============
Amigo Loans Limited United
6 Bond Security Kingdom Bond Consumer 10.3 2.12%
=== ===================== ========= =========== ========= =========== ==============
Dynamic Aerospace United
7 and Defense Limited Kingdom Structured SME 10.0 2.06%
=== ===================== ========= =========== ========= =========== ==============
United
8 D&B Finance Limited Kingdom Structured Property 8.7 1.81%
=== ===================== ========= =========== ========= =========== ==============
Amicus Finance United
9 plc Kingdom Structured Property 6.6 1.36%
=== ===================== ========= =========== ========= =========== ==============
Capital Step United
10 Funding Limited Kingdom Structured SME 6.2 1.29%
=== ===================== ========= =========== ========= =========== ==============
(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 also is a portfolio company of funds
managed or advised by the Investment Manager.
Portfolio Composition
The composition of the Company's portfolio as
at 30 June 2018 is set out below:
Borrower Type (By Balances) Consumer 60%
Property 33%
----
SME 7%
----
Portfolio 37%
Organic 23%
----
Secured
Structured 40%
----
Loan Security (excludes Equity investments) Unsecured 39%
Secured 61%
----
Credit Risk Bands (By balances) (excludes Equity
investments)
Each credit risk band is defined on p 56.
A 71.4%
B 24.5%
------
C 2.5%
------
D/E 1.6%
------
Interim Management Report
Investment restrictions
The Company will invest in Credit Assets originated across
various sectors and across credit risk bands to ensure
diversification and to seek to mitigate concentration risks. The
following investment limits and restrictions apply to the Company
to ensure that the diversification of the portfolio is maintained,
that concentration risk is limited and that limits are placed on
risk associated with borrowings.
The Company will not invest, in aggregate, more than 10 per cent
of the aggregate value of total assets of the Company ("Gross
Assets"), at the time of investment, in other investment funds that
invest in Credit Assets.
The Company will not invest, in aggregate, more than 50 per cent
of Gross Assets, at the time of investment, in Credit Assets
comprising investments in loans (alongside or in conjunction with
Shawbrook Bank ("Shawbrook")) referred to the Origination Partner
by Shawbrook. Shawbrook is a portfolio company of funds managed or
advised by Pollen Street Capital Limited.
The following restrictions apply, in each case at the time of
the investment by the Company:
-- no single Credit Asset comprising a consumer credit asset
shall exceed 0.15 per cent of Gross Assets;
-- no single SME or corporate loan, or trade receivable, shall
exceed 5.0 per cent of Gross Assets;
-- 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 Company
from directly acquiring portfolios of Credit Assets which comply
with the other investment restrictions described in this section;
and
-- The Company will not invest in Equity Assets to the extent
that such investment would, at the time of investment, result in
the Company controlling more than 35 per cent of the issued and
voting share capital of the issuer of such Equity Assets.
Other restrictions
The Company may invest in cash, cash equivalents, money market
instruments, money market funds, bonds, commercial paper or other
debt obligations with banks or other counterparties having single-A
(or equivalent) or higher credit rating as determined by an
internationally recognised agency or systemically important bank,
or any "governmental and public securities" (as defined for the
purposes of the Financial Conduct Authority's Handbook of rules and
guidance) for cash management purposes and with a view to enhancing
returns to shareholders or mitigating credit exposure.
The Company will not invest in Collateralised Loan Obligations
("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.
Principal Risks and Uncertainties
The Company is exposed to a number of potential risks and
uncertainties. These risks could have a material impact on
financial performance and position and could cause actual results
to differ materially from expected and historical results.
The 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 4 September 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 Issue 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 30 June
2018 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
GBP100.0 million drawn representing 25.4 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
expected credit loss 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, Financial Services and Markets
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.
2 Statement of Directors' Responsibilities
The Directors, being the persons responsible, confirm that to
the best of their knowledge:
a) the condensed set of Unaudited Financial Statements contained
within the half-yearly financial report have been prepared in
accordance with International Accounting Standard ("IAS") 34,
Interim Financial Reporting, as adopted by the European Union, as
required by the Disclosure and Transparency Rule 4.2.4R, and gives
a true and fair view of the assets, liabilities and financial
position of the Company;
b) the Interim Management Report includes a fair review, as
required by Disclosure and Transparency Rule 4.2.7R, of important
events that have occurred during the first six months of the
financial year, their impact on the condensed set of unaudited
Financial Statements, and a description of the principal risks and
perceived uncertainties for the remaining six months of the
financial year; and
c) the Interim Management Report includes a fair review of the
information concerning related parties' transactions as required by
Disclosure and Transparency Rule 4.2.8R.
Signed on behalf of the board by
Robert Sharpe
Chairman
4 September 2018
3 Financial Statements
Statement of Comprehensive Income
For the period from 1 January 2018 to 30 June 2018
(Unaudited)
Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================= ====== ========= ========= =========
Income
Investment interest 5 22,474 - 22,474
Net Loss on Investments 5 - (750) (750)
Other income 5 1 - 1
================================= ====== ========= ========= =========
22,475 (750) 21,725
Expenses
Management fee 6 (2,107) (42) (2,149)
Performance fee 6 (1,398) - (1,398)
Change in expected credit
losses 10 (2,777) - (2,777)
Other expenses 7 (605) - (605)
================================= ====== ========= ========= =========
(6,887) (42) (6,929)
Profit / (loss) before finance
costs and taxation 15,588 (792) 14,796
Finance costs 15 (2,224) - (2,224)
Profit / (loss) before taxation 13,364 (792) 12,572
Taxation on ordinary activities - - -
Profit / (loss) after taxation 13,364 (792) 12,572
================================= ====== ========= ========= =========
Earnings per share (basic
and diluted) 9 40.0p (2.4)p 37.6p
================================= ====== ========= ========= =========
The total column of this statement represents the Statement of
Comprehensive Income prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union. The supplementary revenue return and capital return columns
are both prepared under guidance issued by the Association of
Investment Companies.
No operations were acquired during this period.
The Company does not have any income or expense that is not
included in net profit for the period. Accordingly, the net profit
for the period is also the Total Comprehensive Income for the
period, as defined in IAS1 (revised).
The notes on pages 26 to 58 form an integral part of these
financial statements.
Statement of Comprehensive Income (continued)
For the period from 1 January 2017 to 30 June 2017
(Unaudited)
Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================= ====== ========= ========= =========
Income
Investment interest 5 13,288 - 13,288
Other income 5 2 - 2
================================= ====== ========= ========= =========
13,290 - 13,290
Expenses
Management fee 6 (1,149) (41) (1,190)
Performance fee 6 (1,042) - (1,042)
Impairment of loans 10 (1,183) - (1,183)
Other expenses 7 (415) - (415)
================================= ====== ========= ========= =========
(3,789) (41) (3,830)
Profit / (loss) before finance
costs and taxation 9,501 (41) 9,460
Finance costs (548) - (548)
Profit / (loss) before taxation 8,953 (41) 8,912
Taxation on ordinary activities - - -
Profit / (loss) after taxation 8,953 (41) 8,912
================================= ====== ========= ========= =========
Earnings per share (basic
and diluted) 9 41.4p (0.2)p 41.2p
================================= ====== ========= ========= =========
The total column of this statement represents the Statement of
Comprehensive Income prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union. The supplementary revenue return and capital return columns
are both prepared under guidance issued by the Association of
Investment Companies.
No operations were acquired during the period.
The Company does not have any income or expense that is not
included in net profit for the period. Accordingly, the net profit
for the period is also the Total Comprehensive Income for the
period, as defined in IAS1 (revised).
The notes on pages 26 to 58 form an integral part of the
financial statements.
Statement of Comprehensive Income (continued)
For the year ended 31 December 2017 (Audited)
Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
================================= ====== ========= ========= =========
Income
Investment interest 5 31,771 - 31,771
Other income 5 2 2
================================= ====== ========= ========= =========
31,773 - 31,773
Expenses
Management fee 6 (2,841) (81) (2,922)
Performance fee 6 (2,329) - (2,329)
Impairment of loans 10 (2,783) - (2,783)
Other expenses 7 (1,046) - (1,046)
================================= ====== ========= ========= =========
(8,999) (81) (9,080)
Profit / (loss) before finance
costs and taxation 22,774 (81) 22,693
Finance costs 15 (1,732) - (1,732)
Profit / (loss) before taxation 21,042 (81) 20,961
Taxation on ordinary activities - - -
Profit / (loss) after taxation 21,042 (81) 20,961
================================= ====== ========= ========= =========
Earnings per share (basic and
diluted) 9 81.5p (0.3)p 81.2p
================================= ====== ========= ========= =========
The total column of this statement represents the Statement of
Comprehensive Income prepared in accordance with International
Financial Reporting Standards ("IFRS") as adopted by the European
Union. The supplementary revenue return and capital return columns
are both prepared under guidance issued by the Association of
Investment Companies.
The Company does not have any income or expense that is not
included in net profit for the period. Accordingly, the net profit
for the period is also the Total Comprehensive Income for the
period, as defined in IAS1 (revised).
The notes on pages 26 to 58 form an integral part of the
financial statements.
Statement of Financial Position
As at 30 June 2018
30 June 2018 30 June 2017 31 December
(Unaudited) (Unaudited) 2017 (Audited)
Notes GBP'000 GBP'000 GBP'000
============================= ====== ============= ============= ================
Non-current assets
Investments at amortised
cost 10 475,324 292,435 345,566
Investments held at
fair value through
profit or loss 11 7,980 7,730 11,227
Fixed assets 12 253 394 342
============================= ====== ============= ============= ================
483,557 300,559 357,135
Current assets
Receivables 13 6,398 5,032 3,477
Cash and cash equivalents 15,662 34,465 5,730
============================= ====== ============= ============= ================
22,060 39,497 9,207
Total assets 505,617 340,056 366,342
Current liabilities
Management fee payable (760) (283) (592)
Performance fee payable (1,398) (1,042) (2,329)
Other payables 14 (1,939) (3,946) (1,875)
============================= ====== ============= ============= ================
(4,097) (5,271) (4,796)
Total assets less
current liabilities 501,520 334,785 361,546
Interest bearing borrowings 15 (100,653) (30,036) (56,787)
Total net assets 400,867 304,749 304,759
============================= ====== ============= ============= ================
Shareholders' funds
Ordinary share capital 16 394 299 299
Share premium 299,601 201,921 201,852
Revenue reserves 5,041 5,014 5,133
Capital reserves (917) (85) (125)
Special distributable
reserves 17 96,748 97,600 97,600
============================= ====== ============= ============= ================
Total shareholders'
funds 400,867 304,749 304,759
============================= ====== ============= ============= ================
Net asset value per
share 19 1,016.1p 1,018.3p 1,018.4p
============================= ====== ============= ============= ================
The notes on pages 26 to 58 form an integral part of the
financial statements.
Statement of Changes in Shareholders' Funds
For the period from 1 January 2018 to 30 June 2018
(Unaudited)
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 2018 299 201,852 5,133 (125) 97,600 304,759
====================== ========= ========= ========== ========== =============== =========
Changes on
initial application
of IFRS 9 - - (2,338) - - (2,338)
====================== ========= ========= ========== ========== =============== =========
Restated balance
at 1 January
2018 299 201,852 2,795 (125) 97,600 302,421
====================== ========= ========= ========== ========== =============== =========
Ordinary shares
issued 95 99,905 - - - 100,000
====================== ========= ========= ========== ========== =============== =========
Ordinary shares
issue costs - (2,156) - - - (2,156)
====================== ========= ========= ========== ========== =============== =========
Profit / (loss)
after taxation - - 13,364 (792) - 12,572
====================== ========= ========= ========== ========== =============== =========
Dividends
paid in the
period - - (11,118) - (852) (11,970)
====================== ========= ========= ========== ========== =============== =========
Shareholders'
funds at 30
June 2018 394 299,601 5,041 (917) 96,748 400,867
====================== ========= ========= ========== ========== =============== =========
As at 30 June 2018 the Company had distributable reserves of
GBP100.87 million for the payment of future dividends. The
distributable reserves are the revenue reserves (GBP5.04 million),
realised capital reserves (-GBP0.92 million) and the special
distributable reserves (GBP96.75 million).
The notes on pages 26 to 58 form an integral part of the
financial statements.
Statement of Changes in Shareholders' Funds (continued)
For the period from 1 January 2017 to 30 June 2017
(Unaudited)
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 - (1,649) - - - (1,649)
===================== ========= ========= ========== ========== =============== =========
Profit / (loss)
after taxation - - 8,953 (41) - 8,912
===================== ========= ========= ========== ========== =============== =========
Dividends paid
in the period - - (9,065) - (500) (9,565)
===================== ========= ========= ========== ========== =============== =========
Shareholders'
funds at 30 June
2017 299 201,921 5,014 (85) 97,600 304,749
===================== ========= ========= ========== ========== =============== =========
As at 30 June 2017 the Company had distributable reserves of
GBP102.52 million for the payment of future dividends. The
distributable reserves are the revenue reserves (GBP5.01 million),
realised capital reserves (-GBP0.09 million) and the special
distributable reserves (GBP97.60 million).
For the year ended 31 December 2017 (Audited)
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).
The notes on pages 26 to 58 form an integral part of the
financial statements.
Statement of Cash Flows
For the period to 30 June 2018
30 June 2018 30 June 2017 31 December
(Unaudited) (Unaudited) 2017 (Audited)
Notes GBP'000 GBP'000 GBP'000
==================================== ====== ============= ============= ================
Cash flows from operating
activities:
Profit after taxation 12,572 8,912 20,961
Adjustments for:
Changes on initial application (2,338) - -
of IFRS 9
Impairment of loans 10 - 1,183 2,783
Change in expected credit
loss 10 2,777 - -
Finance costs 2,224 548 1,732
Amortisation 12 138 111 240
(Increase)/Decrease in receivables 13 (2,920) (1,309) 246
(Decrease)/Increase in payables (700) 1,791 1,316
Net cash inflow from operating
activities 11,753 11,236 27,278
Cash flows from investing
activities:
Purchase of Investments
at amortised cost (132,535) (135,773) (190,504)
Sale/(Purchase) of investments 11 3,247 (3,000) (6,497)
Purchase of fixed assets 12 (49) (136) (213)
Net cash (outflow) from
investing activities (129,337) (138,909) (197,214)
Cash flows from financing
activities:
Proceeds from issue of ordinary
shares 16 100,000 105,000 105,000
Share issue costs (2,156) (1,649) (1,718)
Proceeds from interest bearing
borrowings 15 108,700 88,000 122,500
Repayments of interest bearing
borrowings 15 (65,200) (58,000) (66,000)
Interest paid on financing
activities (1,858) (525) (1,458)
Dividends declared and paid 8 (11,970) (9,565) (21,535)
Net cash inflow from financing
activities 127,516 123,261 136,789
Net change in cash and cash
equivalents 9,932 (4,412) (33,147)
Cash and cash equivalents
at the beginning of the
period 5,730 38,877 38,877
Net cash and cash equivalents 15,662 34,465 5,730
==================================== ====== ============= ============= ================
The notes on pages 26 to 58 form an integral part of the
financial statements.
Notes to the Financial Statements
1. General Information
Honeycomb Investment Trust plc (the "Company") is a closed-ended
investment company incorporated in England and Wales on 2 December
2015 with registered number 09899024. The Company commenced
operations on 23 December 2015 and carries on business as an
investment trust within the meaning of chapter 4 of Part 24 of the
Corporation Tax Act 2010.
The Company's investment objective is to provide shareholders
with an attractive level of dividend income and capital growth
through the acquisition of loans made to consumers and small
businesses as well as other counterparties, together with related
investments 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.
The Company's investment manager is Pollen Street Capital
Limited a UK-based company authorised and regulated by the FCA, who
also acts as the Alternative Investment Fund Manager (the "AIFM")
under the Alternative Investment Fund Managers Directive (the
"AIFMD"). The Company is defined as an Alternative Investment Fund
and is subject to the relevant articles of the AIFMD.
The Investment Manager, on behalf of the Company, 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
Company's investment opportunities.
Each opportunity is underwritten by the Investment Manager or
Honeycomb Finance Limited (the "Origination Partner") to assess
whether the risk of the borrower is acceptable. There are various
processes adopted to underwrite each opportunity to ensure a
consistent approach to risk-based pricing to ensure the weighted
risk adjusted return provides an attractive level of dividend
income with acceptable risk profile for shareholders of the
Company.
The Company, either directly or through the Origination Partner
has arrangements with a number of referral partners, through which
the Company either acquires Credit Assets, either individually, as
portfolios or via structured investments. The Directors believe
that the Company 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 Company will reduce its dependence on any
one single source of opportunities to acquire Credit Assets and
expects to gain a strong visibility of high quality assets.
The Company believes it is important to provide best-in-class
servicing to ensure that Credit Assets forming part of the
portfolio are managed efficiently throughout their lifecycle. As
such, the Company appoints servicers best placed to service the
investment asset.
The Company may invest in Equity Assets that are aligned with
the Company strategy and that present opportunities to enhance the
Company's returns from its investments. The Company expects, that
most of its investments in Equity Assets will take the form of
minority interests in referral partners, in pursuit of its
investment policy. The Directors believe that an ancillary benefit
of these investments in Equity Assets will be to more closely align
the interests of the Company with those of its commercial partners,
and thereby improve the Company's underwriting and analysis
capabilities and visibility of trends and opportunities in the
specialist finance market.
As at 30 June 2018 the Company's share capital comprised
39,449,919 ordinary shares. These shares are listed and trade on
the London Stock Exchange's Specialist Fund Market.
2. Basis of accounting
The Company's financial statements are prepared in accordance
with International Accounting Standard 34 - Interim Financial
Reporting ("IAS 34"). They comprise standards and interpretations
approved by the International Accounting Standards Board ("IASB")
and International Financial Reporting Committee ("IFRC"),
interpretations issued by the International Accounting Standard
Committee ("IASC") that remain in effect, to the extent they have
been adopted by the European Union. The financial statements are
also in compliance with relevant provisions of the Companies Act
2006 as applicable to companies reporting under IAS 34. The results
for the half year ended 30 June 2018 constitute non-statutory
accounts within the meaning of Section 435 of the Companies Act
2006. The latest published accounts which have been delivered to
the Registrar of companies are for the year ended 31 December 2017;
the report of the Auditor thereon was unqualified and did not
contain a statement under Section 498(2) or (3) of the Companies
Act 2006. The comparative figures for the year ended 31 December
2017 have been extracted from those accounts.
The financial statements have been prepared on a going concern
basis under the historical cost convention, as modified by the
valuation of investments at fair value. The Directors consider that
the Company has adequate financial resources to enable it to
continue operations for a period no less than 12 months from the
reporting date. Accordingly, the Directors believe that it is
appropriate to adopt the going concern basis in preparing the
company's 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.
Except for new accounting policies introduced by IFRS 9 the
accounting policies have been applied consistently year on
year.
Changes to Accounting Policies
The Company has adopted IFRS 9 as issued by the IASB in July
2014 with a date of transition of 1 January 2018, which resulted in
changes in accounting policies. The Company did not early adopt any
of IFRS 9 in previous periods. IFRS 9 replaces IAS 39 and addresses
classification, measurement and derecognition of financial assets
and liabilities, the impairment of financial assets measured at
amortised cost or fair value through other comprehensive income and
general hedge accounting.
As permitted by the transitional provisions of IFRS 9, the
Company elected not to restate comparative figures. Any adjustments
to the carrying amounts of financial assets and liabilities at the
date of transition were recognised in the opening retained earnings
and other reserves of the current period.
Consequently, for notes disclosures, the consequential
amendments to IFRS 7 disclosures have also only been applied to the
current period. The comparative period notes disclosures repeat
those disclosures made in the prior year. The adoption of IFRS 9
has resulted in changes in the Company's accounting policies for
recognition, classification and measurement of financial assets and
impairment of financial assets. IFRS 9 also significantly amends
other standards dealing with financial instruments such as IFRS 7
'Financial Instruments: Disclosures'.
Set out below are disclosures relating to the impact of the
adoption of IFRS 9 on the Company. Further details of the specific
IFRS 9 accounting policies applied in the current period (as well
as the previous IAS 39 accounting policies applied in the
comparative period) are described in more detail on page 31.
(a) Classification and measurement of financial instruments
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.
The measurement category and the carrying amount of financial
assetsin accordance with IAS 39 and IFRS 9 at 1 January 2018 are
compared as follows:
IAS 39 IFRS 9
=============================================================== ==========================
Measurement Carrying Measurement Carrying
category amount category amount
GBP'000 GBP'000 GBP'000 GBP'000
=========================== ========================= ======== ================ ========
Financial Assets
Investments at Amortised cost
amortised cost (Loans and receivables) 335,252 Amortised cost 332,914
Investments at Amortised cost
amortised cost (Held-to-maturity) 10,314 Amortised cost 10,314
Investments held
at fair value through FVPL (Held for
profit or loss trading) 11,227 FVPL (Mandatory) 11,227
Fixed assets Amortised cost 342 Amortised cost 342
Amortised cost
Receivables (Loans and receivables) 3,477 Amortised cost 3,477
Amortised cost
Cash and cash equivalents (Loans and receivables) 5,730 Amortised cost 5,730
Total Assets 366,342 364,004
=========================== ========================= ======== ================ ========
There were no changes in measurement category driven by the
introduction of IFRS 9. All movements in carrying amount were due
to the changes to the expected credit loss model. There were no
changes to the classification and measurement of financial
liabilities.
(b) Reconciliation of statement of financial positional balances from IAS 39 to IFRS 9
The Company performed a detailed analysis of its business models
for managing financial assets and analysis of their cash flow
characteristics. Please refer to page 31 for more detailed
information regarding the new classification requirements under
IFRS 9.
The following table reconciles the carrying amounts of financial
assets, from their previous measurement category in accordance with
IAS 39 to their new measurement categories upon transition to IFRS
9 on 1 January 2018:
IAS39 carrying IFRS9 carrying
amount Reclassifications Remeasurements amount
GBP'000 GBP'000 GBP'000 GBP'000
========================= ============== ================= ============== ==============
Investments at amortised
cost
Opening balance under
IAS 39 355,309 - - 355,309
Reclassification - - - -
Remeasurement: ECL
allowance (9,743) - (2,338) (12,081)
Closing balance under
IFRS 9 - - 343,228
========================= ============== ================= ============== ==============
There were no changes to any other asset or liability captions
due to remeasurement or reclassification on initial adoption of
IFRS 9.
The total remeasurement loss of GBP2.3 million was recognised in
opening reserves at 1 January 2018. There were no changes due to
reclassification, and the whole re-measurement being a change
relating to the changes due to the new expected credit loss
model.
(c) Reconciliation of impairment allowance balance from IAS 39 to IFRS 9
The new requirements of IFRS 9 have been applied by adjusting
the Statement of Financial Position on 1 January 2018, the date of
initial application. The Company has taken advantage of the
exemption allowing it not to restate comparative information for
prior periods with respect to financial information.
The 'incurred loss model' under IAS 39 is replaced with a new
forward looking 'expected loss model' under IFRS 9. Impairment
provisions are driven by changes in credit risk of instruments,
with a provision for lifetime expected credit losses recognised
where the risk of default of an instrument has increased
significantly since initial recognition. Risk of default and
expected credit losses must incorporate forward-looking and
macroeconomic information.
The new expected credit loss 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 credit losses expected to
result from defaults occurring over the next 12 months.
-- 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 credit losses expected over
the remaining lifetime of the asset.
-- Stage 3 - When a financial asset is considered to be
credit-impaired, a loss allowance equal to full lifetime expected
credit losses 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.
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 Company's continued origination of new
assets.
The following table reconciles the prior period's closing
impairment allowance measured in accordance with the IAS 39
incurred loss model to the new ECL allowance measured in accordance
with the IFRS 9 expected loss model at 1 January 2018:
Loan loss Loan loss
allowance allowance
under IAS under
39 Remeasurement IFRS 9
GBP'000 GBP'000 GBP'000
========= ========== ============= ==========
Consumer 4,675 1,741 6,416
Property 5,068 597 5,665
SME - - -
Total 9,743 2,338 12,081
========= ========== ============= ==========
The driver behind the remeasurement is the implementation of
stage 1 estimate credit losses particularly in the Consumer
portfolio.
Accounting Policies
Foreign Currency
The financial statements are prepared in Pounds Sterling because
that is the currency of all of the transactions during the period,
so has been selected as the presentational currency.
The primary objective of the Company is to generate returns in
Pounds Sterling, its capital-raising currency. The liquidity of the
Company is managed on a day-to-day basis in Pounds Sterling as the
Company's performance is evaluated in that currency. Therefore, the
Directors consider Pounds Sterling as the currency that most
faithfully represents the economic effects of the underlying
transactions, events and conditions and is therefore the functional
currency.
During the period under review there were no transactions in
foreign currencies. Transactions involving foreign currencies would
be converted at the exchange rate ruling at the date of the
transaction. Foreign currency monetary assets and liabilities would
be translated into Pounds Sterling at the exchange rate ruling on
the period-end date. Foreign exchange differences arising on
translation would be recognised in the Statement of Comprehensive
Income.
Presentation of Statement of Comprehensive Income
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of
Comprehensive Income between items of a revenue and capital nature
has been presented alongside the Statement of Comprehensive
Income.
In respect of the analysis between revenue and capital items
presented within the Statement of Comprehensive Income, all
expenses and finance costs, which are accounted for on an accruals
basis, have been presented as revenue items except those items
listed below:
-- expenses are allocated to capital where a direct connection
with the maintenance or enhancement of the value of the investments
can be demonstrated; and
-- expenses which are incidental to the disposal of an
investment are deducted from the disposal proceeds of the
investment.
The following are presented as capital items:
-- gains and losses on the realisation of investments;
-- increases and decreases in the valuation of investments held at the 30 June 2018;
-- realised and unrealised gains and losses on transactions
undertaken to hedge an exposure of a capital nature;
-- realised and unrealised exchange differences of a capital nature; and
-- expenses, together with the related taxation effect,
allocated to capital in accordance with the above policies.
Income
Interest from loans are recognised in the Statement of
Comprehensive Income for all instruments measured at amortised cost
using the effective interest rate method ("EIRM").
The EIRM is a method of calculating the amortised cost of a
financial asset or financial liability and of allocating the
interest income or interest expense over the relevant period. The
effective interest rate ("EIR") is the rate that exactly discounts
estimated future cash flows through the expected life of the
financial instrument or, when appropriate, a shorter period to the
net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Company takes
into account all contractual terms of the financial instrument, for
example prepayment options, but does not consider future credit
losses. The calculation includes all fees paid or received between
parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts.
Fees and commissions which are not considered integral to the
EIRM and deposit interest income are recognised on an accruals
basis when the service has been provided or received.
Dividend income from investments is recognised when the
Company's right to receive payment has been established, normally
the ex-dividend date.
Expenses
All expenses are accounted for on the accruals basis. In respect
of the analysis between revenue and capital items presented within
the Statement of Comprehensive Income, all expenses have been
presented as revenue items except as follows:
-- Transaction costs which are incurred on the purchases or
sales of investments designated as fair value through profit or
loss are expensed to capital in the Statement of Comprehensive
Income.
-- Expenses are split and presented partly as capital items
where a connection with the maintenance or enhancement of the value
of the investments held can be demonstrated and, accordingly, the
management fee for the financial period has been allocated 98. per
cent to revenue and 2.0 per cent to capital (being the ratio of
Credit Assets to Equity Assets at the period-end), in order to
reflect the Directors' long term view of the nature of the expected
investment returns of the Company.
Finance costs
Finance costs are accrued on the effective interest rate basis.
Since these costs are considered to be an indirect cost of
maintaining the value of investments they are allocated in full to
revenue.
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax. The tax currently payable is based on the taxable
profit for the period. The taxable profit differs from profit
before tax as reported in the Statement of Comprehensive Income
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible. The Company's liability for current
tax is calculated using a blended rate as applicable throughout the
period.
In line with the recommendations of the SORP, the allocation
method used to calculate tax relief on expenses presented against
capital returns in the supplementary information in the Statement
of Comprehensive Income is the 'marginal basis'. Under this basis,
if taxable income is capable of being entirely offset by expenses
in the revenue column of the statement of Comprehensive Income,
then no tax relief is transferred to the capital return column.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit and is accounted for using the
Statement of Financial Position liability method. Deferred tax
liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled, or the asset is
realised. Deferred tax is charged or credited in the revenue return
column of the Statement of Comprehensive Income, except when it
relates to items charged or credited directly to equity, in which
case the deferred tax is also dealt with in equity.
Investment trusts which have approval under Part 24, Chapter 4
of the Corporation Tax Act 2010 are not liable for taxation on
capital gains. The Company has been approved as an Investment Trust
by HMRC.
Irrecoverable withholding tax is recognised on any overseas
dividends on an accruals basis using the applicable rate for the
country of origin.
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 allowance for expected credit losses (see
note 10).
Investments
All investments held by the Company have been designated at fair
value through profit or loss ("FVPL") but are also described in
these financial statements as investments held at fair value and
are valued in accordance with the International Private Equity and
Venture Capital Valuation Guidelines ("IPEVCV") effective 1 January
2016 as recommended by the British Private Equity and Venture
Capital Association.
Purchases and sales of unlisted investments are recognised when
the contract for acquisition or sale becomes unconditional.
Fixed assets
Fixed assets are shown at cost less accumulated depreciation.
Depreciation is calculated by the Company on a straight-line basis
by reference to the original cost, estimated useful life and
residual value. Cost includes the original purchase price of the
asset and the costs attributable to bringing the asset to its
working condition for its intended use. The period of estimated
useful life for this purpose is between one and three years.
Residual values are assumed to be nil.
Receivables
Receivables do not carry any interest and are short term in
nature. They are initially stated at their nominal value and
reduced by appropriate allowances for estimated irrecoverable
amounts (if any).
Cash and cash equivalents
Cash and cash equivalents (which are presented as a single class
of asset on the Statement of Financial Position) comprise cash at
bank and in hand and deposits with an original maturity of three
months or less. The carrying value of these assets approximates
their fair value.
Financial liabilities
Financial liabilities are classified according to the substance
of the contractual arrangements entered into.
Payables
Payables are non-interest bearing. They are initially stated at
their nominal value.
Interest bearing borrowings
Interest bearing borrowings are initially recognised at a
carrying value equivalent to the proceeds received net of issue
costs associated with the borrowings. After initial recognition,
interest bearing borrowings are subsequently measured at amortised
cost using the effective interest rate method.
Dividends
Interim dividends are recognised in the period in which they are
paid.
Associates
Associates are entities over which the Company has significant
influence, but does not control, generally accompanied by a
shareholding of between 20 per cent and 50 per cent of the voting
rights.
No associates are presented on the Statement of Financial
Position as the Company 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
Company has no interests in associates through which it carries on
its business.
The disclosures required by Section 409 of the Companies Act
2006 for associated undertakings are included in Note 18 to the
financial statements.
Classification and measurement
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.
From 1 January 2018 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. This is a principal-based approach and applies one
classification approach for all types of financial assets. For Debt
Instruments two criteria are used to determine how financial assets
should be classified and measured:
-- the entity's business model (i.e. how an entity manages its
financial assets in order to generate cash flows by collecting
contractual cash flows, selling financial assets or both); and
-- the contractual cash flow characteristics of the financial
asset (i.e. whether the contractual cash flows are solely payments
of principal and interest).
A 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.
Movements in the carrying amount are taken through the Other
Comprehensive Income ("OCI"), except for the recognition of
expected credit losses, interest revenue and foreign exchange gains
and losses on the investments at amortised cost which is recognised
in the Consolidated Statement of Comprehensive Income. When the
financial asset is derecognised, the cumulative gain or loss
previously recognised in OCI is reclassified from equity to the
Consolidated Statement of Comprehensive Income and recognised in
'Income'. Interest income from these financial assets in included
in 'Income' using the EIRM.
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 assess the objective of the business model in
which a financial asset is held at a portfolio level in order to
generate cash flows because this best reflects the way the business
is managed, and information is provided to the Investment Manager.
That is, whether the Company's objective is solely to collect the
contractual cash flows from the assets or is to collect both the
contractual cash flows and cash flows arising from the sale of
assets. If neither of these are applicable, then the financial
assets are classified as part of the other business model and
measured at FVTPL.
The information that 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;
-- Past experience on how the cash flows for these assets were collected;
-- How the performance of the portfolio is evaluated and reported to the Investment Manager;
-- The risks that affect the performance of the business model
(and the financial assets held within that business model) and how
those risks are managed; and
-- The frequency, volume and timing of sales in prior periods,
the reasons for such sales and expectations about future sales
activity. However, information about sales activity is not
considered in isolation, but as part of an overall assessment of
how the Investment Manager's stated objective for managing the
financial assets is achieved and how cashflows are realised.
Assessment whether contractual cash flows are solely payments of
principal and interest
For the purposes of this assessment, 'principal' is defined as
the fair value of the financial asset on initial recognition.
'Interest' is defined as consideration for the time value of money,
for the credit risk associated with the principal amount
outstanding during a particular period of time and for other basic
lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely
payments of principal and interest, the contractual terms of the
instrument 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.
Equity instruments
Equity instruments are instruments that meet the definition of
equity from the issuer's perspective; that is, instruments that do
not contain a contractual obligation to pay and that evidence a
residual interest in the issuer's net assets. Examples of equity
instruments include basic ordinary shares.
The Company subsequently measures all equity investments at
FVTPL Gains and losses on equity investments at FVTPL are included
in the 'Income' line in the Statement of Comprehensive Income.
Comparative periods - 2017
For comparative periods prior to 1 January 2018 financial assets
have been classified Under IAS 39. Under IAS 39 the Company 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 Company.
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 Company 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 Company has no AFS.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Company has transferred substantially all risks and rewards of
ownership. If substantially all the risks and rewards have been
neither retained nor transferred and the Company has retained
control, the assets continue to be recognised to the extent of the
Company's continuing involvement. Financial liabilities are
derecognised when they are extinguished.
Expected Credit loss allowance for financial assets measured at
amortised cost
The impairment charge in the income statement includes the
change in expected credit losses which are recognised for loans and
advances to customers, other financial assets held at amortised
cost and certain loan commitments.
At initial recognition, allowance is made for expected credit
losses resulting from default events that are possible within the
next 12 months (12-month expected credit losses). In the event of a
significant increase in credit risk, allowance (or provision) is
made for expected credit losses resulting from all possible default
events over the expected life of the financial instrument (lifetime
expected credit losses). Financial assets where 12-month expected
credit losses are recognised are considered to be Stage 1;
financial assets which are considered to have experienced a
significant increase in credit risk are in Stage 2; and financial
assets which have defaulted or are otherwise considered to be
credit impaired are allocated to Stage 3.
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"), taking into
account the value of any collateral held or other mitigants of loss
and including the impact of discounting using the effective
interest rate.
-- The PD represents the likelihood of a borrower defaulting on
its financial obligation, either over the next 12 months ("12M
PD"), or over the remaining lifetime ("Lifetime PD") of the
obligation.
-- EAD is based on the amounts the Company expects to be owed at
the time of default, over the next 12 months ("12M EAD") or over
the remaining lifetime ("Lifetime EAD"). For example, for a
revolving commitment, the Company includes the current drawn
balance plus any further amount that is expected to be drawn up to
the current contractual limit by the time of default, should it
occur.
-- LGD represents the Company's expectation of the extent of
loss on a defaulted exposure. LGD varies by type of counterparty,
type and seniority of claim and availability of collateral or other
credit support. LGD is expressed as a percentage loss per unit of
exposure at the time of default (EAD). LGD is calculated on a
12-month or lifetime basis, where 12-month LGD is the percentage of
loss expected to be made if the default occurs in the next 12
months and Lifetime LGD is the percentage of loss expected to be
made if the default occurs over the remaining expected lifetime of
the loan.
The ECL is determined by projecting the PD, LGD, and EAD for
each future month and for each individual exposure or collective
segment. These three components are multiplied together and
adjusted for the likelihood of survival (i.e. the exposure has not
prepaid or defaulted in an earlier month). This effectively
calculates an ECL for each future month, which is then discounted
back to the reporting date and summed. The discount rate used in
the ECL calculation is the original effective interest rate or an
approximation thereof.
The Lifetime PD is developed by applying a maturity profile to
the current 12M PD. The maturity profile looks at how defaults
develop on a portfolio from the point of initial recognition
throughout the lifetime of the loans. The maturity profile is based
on historical observed data and is assumed to be the same across
all assets within a portfolio and credit grade band. This is
supported by historical analysis.
The 12-month and lifetime EADs are determined based on the
expected payment profile, which varies by product type.
-- For amortising products and bullet repayment loans, this is
based on the contractual repayments owed by the borrower over a 12
month or lifetime basis. This will also be adjusted for any
expected overpayments made by a borrower. Early repayment/refinance
assumptions are also incorporated into the calculation.
-- For revolving products, the exposure at default is predicted
by taking current drawn balance and adding a "credit conversion
factor" which allows for the expected drawdown of the remaining
limit by the time of default. These assumptions vary by product
type and current limit utilisation band, based on analysis of the
Company's recent default data.
The 12-month and lifetime LGDs are determined based on the
factors which impact the recoveries made post default. These vary
by product type.
-- For secured products, this is primarily based on collateral
type and projected collateral values, historical discounts to
market/book values due to forced sales, time to repossession and
recovery costs observed.
-- For unsecured products, LGD's are typically set at product
level due to the limited differentiation in recoveries achieved
across different borrowers. These LGD's are influenced by
collection strategies, including contracted debt sales and
price.
The main difference between Stage 1 and Stage 2 is the
respective PD horizon. Stage 1 estimates 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.
Where the credit risk subsequently improves such that it no longer
represents a significant increase in credit risk since origination,
the asset is transferred back to Stage 1. Where the credit risk
subsequently improves such that it no longer represents a
significant increase in credit risk since origination, the asset is
transferred back to Stage 1.
In assessing whether a borrower has had a significant increase
in credit risk the following indicators will be considered:
-- Consumer
- Short-term forbearance
- Extension of terms granted
-- Wholesale/SME/Property
- Significant increase in credit spread
- Significant adverse changes in business, financial and/or
economic conditions in which the borrower operates
- Actual or expected forbearance or restructuring
- Actual or expected significant adverse change in operating results of the borrower
- Significant change in collateral value (secured facilities
only) which is expected to increase the risk of default
- Early signs of cashflow/liquidity problems such as delay in servicing of trade creditors
However, unless identified at an earlier stage, the credit risk
of financial assets is deemed to have increased significantly when
more than 30 days past due.
Movements between Stage 2 and Stage 3 are based on whether
financial assets are credit-impaired as at the reporting date. IFRS
9 contains a rebuttable presumption that default occurs no later
than when a payment is 90 days past due. The Company uses this
90-day backstop for all its. For UK second mortgages, the Company
has assumed a backstop of 180 days past due as mortgage exposures
more than 90 days past due, but less than 180 days, typically show
high cure rates and this aligns to the Company's risk management
practices. 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;
- Consumer
-- Long-term forbearance
-- Borrower deceased
-- Borrower insolvent
- Wholesale/SME/Property
-- Borrower in breach of financial covenants
-- Concessions have been made by the lender relating to the borrower's financial difficulty
-- Significant adverse changes in business, financial or
economic conditions on which the borrower operates
-- Long term forbearance or restructuring
-- Quantitative;
-- The remaining lifetime PD at the reporting date has
increased, compared to the residual lifetime PD expected at the
reporting date when the exposure was first recognised.
-- Based on data developed internally and obtained from external sources.
The criteria for determining whether credit risk has increased
significantly will vary by portfolio and will include a backstop
based on delinquency. IFRS 9 contains a rebuttable presumption that
default occurs no later than when a payment is 90 days past due.
The Company uses this 90-day backstop for all its.
The criteria above have been applied to all financial
instruments held by the Company and are consistent with the
definition of default used for internal credit risk management
purposes. The default definition has been applied consistently to
model the PD, EAD and LGD throughout the Company's expected loss
calculations.
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 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 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 Company uses two other scenarios to
ensure non-linearities are captured. The number of scenarios and
their attributes are reassessed at each reporting date. At 30 June
2018, all the portfolios of the Company use one positive, more
optimistic and two downside, more pessimistic outcomes. The
scenario weightings are determined by a combination of statistical
analysis and expert credit judgement, taking account of the range
of possible outcomes each chosen scenario is representative of.
The estimation and application of forward-looking information
requires significant judgement. PD, LGD and EAD inputs used to
estimate Stage 1 and Stage 2 credit loss allowances, are modelled
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 Company.
As with any economic forecasts, the projections and likelihoods
of occurrence are subject to a high degree of inherent uncertainty
and therefore the actual outcomes may be significantly different to
those projected. The Company considers these forecasts to represent
its best estimate of the possible outcomes and has analysed the
non-linearities and asymmetries within the Company's different
portfolios to establish that the chosen scenarios are appropriately
representative of the range of possible scenarios.
Other forward-looking considerations not otherwise incorporated
within the above scenarios, such as the impact of any regulatory,
legislative or political changes, have also been considered, but
are not deemed to have a material impact and therefore no
adjustment has been made to the ECL for such factors. This is
reviewed and monitored for appropriateness on a quarterly
basis.
Collateral and other credit enhancements
The Company employs a range of policies to mitigate credit risk.
The most common of these is accepting collateral for funds
advanced. The Company has internal policies of the acceptability of
specific classes of collateral or credit risk mitigation.
The Company prepares a valuation of the collateral obtained as
part of the loan origination process. This assessment is reviewed
periodically. The principal collateral types for loans and advances
are:
-- Mortgages over residential properties;
-- Margin agreement for derivatives, for which the Company has
also entered into master netting agreements;
-- Charges over business assets such as premises, inventory and accounts receivable; and
-- Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are
generally secured; revolving individual credit facilities are
generally unsecured.
Collateral held as security for financial assets other than
loans and advances depends on the nature of the instrument. Debt
securities, treasury and other eligible bills are generally
unsecured, with the exception of asset-backed securities and
similar instruments, which are secured by portfolios of financial
instruments. Derivatives are also collateralised.
The Company's policies regarding obtaining collateral have not
significantly changed during the reporting period and there has
been no significant change in the overall quality of the collateral
held by the Company since the prior period.
The Company closely monitors collateral held for financial
assets considered to be credit-impaired, as it becomes more likely
that the Company will take possession of collateral to mitigate
potential credit losses.
Modification of financial assets
The Company sometimes modifies the terms or loans provided to
customers due to commercial renegotiations, or for distressed
loans, with a view to maximising recovery.
Such restructuring activities include extended payment term
arrangements, payment holidays and payment forgiveness.
Restructuring policies and practice are based on indicators or
criteria which, in the judgement of management, indicate that
payment will most likely continue. These policies are kept under
continuous review. Restructuring is most commonly applied to term
loans.
The risk of default of such assets after modification is
assessed at the reporting date and compared with the risk under the
original terms at initial recognition, when the modification is not
substantial and so does not result in derecognition of the original
assets. The Company monitors the subsequent performance of modified
assets. The Company may determine that the credit risk has
significantly improved after restructuring, so that the assets are
moved from Stage 3 or Stage 2.
Modification of loans
The Company sometimes renegotiates or otherwise modifies the
contractual cash flows of loans to customers. When this happens,
the Company assesses whether or not the new terms are substantially
different to the original terms. The Company does this by
considering, among others, the following factors:
-- If the borrower is in financial difficulty, whether the
modification merely reduces the contractual cash flows to amounts
the borrower is expected to be able to pay;
-- Whether any substantial new terms are introduced, such as a
profit share/equity-based return that substantially affects the
risk profile of the loan;
-- Significant extension of the loan term when the borrower is not in financial difficulty;
-- Significant change in the interest rate;
-- Change in the currency the loan is denominated in; and
-- Insertion of collateral, other security or credit
enhancements that significantly affect the credit risk associated
with the loan.
If the terms are substantially different, the Company
derecognises the original financial asset and recognises a 'New'
asset at fair value and recalculates a new effective interest rate
for the asset. The date of renegotiation is consequently considered
to be the date of initial recognition for impairment calculation
purposes, including for the purpose of determining whether a
significant increase in credit risk has occurred. However, the
Company also assesses whether the new financial asset recognised is
deemed to be credit-impaired at initial recognition, especially in
circumstances where the renegotiation was driven by the debtor
being unable to make the originally agreed payments. Differences in
the carrying amounts are also recognised in the Consolidated
Statement of Comprehensive Income as a gain or loss on
derecognition.
If the terms are not substantially different, the renegotiation
or modification does not result in derecognition, and the Company
recalculates the gross carrying amount based on the revised cash
flows of the financial asset and recognises a modification gain or
loss in the Consolidated Statement of Comprehensive Income. The new
gross carrying amount is recalculated by discounting the modified
cash flows at the original effective interest rate (or
credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets).
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when
the contractual rights to receive the cash flows from the assets
have expired, or when they have been transferred and either (i) the
Company transfers substantially all the risks and rewards of
ownership, or (ii) the Company neither transfers nor retains
substantially all the risks and rewards of ownership and the
Company has not retained control.
The Company enters into transactions where it retains the
contractual rights to receive cash flows from assets but assumes a
contractual obligation to pay those cash flows to other entities
and transfers substantially all of the risks and rewards. These
transactions are accounted for as 'pass through' transfers that
result in derecognition if the Company:
-- Has no obligation to make payments unless it collects equivalent amounts from the assets;
-- Is prohibited from selling or pledging the assets; and
-- Has an obligation to remit any cash it collects from the assets without material delay.
Collateral (shares and bonds) furnished by the Company under
standard repurchased agreements and securities lending and
borrowing transactions are not derecognised because the Company
retains substantially all the risks and rewards on the basis of the
predetermined repurchase price, and the criteria for derecognition
are therefore not met. This also applies to certain securitisation
transactions in which the Company retains a subordinated residual
interest.
Financial liabilities
Classification and subsequent measurement
In both the current period and prior year, financial liabilities
are classified as subsequently measured at amortised cost, except
for:
-- Financial liabilities at fair value through profit or loss:
this classification is applied to derivatives, financial
liabilities held for trading (e.g. short positions in the trading
booking) and other financial liabilities designated as such at
initial recognition. Gains or losses on financial liabilities
designated at fair value through profit or loss are presented
partially in other comprehensive income (the amount of change in
the fair value of the financial liability that is attributable to
changes in the credit risk of that liability, which is determined
as the amount that is not attributable to change in market
conditions that give rise to market risk) and partially profit or
loss (the remaining amount of change in the fair value of the
liability). This is unless such a presentation would create, or
enlarge, an accounting mismatch, in which case the gains and losses
attributable to changes in the credit risk of the liability are
also presented in the Consolidated Statement of Comprehensive
Income;
-- Financial liabilities arising from the transfer of financial
assets which did not qualify for derecognition, whereby a financial
liability is recognised for the consideration received for the
transfer. In subsequent periods, the Company recognises any expense
incurred on the financial liability; and
-- Financial guarantee contracts and loan commitments
Derecognition
Financial liabilities are derecognised when they are
extinguished (i.e. when the obligation specified in the contract is
discharged, cancelled or expires).
Different terms, as well as substantial modifications of the
terms of existing financial liabilities, are accounted for as an
extinguishment of the original financial liability and the
recognition of a new financial liability. The terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective interest rate,
is at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability. In
addition, other qualitative factors, such as the currency that the
instrument is denominated in, changes in the type of interest rate,
new conversion features attached to the instrument and change in
covenants are also taken into consideration. If an exchange of debt
instruments or modification of terms is accounted for as an
extinguishment, any costs or fees incurred are recognised as part
of the gain or loss on the extinguishment. If the exchange or
modification is not accounted for as an extinguishment, any costs
or fees incurred adjust the carrying amount of the liability and
are amortised over the remaining term of the modified
liability.
Comparative periods - 2017
The allowance for impairment losses on loans and receivables is
the Company's best estimate of losses incurred in the portfolio at
the reporting date. In determining the required level of impairment
provisions, the Company uses the outputs from the analysis of
historical data. Judgement is required to assess the robustness of
the outputs from this analysis and, where necessary, make
appropriate adjustments. Impairment allowances are made up of two
components, those determined collectively ("Collective Impairment")
and those determined individually ("Individual Impairment"). Both
components are applied to Consumer Loans, whilst only individual
impairment provisions are calculated for Wholesale loans.
Collective Impairment
Collective Impairment allowances are applied to Consumer Loans
with their smaller balances and homogenous product. This impairment
provision is established where it is believed that a loan is
impaired, but this is not evidenced by way of a default on
contractual terms. Analysis takes into account factors such as the
type of asset, collateral type, past due status and other relevant
factors. These characteristics are relevant to the estimation of
future cash flows for groups of such assets as they are indicative
of the borrower's ability to pay all amounts due according to the
contractual terms of the assets being evaluated. Generally, the
impairment trigger used within the impairment calculation for a
loan, or group of loans, is when they reach a pre-defined level of
delinquency or where the customer is bankrupt. Loans where the
Company provides arrangements that forgive a portion of interest or
principal are also deemed to be impaired.
In addition, the collective provision also includes provision
for inherent losses, that is losses that have been incurred but
have not been separately identified at the reporting date. The
loans that are not currently recognised as impaired are grouped
into homogenous portfolios by product type. An assessment is made
of the likelihood of assets being impaired at the balance sheet
date and being identified subsequently; the length of time taken to
identify that an impairment event has occurred is known as the loss
emergence period. The loss emergence period is determined by the
Investment Manager for each portfolio which are dependent upon the
characteristics of the portfolio. Loss emergence periods are
reviewed regularly and updated when appropriate. In general, the
period used is 3 months based on historical experience. This
provision is sensitive to changes in the loss emergence period.
Management use a significant level of judgement when determining
the collective unidentified impairment provision, including the
assessment of the level of overall risk existing within particular
sectors and the impact of the low interest rate environment on loss
emergence periods.
The collective impairment allowance is also subject to
estimation uncertainty and in particular is sensitive to changes in
economic and credit conditions, including the interdependency of
house prices, unemployment rates, interest rates, borrowers'
behaviour, and consumer bankruptcy trends. It is, however,
inherently difficult to estimate how changes in one or more of
these factors might impact the collective impairment allowance.
Individual Impairment
Individual Impairment provisions are considered against the
assets based on pools of assets of a similar nature.
Consumer - The Company calculates specific impairment provisions
based on the Probability of Default ("PD") multiplied by the
Exposure at Default ("EAD") multiplied by the Loss Given Default
("LGD"):
-- The PD is based on the probability, dependent on stage of
arrears, that the loan will not recover to perform in line with
contractual payment terms; the assessment of the PD uses historical
experience of cohorts of similar products. Future cash flows are
estimated on the basis of the contractual cash flows of the assets
in the cohort and historical loss experience for similar assets.
The methodology and assumptions used for estimating future cash
flows are reviewed regularly by the Investment Manager to reduce
any differences between loss estimates and actual loss
experience.
-- 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.
-- 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.
Wholesale - Wholesale assets are reviewed on a regular basis and
those showing potential or actual vulnerability are placed on a
watch list where greater monitoring is undertaken by the Investment
Manager and any adverse or potentially adverse impact on ability to
repay is used in assessing whether an asset should receive more
detailed scrutiny and support.
Specific examples of trigger events that could lead to the
initial recognition of impairment allowances against lending to
wholesale borrowers (or the recognition of additional impairment
allowances) include (i) trading losses, loss of business or major
customer of a borrower; (ii) material breaches of the terms and
conditions of a loan facility, including non-payment of interest or
principal, or a fall in the value of security such that it is no
longer considered adequate; (iii) disappearance of an active market
because of financial difficulties; or (iv) restructuring a facility
with preferential terms to aid recovery of the lending (such as a
debt for equity swap). For such individually identified financial
assets, a review is undertaken of the expected future cash flows
which requires significant management judgement as to the amount
and timing of such cash flows. Where the debt is secured, the
assessment reflects the expected cash flows from the realisation of
the security, net of costs to realise, whether or not foreclosure
or realisation of the collateral is probable. The determination of
individual impairment allowances requires the exercise of
considerable judgement by management involving matters such as
local economic conditions and the resulting trading performance of
the customer, and the value of the security held, for which there
may not be a readily accessible market. The actual amount of the
future cash flows and their timing may differ significantly from
the assumptions made for the purposes of determining the impairment
allowances and consequently these allowances can be subject to
variation as time progresses and the circumstances of the customer
become clearer.
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 15 Revenue from Contracts with Customers
The Directors do not anticipate that the adoption of this
standard and interpretations will have a material impact on the
financial statements in the period of initial application, given
the nature of the Company'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.
3. 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,
expected credit losses and investments at fair value through profit
or loss. These are detailed below below.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
Expected Credit loss allowance for financial assets measured at
amortised cost
The calculation of the Company's ECL allowances and provisions
against loan commitments and guarantees under IFRS 9 is highly
complex and involves the use of significant judgement and
estimation. This includes the formulation and incorporation of
multiple forward-looking economic conditions into ECL to meet the
measurement objective of IFRS 9. The most significant are set out
below.
Definition of default - The PD of an exposure, both over a
12-month period and over its lifetime, is a key input to the
measurement of the ECL allowance. Default has occurred when there
is evidence that the customer is experiencing significant financial
difficulty which is likely to affect the ability to repay amounts
due.
The definition of default adopted by the Company is described in
expected credit loss allowance for financial assets measured at
amortised cost above.
.
As noted on page 35, the Company has rebutted the presumption in
IFRS 9 that default occurs no later than when a payment is 90 days
past due. The impact on the Company's ECL allowance of assuming a
backstop of 180 days past due for Real estate is not material.
The lifetime of an exposure - To derive the PDs necessary to
calculate the ECL allowance it is necessary to estimate the
expected life of each financial instrument. A range of approaches
has been adopted across different product groupings including the
full contractual life and taking into account behavioural factors
such as early repayments and refinancing. The Company has defined
the lifetime for each product by analysing the time taken for all
losses to be observed and for a material proportion of the assets
to fully resolve through either closure or write-off.
Significant increase in credit risk ("SICR") - Performing assets
are classified as either Stage 1 or Stage 2. An ECL allowance
equivalent to 12 months expected losses is established against
assets in Stage 1; assets classified as Stage 2 carry an ECL
allowance equivalent to lifetime expected losses. Assets are
transferred from Stage 1 to Stage 2 when there has been an SICR
since initial recognition. As described in xxx above, the Company
uses a quantitative test together with qualitative indicators and a
backstop of 30 days past due for determining whether there has been
a SICR. The setting of precise trigger points combined with risk
indicators requires judgement. The use of different trigger points
may have a material impact upon the size of the ECL allowance.
Forward looking information - The measurement of expected credit
losses is required to reflect an unbiased probability-weighted
range of possible future outcomes.
In order to do this the Company uses a model to project a number
of key variables to generate future economic scenarios. These are
ranked according to severity of loss and three economic scenarios
have been selected to represent an unbiased and full loss
distribution. They represent a 'most likely outcome' (the Base case
scenario) and two, less likely, 'outer' scenarios, referred to as
the 'Upside' and 'Downside' scenarios. These scenarios are used to
produce a weighted average PD for each product grouping which is
used to determine stage allocation and calculate the related ECL
allowance. This weighting scheme is deemed appropriate for the
computation of unbiased ECL. Key scenario assumptions are set using
the average of forecasts from external economists, helping to
ensure the IFRS 9 scenarios are unbiased and maximise the use of
independent information. Using externally available forecast
distributions helps ensure independence in scenario construction.
While key economic variables are set with reference to external
distributional forecasts, we also align the overall narrative of
the scenarios to the macroeconomic risks faced by the Company.
The choice of alternative scenarios and probability weighting is
a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and
material non-linearity are captured. Paths for the two outer
scenarios are benchmarked to the Base scenario and reflect the
economic risk assessment. Scenario probabilities reflect management
judgement and are informed by data analysis of past recessions,
transitions in and out of recession, and the current economic
outlook. The key assumptions made, and the accompanying paths,
represent our 'best estimate' of a scenario at a specified
probability. Suitable narratives are developed for the Central
scenario and the paths of the two outer scenarios. Using three
scenarios, will be insufficient in certain economic environments.
Additional analysis may be requested at management's discretion,
including the production of extra scenarios. We anticipate there
will be only limited instances when the standard approach will not
apply.
The Base case, Upside and Downside scenarios are generated at 1
January annually and are only updated during the year if economic
conditions change significantly.
Effective Interest Rate Model
Within the EIRM there are several areas of judgement that need
to be applied which impact the rate at which interest, fees and
expenses are recognised. These areas of judgement are required to
be updated on a periodic basis to ensure that they accurately
reflect management's best estimate of future cash flows. Key areas
of judgement within the policy include:
-- Estimated cash flow excluding expected losses
-- Incurred losses at acquisition
-- Fees and expenses
Equity Investments
The unquoted equity assets are valued on a 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 of the Investment Manager with
the final valuations being reviewed by the Investment Manager's
Valuation Committee. Given the recent nature of the equity
investments currently held, the valuations have been completed
using the transaction prices. In future years the specific
techniques used will typically include earnings multiples,
discounted cash flow analysis, the value of recent transactions,
and, where appropriate, industry rules of thumb. The valuations
will often reflect a synthesis of a number of different approaches
in determining the final fair value estimate. The individual
approach for each investment will vary depending on relevant
factors that a market participant would take into account in
pricing the asset. These might include the specific industry
dynamics, the Investee's stage of development, profitability,
growth prospects or risk as well as the rights associated with the
particular security.
Shareholders should note that increases or decreases in any of
the inputs in isolation may result in higher or lower fair value
measurements. Changes in fair value of all investments held at fair
value are recognised in the 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.
4. Segmental Reporting
The Board and Investment Manager consider investment activity in
Credit Assets and selected Equity Assets as the single operating
segment of the Company, being the sole purpose for its existence.
No other activities are performed.
Whilst visibility over originations, portfolios, wholesale
lending and equity assets is afforded at an operational level, all
are considered 'routes to market' for acquiring interests in credit
assets, and thus act merely as indicators of the key drivers of
financial performance and position of the Company.
The four routes to market are not determinants of resource
allocations, rather each investment opportunity is considered on
its own merits. Additionally, there are no segment managers
directly accountable for the individual routes to market.
The Directors are of the opinion that the Company is engaged in
a single segment of business and operations of the Company are
wholly in the United Kingdom.
5. Income
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
================= ================= ================= ===============
Investment
income
Interest
income 21,774 13,079 31,138
Commitment
fee income 286 101 296
Arrangement
fee income 414 108 337
Total investment
income 22,474 13,288 31,771
Other income
Deposit
interest 1 2 2
Total investment
income 22,475 13,290 31,773
================= ================= ================= ===============
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
=============== ================= ================= ===============
Loss on
investment
Loss on
Investment
in unlisted
equities (750) - -
Total loss
on investment (750) - -
=============== ================= ================= ===============
6. Management and
Performance Fee
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.
Management Fee
The management fee is calculated and payable monthly in arrears
at a rate equal to 1/12 of 1.0 per cent. per month of Gross Asset
Value (the "Management Fee"). The aggregate fee payable on this
basis must not exceed 1.0 per cent of the gross assets of the
Company and its group in any year.
In respect of any issue of Ordinary Shares or C Shares, until
the date on which 80 per cent of the net proceeds of such issue
have been invested or committed to be invested in Credit Assets or
Equity Assets, the Net Asset Value attributable to such Ordinary
Shares or C Shares shall, for the purposes of the Management Fee,
exclude any portion of the issue proceeds in cash, or invested in
cash deposits or cash equivalent investments. Where there are C
Shares in issue, the Management Fee will be calculated separately
on the gross assets attributable to the Ordinary Shares and the C
Shares.
For so long as the Origination Partner is part of the same group
as the Investment Manager, the amount of all fees payable by the
Company to the Origination Partner shall be deducted from the
Management Fee.
Performance Fee
The Investment Manager is also entitled to a performance fee,
which is calculated in respect of each twelve-month period starting
on 1 January and ending on 31 December in each calendar year
("Calculation Period"), and the nal Calculation Period shall end on
the day on which the management agreement is terminated or, if
earlier, the business day immediately preceding the day on which
the Company goes into liquidation.
The performance fee will only be payable if the Adjusted Net
Asset Value at the end of a Calculation Period exceeds a hurdle
threshold, equal to the Adjusted Net Asset Value immediately
following admission to trading on the London Stock Exchange,
compounded at a rate equal to 5 per cent per annum (the
"Hurdle").
If, on the last day of a Calculation Period (each a "Calculation
Date"), the Adjusted Net Asset Value exceeds the Hurdle, the
Investment Manager shall be entitled to a performance fee equal to
the lower of:
a) the amount by which the Adjusted Net Asset Value exceeds the
Hurdle, in each case as at the Calculation Date; and
b) 10 per cent of the amount by which total growth in Adjusted
Net Asset Value since first admission (being the aggregate of the
growth in Adjusted Net Asset Value in the relevant Calculation
Period and in each previous Calculation Period), after adding back
any performance fees paid to the Investment Manager, exceeds the
aggregate of all performance fees payable to the Investment Manager
in respect of all previous Calculation Periods.
'Adjusted Net Asset Value' means the Net Asset Value after: (i)
excluding any increases or decreases in net asset value
attributable to the issue or repurchase of any ordinary shares;
(ii) adding back the aggregate amount of any dividends paid or
distributions made in respect of any ordinary shares; (iii)
excluding the aggregate amount of any dividends or distributions
accrued but unpaid in respect of any ordinary shares; and (iv)
excluding the amount of any performance fees accrued but unpaid, in
each case without double counting.
In the event that C Shares are in issue, the Investment Manager
shall be entitled to a performance fee in respect of the net assets
referable to the C Shares on the same basis as summarised above,
except that a Calculation Period shall be deemed to end on the date
of the conversion of the relevant tranche of C Shares into Ordinary
Shares.
Fee payable to Origination Partner
The Origination Partner is entitled to be paid a fee calculated
on the purchase price for each Credit Asset acquired by the Company
from the Origination Partner. For so long as the Origination
Partner is part of the same group as the Investment Manager, the
amount of all fees payable by the Company to the Origination
Partner shall be deducted from the Management Fee payable to the
Investment Manager.
The Company reimburses the Origination Partner for the fees of
Referral Partners, and Servicers (to the extent paid by the
Origination Partner) in connection with Credit Assets in which the
Company acquires an interest. The amount of such fees are agreed
between the Origination Partner and the relevant counterparties on
arm's length commercial terms, taking account of the strength of
the relationship between the Origination Partner, the Investment
Manager and each relevant counterparty. There was GBPnil payable to
the Origination Partner at 30 June 2018 (June 2017: GBPnil).
7. Other Expenses
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
================ ================= ================= ===============
Directors'
fees 68 54 118
Administrator's
fees 96 62 146
Auditors'
remuneration 40 41 110
Amortisation 138 111 240
Other expenses 263 147 432
Total other
expenses 605 415 1,046
================ ================= ================= ===============
All expenses are inclusive of VAT where applicable. Directors'
fees above include GBP60,500 (June 2017: GBP47,750) paid to
Directors' and GBP7,735 (June 2017: GBP5,921) of employment taxes
and valid business expenses.
During the period, the auditor provided reporting accountant
services in relation to the issuance of ordinary shares in April
2018. These non-audit fees amounted to GBP3,966 (June 2017:
GBP65,898 in relation to May 2017 equity raise). These costs have
been deducted from the proceeds from the issuance of ordinary
shares in line with IAS 32.
Company Secretary
During 2018 Link Company Matters Limited (the "Company
Secretary") replaced Apex Fund Services (UK) Ltd as the company
secretary of the Company. Under the terms of the agreement, the
annual fee for the provisions of the Company Secretary's services
will be GBP52,500 (with VAT thereon).
Administrator
Apex Fund Services (UK) Ltd (the 'Administrator'), a company
authorised and regulated by the FCA, has been appointed as the
administrator of the Company. The Administrator provides the
day-to-day administration of the Company. The Administrator is also
responsible for the Company's general administrative functions,
such as the calculation of the Net Asset Value and maintenance of
the Company's accounting records and ensures that the Company
complies with its continuing obligations as an investment
trust.
Under the terms of the administration agreement, the
Administrator charges a fee for its fund administration services
equal to the greater of: (i) GBP5,150 per month (increased by 3 per
cent on 1 January in each year); and (ii) an amount equal to the
sum of 1/12 of 0.06 per cent of the portion of Net Asset Value up
to GBP150 million, and 1/12 of 0.05 per cent of the excess of Net
Asset Value above GBP150 million. The Administrator is also
entitled to reimbursement of all reasonable out of pocket expenses
incurred by it in connection with the performance of its duties.
The administration agreement can be terminated by either party by
providing 90 days' written notice.
The Administrator invoices the Company monthly in arrears in
respect of the periodic fee (together, if applicable, with any VAT
thereon), which is payable by the Company within 30 days of the
relevant invoice.
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 is payable by the Company within 30 days of the
relevant invoice.
The Depositary is entitled to charge an additional fee where the
Company undergoes a lifecycle event (e.g. a reorganisation or a
distribution) which entails additional work for the Depositary.
Such a fee is agreed with the Company on a case by case basis.
All charges may be subject to change from time to time, with the
agreement of the Depositary and the Company. All charges are
exclusive of VAT, if applicable.
The Depositary is entitled to be reimbursed for certain expenses
properly incurred in performing or arranging for the performance of
functions conferred upon it under the agreement.
The Company may terminate the depositary services agreement for
convenience on nine months' written notice. If the Depositary
wishes to retire and stop providing the services under the
agreement, it must give the Company not less than nine months'
written notice of its wish to do so. To the extent that the Company
is required to have a depositary under applicable law, the
Depositary may not retire until a successor is appointed. The
depositary agreement may be terminated immediately by either the
Company or the Depositary on the occurrence of certain events,
including: (i) if the other party has committed a material and
continuing breach of the terms of the agreement; or (ii) in the
case of the other's insolvency.
Corporate broker and financial adviser
Liberum Capital Limited ("Liberum"), a company authorised and
regulated in the United Kingdom by the FCA, has been appointed as
the Company's corporate broker and financial adviser. Liberum is
entitled to a retainer fee of GBP1 per annum (exclusive of VAT and
out of pocket expenses). Liberum was also appointed as the placing
agent for the Company's initial public offering and subsequent
share issues, and under the terms of the placing agreement was
entitled to placing commission equal to 1 per cent of gross
proceeds (exclusive of VAT and out of pocket expenses). The broker
agreement between Liberum and the Company can be terminated by
either party providing three months' written notice.
8. Ordinary Dividends
The following table summarises the interim dividends payable to
equity shareholders:
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
================= ================= ================= ===============
23.50p Interim
dividend
for the period
to 31 December
2016 (paid
on 28 March
2017) - 4,683 4,683
24.50p Interim
dividend
for the period
to 31 March
2017 (paid
on 16 June
2017) - 4,882 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
20.00p Interim
dividend
for the period
to 31 December
2017 (paid
29 March
2018) 5,985 - -
20.00p Interim
dividend
for the period
to 31 March
2018 (paid
30 April
2018) 5,985 - -
Total dividend
paid in period 11,970 9,565 21,535
================= ================= ================= ===============
20.00p Interim
dividend
for the period
to 30 June
2017 (declared
31 Aug 2017) - 5,985 -
20.00p Interim
dividend
for the period
to 31 December
2017 (paid
29 March
2018) - - 5,985
================= ================= ================= ===============
Total dividend 11,970 15,550 22,837
================= ================= ================= ===============
9. Earnings per Share
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
=============== ================== ================== ================
Revenue
pence 40.0p 41.4p 81.5p
Capital
pence (2.4)p (0.2)p (0.3)p
Earnings
per ordinary
share 37.6p 41.2p 81.2p
=============== ================== ================== ================
The calculation at 30 June 2018 is based on revenue returns of
GBP13.364 million, capital returns of GBP(0.792) million and total
returns of GBP12.572 million and a weighted average number of
ordinary shares of 33,398,880.
The calculation at 30 June 2017 is based on revenue returns of
GBP8.953 million, capital returns of GBP(0.041) million and total
returns of GBP8.912 million and a weighted average number of
ordinary shares of 21,638,817.
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.
10. Investments at amortised cost
(a) Investments at amortised cost
The disclosure below presents the gross carrying amount of
financial instruments to which the impairment requirements in IFRS
9 are applied and the associated allowance for ECL. Under the
expected credit loss model introduced by IFRS 9 the incurred loss
model under IAS 39 is replaced. Due to the forward-looking nature
of IFRS 9, the scope of financial instruments on which ECL are
recognised is greater than the scope of IAS 39.
The following table analyse loans by industry sector and
represent the concentration of exposures on which credit risk is
managed. Please see note 23 for more detail on the allowance for
ECL.
30 June 2018 1 January 2018
============== ======================================= =======================================
Gross Carrying Allowance Net Carrying Gross Carrying Allowance Net Carrying
Amount for ECL Amount Amount for ECL Amount
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============== ============== ========= ============ ============== ========= ============
Investments
at amortised
cost
Consumer 294,270 (8,225) 233,645 233,644 (6,416) 227,228
Property 158,548 (7,747) 150,801 106,926 (5,665) 101,261
SME 38,512 (34) 14,738 14,739 - 14,739
Total Assets 491,330 (16,006) 475,324 355,309 (12,081) 343,228
============== ============== ========= ============ ============== ========= ============
Selected 2017 Investments at amortised cost disclosures
The disclosures below were included in our 2017 external reports
and do not reflect the adoption of IFRS 9. As these tables are not
directly comparable to the current 2018 investments at amortised
cost tables, which are disclosed on an IFRS 9 basis, these 2017
disclosures have been shown below and not adjacent to 2018
tables.
30 Jun 2017 31 Dec
(Unaudited) 2017 (Audited)
GBP'000 GBP'000
=================== ============= ================
Held-to-maturity
bond investments - 10,314
Amortised
cost before
impairment 300,087 344,995
Cumulative
Impairment
Provision (7,652) (9,743)
=================== ============= ================
Carrying Value 292,435 345,566
=================== ============= ================
Cumulative impairment includes incurred losses already present
on the loan portfolios acquired at a discount to face value in
secondary transactions which are brought onto the Statement of
Financial Position at an amount that includes impairment losses up
to the date of their acquisition. Impairment included in the
Statement of Financial Position for the period is reported in
impairment of loans in the Statement of Comprehensive Income.
31 Dec 2017
30 Jun 2017 (Unaudited) (Audited)
GBP'000 GBP'000
============================= ======================== ============
Loans with no payments past
due) 1,252 1,374
Loans up to 1 payment past
due 71 96
Loans 1-2 payments past due 291 279
Loans 2-3 payments past due 228 351
Loans 3-4 payments past due 396 603
Loans more than 4 payments
past due 5,414 7,040
Cumulative impairment 7,652 9,743
============================= ======================== ============
(b) Expected Credit Loss allowance for IFRS 9
Under Expected credit loss model introduced by IFRS 9 the
incurred loss model under IAS 39 is replaced. 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.
Consumer Property SME Total
GBP'000 GBP'000 GBP'000 GBP'000
==================== ========= ========= ========= =========
At 1 January
2018 3,589 6,154 - 9,743
Changes on initial
application of
IFRS 9 1,785 553 - 2,338
Revised opening
balance 1 January
2018 5,374 6,707 - 12,081
Charge for the
period - Stage
1 568 (69) 34 533
Charge for the
period - Stage
2 182 260 - 442
Charge for the
period - Stage
3 1,181 621 - 1,802
Total charge
for expected
credit losses 1,931 812 34 2,777
Acquired losses
on acquisition - 1,270 - 1,270
Amounts written
off during the
period (122) - - (122)
Amounts recovered - - - -
during the period
Carrying Value 7,183 8,789 34 16,006
==================== ========= ========= ========= =========
Measurement uncertainty and sensitivity analysis of ECL
The recognition and measurement of expected credit losses
('ECL') is highly complex and involves the use of significant
judgement and estimation. This includes the formulation and
incorporation of multiple forward-looking economic conditions into
ECL to meet the measurement objective of IFRS 9.The ECL recognised
in the financial statements reflect the effect on expected credit
losses of a range of possible outcomes, calculated on a
probability-weighted basis, based on the economic scenarios
described above, including management overlays where required. The
probability-weighted amount is typically a higher number than would
result from using only the Base (most likely) economic scenario.
Expected losses typically have a non-linear relationship to the
many factors which influence credit losses, such that more
favourable macroeconomic factors do not reduce defaults as much as
less favourable macroeconomic factors increase defaults. or most
portfolios, the Company has adopted the use of three economic
scenarios, representative of our view of forecast economic
conditions, sufficient to calculate unbiased ECL. They represent a
'most likely outcome' (the Base scenario) and two, less likely,
'outer' scenarios, referred to as the 'Upside' and 'Downside'
scenarios. The Company has developed a shortlist of the upside and
downside economic and political risks most relevant to the Company
and the IFRS 9 measurement objective. These include economic and
political risks which together affect economies that materially
matter to the Company.
For stage 3 impaired loans, LGD estimates take into account
independent recovery valuations provided by external consultants
where available, or internal forecasts corresponding to anticipated
economic conditions.
Selected 2017 Accumulated allowance for impairment losses on
loans and receivables disclosures
The disclosures below were included in our 2017 external reports
and do not reflect the adoption of IFRS 9. As these tables are not
directly comparable to the current 2018 credit risk tables, which
are disclosed on an IFRS 9 basis, these 2017 disclosures have been
shown below and not adjacent to 2018 tables.
Under IAS 39 the Company segmented its assets into 2 categories
when considering impairment provisions; Consumer and Wholesale.
Impairment provisions were subject to periodic review conducted by
the Investment Manager's Valuation Committee, with the underlying
assumptions monitored on an on-going basis and revised accordingly
based on actual loss experience of the business.
There was no impairment of Wholesale assets at the 30 June 2017
or 31 December 2017.
The following impairment amounts have been recorded in the
Statement of Financial Position relating to investments at
amortised cost during the period from 1 January 2017 to 30 June
2017:
Total
GBP'000
============================ =========
At 1 January 2017 6,187
Incurred Losses (Portfolio
Acquisition) 282
Charge for the period 1,183
Amounts written off during -
the period
Amounts recovered during -
the period
Cumulative impairment 30
June 2017 7,652
============================ =========
The table below sets out the movement of the impairment
provision from 1 January 2017 to 31 December 2017.
Total
GBP'000
============================ =========
At 1 January 2017 6,187
Incurred Losses (Portfolio
Acquisition) 773
Charge for the period 2,783
Amounts written off during -
the period
Amounts recovered during -
the period
Cumulative impairment 31
Dec 2017 9,743
============================ =========
Write-offs take place where it is deemed the balance is
irrecoverable or it is no longer considered economically viable to
try and recover the asset or final settlement is reached and the
shortfall written off. In the event of write off, the customer
balance and any related impairment balance are removed from the
balance sheet. Before any balance is written off an extensive set
of collections processes will have been completed, or the status of
the account reaches a point where policy dictates that forbearance
is no longer appropriate.
11. Investments at Fair Value Through Profit or Loss
(a) Movements in the period
30 Jun 2018
GBP'000
================================ ============
Opening cost at 1 January
2018 11,227
Opening fair value 11,227
Purchases at cost 1,000
Disposal at cost (3,497)
Net change in realised
(losses)/gains (750)
Closing fair value
at 30 June 2018 7,980
Comprising:
Closing cost as at
30 June 2018 7,980
Closing fair value
as at 30 June 2018
(Unaudited) 7,980
================================ ============
30 Jun 2017
GBP'000
================================ ============
Opening cost at 1 January
2017 4,730
Opening fair value 4,730
Purchases at cost 3,000
Closing fair value
at 30 June 2017 7,730
Comprising:
Closing cost as at
30 June 2017 7,730
Closing fair value
as at 30 June 2017
(Unaudited) 7,730
================================ ============
31 Dec
2017
GBP'000
================================ ============
Opening cost at 1 January
2017 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 (Audited) 11,227
================================ ============
(b) Fair value of financial instruments
IFRS 13 requires the Company to classify its financial
instruments held at fair value using a hierarchy that reflects the
significance of the inputs used in the valuation methodologies.
These are as follows:
-- Level 1 - quoted prices in active markets for identical investments;
-- Level 2 - other significant observable inputs (including
quoted prices for similar investments, interest rates, prepayments,
credit risk, etc.); and
-- Level 3 - significant unobservable inputs (including the
Company's own assumptions in determining the fair value of
investments).
An investment is always categorised as Level 1, 2 or 3 in its
entirety. In certain cases, the fair value measurement for an
investment may use a number of different inputs that fall into
different levels of the fair value hierarchy. In such cases, an
investment's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement. The assessment of the significance of a particular
input to the fair value measurement requires judgement and is
specific to the investment.
The following sets out the classifications used as at 30 June
2018 in valuing the Company's investments:
Closing Closing Closing
fair value fair value fair value
as at as at as at
30 Jun 30 Jun 31 Dec
2018 2017 2017
(Unaudited) (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
======= ============= ============= ============
Level - - -
1
Level - - -
2
Level
3 7,980 7,730 11,227
======= ============= ============= ============
Total 7,980 7,730 11,227
======= ============= ============= ============
The investments in unlisted equities are valued using several
different techniques, primarily recent transactions and recent
rounds of funding by the investee entities. Sensitivity analysis is
not considered appropriate at this stage as there are not multiple
inputs used for valuation.
12. Fixed Assets
Period ended IT Development
30 June 2018 and Software Total
(Unaudited) GBP'000 GBP'000
========================= ============== ========
Opening net book
amount 342 342
Additions 49 49
Depreciation
charge (138) (138)
Closing net book
amount 253 253
As at 30 June
2018
Cost 729 729
Accumulated depreciation (476) (476)
========================= ============== ========
Net book amount
(Unaudited) 253 253
========================= ============== ========
Period ended IT Development
30 June 2017 and Software Total
(Unaudited) GBP'000 GBP'000
========================= ============== ========
Opening net book
amount 369 369
Additions 136 136
Depreciation
charge (111) (111)
Closing net book
amount 394 394
As at 30 June
2017
Cost 604 604
Accumulated depreciation (210) (210)
========================= ============== ========
Net book amount
(Unaudited) 394 394
========================= ============== ========
Year ended 31 IT Development
December 2017 and Software Total
(Audited) 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
(Audited) 342 342
========================= ============== ========
13. Receivables
31 Dec
30 Jun 30 Jun 2017
2018 (Unaudited) 2017 (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
================== ================= ================= ==========
Prepayments 3,091 3,080 2,326
Other receivables 3,307 1,952 1,151
Total receivables 6,398 5,032 3,477
================== ================= ================= ==========
The above receivables do not carry any interest and are short
term in nature. The Directors consider that the carrying values of
these receivables approximate their fair value.
14. Other Payables
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
============== ================= ================= ===============
Accruals
and deferred
income 1,939 3,946 1,875
Total other
payables 1,939 3,946 1,875
============== ================= ================= ===============
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.
15. Interest Bearing Borrowings
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
======================= ================= ================= ===============
Term and
revolving
credit
facility 100,000 30,000 56,500
Interest
and commitment
fees payable 653 36 287
======================= ================= ================= ===============
Total interest-bearing
borrowings 100,653 30,036 56,787
======================= ================= ================= ===============
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 subsequently 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
Company further 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. This facility was GBP100.0 million drawn at
period end (30 June 2017: GBP30.0 million).
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
================ ================= ================= ===============
Interest
and commitment
fees paid 1,259 264 886
Other finance
charges 965 284 846
Total finance
costs 2,224 548 1,732
================ ================= ================= ===============
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 30 June 2018 the below changes occurred for the
Company:
Total
GBP'000
============================= =========
At 1 January 2018 56,787
Interest bearing borrowings 108,700
Repayments of interest
bearing borrowing (65,200)
Finance costs 2,224
Interest paid on financing
activities (1,858)
At 30 June 2018 100,653
============================= =========
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 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.
30 June < 1 year 1 - 5 Total
2018 GBP'000 years GBP'000
Financial GBP'000
instrument
================ ======== ======== ========
Credit facility - 100,000 100,000
Interest
and commitment
fees payable 653 - 653
================ ======== ======== ========
Total exposure 653 100,000 100,653
================ ======== ======== ========
30 June < 1 year 1 - 5 Total
2017 GBP'000 years GBP'000
Financial GBP'000
instrument
================ ======== ======== ========
Credit facility - 30,000 30,000
Interest
and commitment
fees payable 36 - 36
================ ======== ======== ========
Total exposure 36 30,000 30,036
================ ======== ======== ========
31 December < 1 year 1 - 5 Total
2017 GBP'000 years GBP'000
Financial GBP'000
instrument
================ ======== ======== ========
Credit facility - 56,500 56,500
Interest
and commitment
fees payable 287 - 287
================ ======== ======== ========
Total exposure 287 56,500 56,787
================ ======== ======== ========
16. Ordinary Share Capital
The table below details the issued share capital of the Company
as at the 30 June 2018.
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
============= ================= ================= ===============
No. Issued,
allotted
and fully
paid shares 39,449,919 29,926,110 29,926,110
GBP'000 394 299 299
============= ================= ================= ===============
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 1,000p to 1,015p and the total
paid for the shares during the period amounted to GBP98.8
million.
During 2017 a further 10,000,000 ordinary shares were issued.
The price paid per share was 1,050p and the total paid for the
shares during the period amounted to GBP105.0 million.
During the period under review a further 9,523,809 ordinary
shares were issued. The price paid per share was 1,050p and the
total paid for the shares during the period amounted to GBP100.0
million.
Rights attaching to the Ordinary Shares
The holders of Ordinary Shares shall be entitled to all of the
Company's net assets.
The holders of Ordinary Shares are only entitled to receive, and
to participate in, any dividends declared in relation to the
relevant class of shares that they hold.
The Ordinary Shares shall carry the right to receive notice of,
attend and vote at general meetings of the Company.
The consent of the holders of Ordinary Shares will be required
for the variation of any rights attached to the relevant class of
shares.
Voting rights
Subject to any rights or restrictions attached to any shares, on
a show of hands every Shareholder present in person has one vote
and every proxy present who has been duly appointed by a
Shareholder entitled to vote has one vote, and on a poll every
Shareholder (whether present in person or by proxy) has one vote
for every share of which they are the holder.
A Shareholder entitled to more than one vote need not, if he
votes, use all his votes or cast all the votes he uses the same
way. In the case of joint holders, the vote of the senior who
tenders a vote shall be accepted to the exclusion of the vote of
the other joint holders, and seniority shall be determined by the
order in which the names of the holders stand in the Register.
No Shareholder shall have any right to vote at any general
meeting or at any separate meeting of the holders of any class of
shares, either in person or by proxy, in respect of any share held
by him unless all amounts presently payable by him in respect of
that share have been paid.
Variation of rights and distribution on wind up
If at any time the share capital of the Company is divided into
different classes of shares, the rights attached to any class may
be varied either in writing of the holders of three-quarters in
nominal value of the issued shares of that class or with the
sanction of an extraordinary resolution passed at a separate
meeting of the holders of the shares of that class.
The Company has no fixed life but, pursuant to the Articles, an
ordinary resolution for the continuation of the Company will be
proposed at the annual general meeting of the Company to be held in
2021 and, if passed, every five years thereafter. Upon any such
resolution not being passed, proposals will be put forward to the
effect that the Company be wound up, liquidated, reconstructed or
unitised.
If the Company is wound up, the liquidator may divide among the
shareholders in specie the whole or any part of the assets of the
Company and for that purpose may value any assets and determine how
the division shall be carried out as between the shareholders or
different classes of shareholders.
17. Special Distributable Reserve
At a general meeting of the Company held on 14 December 2015,
special resolutions were passed approving the cancellation of the
amount standing to the credit of the Company's share premium
account as at 23 December 2015.
Following the approval of the Court and the subsequent
registration of the Court order with the Registrar of Companies on
21 March 2016, the reduction became effective. Accordingly, GBP98.1
million, that was held in the share premium account, was
transferred to the special distributable reserve as disclosed in
the Statement of Financial Position.
During the period GBP0.85 million of the special distributable
reserve was used to pay the Q4 2017 Dividend on 29 March 2018.
During the prior period GBP0.5 million of the special distributable
reserve was used to pay the Q4 2016 Dividend on 28 March 2017.
18. Investments in Associates
As at 30 June 2018 and 30 June 2017, the Company has a single
associate, being a 28.57 per cent investment in 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
period in respect of the investment. The Company holds Hiber
Limited at a fair value of GBP3 million.
The unaudited net assets as at 30 June 2018 were GBP5.0 million,
and the loss after tax was GBP2.7 million. The unaudited net assets
as at 31 December 2017 were GBP3.6 million, and the profit after
tax was GBP24.5 million, which included a one off gain of GBP30.5
million.
Hiber Limited is incorporated in England and Wales.
The Company has also provided GBP6.0 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.
19. Net Asset Value per Ordinary Share
30 Jun 30 Jun 31 Dec
2018 (Unaudited) 2017 (Unaudited) 2017 (Audited)
GBP'000 GBP'000 GBP'000
============== ================= ================= ===============
Net asset
value
per
ordinary
share
pence 1,016.1p 1,018.3p 1,018.4p
Net assets
attributable
GBP'000 400,867 304,749 304,759
============== ================= ================= ===============
The net asset value per ordinary share at 30 June 2018 is based
on net assets of GBP400.867 million and on 39,449,919 ordinary
shares in issue.
The net asset value per ordinary share at 30 June 2017 is based
on net assets of GBP304.749 million and on 29,926,110 ordinary
shares in issue.
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.
20. Investments in SUBSIDIARIES
As at the 31 December 2017 the Company was invested in a
structured entity, and by virtue of having accounting control,
consolidated this entity. The Company was 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 was
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.
On 15 January 2018 the Company being the beneficial owner of the
subordinated loan gave notice to call the external loan note
holders of BMF 3 one month prior to the quarterly interest payment
date. Subsequently, on 15 February 2018, the Company redeemed all
external loan 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 is an SPV with the sole purpose of holding a
portfolio of loans for note holders. Given the portfolio of loans
has been sold to the Company and all outstanding liabilities have
been settled, BMF 3 will be wound up in due course. BMF 3 will no
longer be consolidated as the Company will no longer have control
of BMF 3.
21. Contingent Liabilities and Capital Commitments
As at 30 June 2018 and 30 June 2017 there were no contingent
liabilities or capital commitments for the Company.
22. related party transactions and transaction 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 30 June 2018 outstanding loan balance of GBP6.0
million (June 2017: GBP5.0 million) and accrued interest of
GBP699,343 (June 2017: GBP219,932).
Directors
From the 1 January 2017 until 1 April 2017 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. 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 was also 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.
At 30 June 2018 and 30 June 2017, there was GBPnil payable to
the Directors for fees and expenses.
Investment Manager
The Investment Manager 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 42 to 43.
During the period, the Company incurred GBP3.5 million (June
2017: GBP2.2 million) of fees and at 30 June 2018, there was GBP2.2
million (June 2017: GBP1.3 million) payable to the Investment
Manager.
Origination Partner
The Origination Partner has been appointed as one of the
Company's origination partners. Honeycomb Finance Limited is a
wholly owned subsidiary of the Investment Manager's parent company.
Details of the services provided by the Origination Partners are
given on page 43.
During the period given that the Origination Partner was part of
the same group as the Investment Manager, the fees payable to the
Origination Partner by the Company were deducted from the
management fee payable to the Investment Manager and totalled
GBP52,985 (June 2017: GBP26,409), and at 30 June 2018, there was
GBPnil (June 2017: Nil) payable to the Origination Partner.
23. Financial Risk Management
The Company's investing activities undertaken in pursuit of its
investment objective, as set out on page 4, involve certain
inherent risks. The main financial risks arising from the Company's
financial instruments are market risk, credit risk and liquidity
risk. The Board reviews and agrees policies for managing each of
these risks as summarised below.
Market risk
The fair value or future cash flows of a financial instrument or
investment property held by the Company may fluctuate because of
changes in market prices. Market risk can be summarised as
comprising three types of risk:
-- Price risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
market prices (other than those arising from interest rate risk or
currency risk);
-- Interest rate risk - the risk that the fair value or future
cash flows of financial instruments will fluctuate because of
changes in market interest rates; and
-- Currency risk - the risk that the fair value or future cash
flows of financial instruments will fluctuate because of changes in
foreign exchange rates.
The Company's exposure, sensitivity to and management of each of
these risks is described in further detail below. Management of
market risk is fundamental to the Company's investment objective.
The investment portfolio is continually monitored to ensure an
appropriate balance of risk and reward. The Board has also
established a series of investment parameters, which are reviewed
annually, designed to limit the risk inherent in managing a
portfolio of investments.
(a) Price risk
Price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents
the potential loss the Company might suffer through holding market
positions in the face of price movements (other than those arising
from interest rate risk or currency risk).
The Company is exposed to price risk arising from its equity
investments. Given the Company's equity assets are unquoted, the
fair value has been determined to be the transaction price.
Sensitivity analysis is not considered appropriate at this stage as
there are not multiple inputs used for valuation.
(b) Interest rate risk
The Company invests in Credit Assets which may be subject to a
fixed rate of interest, or a floating rate of interest (which may
be linked to base rates or LIBOR). The Company's borrowings may be
subject to a floating rate of interest.
The Company intends to manage the mismatch it has in respect of
the income generated by its Credit Assets, on the one hand, with
the liabilities in respect of its borrowings, on the other hand, by
matching any floating rate borrowings with investments in Credit
Assets that are also subject to a floating rate of interest. To the
extent that the Company is unable to match its funding in this way,
it may use derivative instruments, including interest rate swaps,
to reduce its exposure to fluctuations in interest rates, however
some unmatched risk may remain.
The Company finances its operations mainly through its share
capital and reserves, including realised gains on investments. In
addition, the Company increased the size of its debt facility to
GBP150m and extended the term. As at 30 June 2018 the Company had
GBP100 million (June 2017: GBP30.0 million) drawn-down under this
facility.
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 30 June 2018 is shown below:
Fixed or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ========= ============= =========
Investments
at amortised
cost 83,719 391,605 475,324
Cash and
cash equivalents 15,662 - 15,662
Interest
bearing
borrowings (100,000) - (100,000)
================== ========= ============= =========
Total exposure (619) 391,605 390,985
================== ========= ============= =========
As at 30 June 2017 is shown below:
Fixed or
Floating Administered
Financial Rate Rate Total
instrument GBP'000 GBP'000 GBP'000
================== ======== ============= ========
Investments
at amortised
cost 23,305 269,130 292,435
Cash and
cash equivalents 34,465 - 34,465
Interest
bearing
borrowings (30,000) - (30,000)
================== ======== ============= ========
Total exposure 27,770 269,130 296,900
================== ======== ============= ========
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
================== ======== ============= ========
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.
(c) Currency risk
The Company has no assets, liabilities or income denominated in
currencies other than Pounds Sterling (the Company's functional
currency, in which it reports its results). Thus, the Company is
not exposed to currency risk.
24. 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 disclosure below presents the gross carrying/nominal amount
of financial instruments to which the impairment requirements in
IFRS 9 are applied and the associated allowance for ECL. Due to the
forward-looking nature of IFRS 9, the scope of financial
instruments on which ECL are recognised is greater than the scope
of IAS 39.
The following table provides an overview of the Company's credit
risk by stage and industry, and the associated ECL coverage at 30
June 2018 and 1 January 2018. The financial assets recorded in each
stage have the following characteristics:
Stage Characteristics
========= ===================================================================================================
Stage Unimpaired and without significant increase in credit risk
1 on which a 12-month allowance for ECL is recognised.
Stage A significant increase in credit risk has been experienced
2 since initial recognition on which a lifetime ECL is recognised.
Unless identified at an earlier stage, all financial assets
are deemed to have suffered a significant increase in credit
risk when they are 30 days past due and are transferred
from stage 1 to stage 2.
Stage Objective evidence of impairment and are therefore considered
3 to be in default or otherwise credit-impaired on which a
lifetime ECL is recognised.
========= ===================================================================================================
30 June Gross Carrying Amount Expected Credit Loss ECL coverage %
2018
Stage Stage Stage Total Stage Stage Stage Total Stage Stage Stage
1 2 3 1 2 3 1 2 3
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 % % %
Consumer 287,473 1,407 5,390 294,270 2,871 659 4,695 8,225 1.0 46.8 87.1
Property 140,328 9,236 8,984 158,548 483 1,949 5,315 7,747 0.3 21.1 59.2
SME 38,512 - - 38,512 34 - - 34 0.1 - -
Total
Assets 466,313 10,643 14,374 491,330 3,388 2,608 10,011 16,006 0.7 24.5 69.6
1 January Gross Carrying Amount Expected Credit Loss ECL coverage %
2018
Stage Stage Stage Total Stage Stage Stage Total Stage Stage Stage
1 2 3 1 2 3 1 2 3
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 % % %
Consumer 228,700 973 3,971 233,644 2,303 477 3,636 6,416 1.0 49.0 91.5
Property 94,403 6,638 5,885 106,926 552 1,689 3,424 5,665 0.6 25.4 58.2
SME 14,739 - - 14,739 - - - - - - -
Total
Assets 337,842 7,611 9,856 355,309 2,855 2,166 7,059 12,081 0.8 28.5 71.6
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.
Below analyses the closing balances of the Company's credit
assets split by type of loan and the credit risk band as at 30 June
2018:
Credit Risk Unsecured Secured Total
Band GBP'000 GBP'000 GBP'000
============ ========= ======== ========
A & B 173,004 297,948 470,952
C, D & E 18,323 2,164 20,487
Total 191,327 300,112 491,439
============ ========= ======== ========
Below analyses the closing balances of the Company's credit
assets split by the type of loan and the credit risk band as at 30
June 2017:
Credit Unsecured Secured Total
Risk GBP'000 GBP'000 GBP'000
Band
======= ========= ======== ========
A &
B 136,817 139,087 275,904
C, D
& E 20,177 362 20,539
Total 156,994 139,459 296,443
======= ========= ======== ========
Below analyses 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, D
& E 27,598 301 27,899
Total 157,443 193,040 350,485
======= ========= ======== ========
Each credit risk band is defined below:
Credit Risk
Band Definition
=========== =====================================================
A Highest quality with minimal indicators of credit
risk
B High quality, with minor adverse indicators
C Medium-grade, moderate credit risk, may have some
adverse credit risk indicators
D Elevated credit risk, elevated adverse indicators
E High credit risk, with adverse indicators (e.g. lower
borrowing ability, credit history, existing debt)
=========== =====================================================
The Company ensures that it only deposits cash balances with
institutions with appropriate financial standing or those deemed to
be systemically important.
Liquidity risk
Liquidity risk is the risk that the Company will have difficulty
in meeting its obligations in respect of financial liabilities as
they fall due.
The Company manages its liquid resources to ensure sufficient
cash is available to meet its expected contractual commitments. It
monitors the level of short-term funding and balances the need for
access to short-term funding, with the long-term funding needs of
the Company.
Liquidity risk is not viewed as significant as a substantial
proportion of the Company's net assets are in loans, whose cash
collections could be utilised to meet funding requirements if
necessary. The Company has the power, under its Articles of
Association, to take out both short and long-term borrowings
subject to a maximum value of one times its share capital and
reserves.
The Company has a committed debt facility totalling GBP150.0
million (details of which is disclosed in note 15).
Assets and liabilities not carried at fair value but for which
fair value is disclosed
For the Company for the period ended 30 June 2018:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ======== ======== ========
Assets
Investments
at amortised
cost - - 475,324 475,324
Receivables - 6,398 - 6,398
Cash and
cash equivalents 15,662 - - 15,662
================== ======== ======== ======== ========
Total assets 15,662 6,398 475,324 497,384
================== ======== ======== ======== ========
Liabilities
Management
fee payable - 760 - 760
Performance
fee payable - 1,398 - 1,398
Other payables - 1,939 - 1,939
Interest
bearing
borrowings - 100,653 - 100,653
================== ======== ======== ======== ========
Total liabilities - 104,750 - 104,750
================== ======== ======== ======== ========
For the Company for the period ended 30 June 2017:
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
================== ======== ======== ======== ========
Assets
Held-to-maturity - - - -
loans
Investments
at amortised
cost - - 292,435 292,435
Receivables - 5,032 - 5,032
Cash and
cash equivalents 34,465 - - 34,465
================== ======== ======== ======== ========
Total assets 34,465 5,032 292,435 331,932
================== ======== ======== ======== ========
Liabilities
Management
fee payable - 283 - 283
Performance
fee payable - 1,042 - 1,042
Other payables - 3,946 - 3,946
Interest
bearing
borrowings - 30,036 - 30,036
================== ======== ======== ======== ========
Total liabilities - 35,307 - 35,307
================== ======== ======== ======== ========
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
Investments
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
================== ======== ======== ======== ========
Categorisation within the hierarchy has been determined based on
the lowest level input that is significant to the fair value
measurement of the relevant asset or liability (see note 11
Investments at Fair Value Through Profit or Loss for details).
Further details of the investments at amortised cost held by the
Company can be found in note 10.
Capital Management
The Company's primary objectives in relation to the management
of capital are:
-- to ensure its ability to continue as a going concern; and
-- to maximise the long-term capital growth for its shareholders
through an appropriate balance of equity capital and gearing.
The Company is subject to externally imposed capital
requirements:
-- the Company's Articles of Association restrict borrowings to
the value of its share capital and reserves;
-- as a public company, the Company has a minimum share capital of GBP50,000;
-- to be able to pay dividends out of profits available for
distribution by way of dividends, the Company must be able to meet
one of the two capital restriction tests imposed on investment
companies by company law; and
-- the Company's borrowings are subject to covenants limiting
the total exposure based on interest cover ratios, a minimum total
net worth and a cap of borrowings as a percentage of the eligible
borrowing base.
The Company has complied with all the above requirements during
this financial period.
25. Ultimate Controlling Party
It is the opinion of the Directors that there is no ultimate
controlling party.
26. Subsequent Events
Save as noted below, there have been no important events to
disclose since the period end under review.
On 4 September 2018, a dividend of 20.00 pence per Ordinary
Share was declared with an ex-dividend date 13 September 2018 and a
payment date of 28 September 2018.
27. APPROVAL OF FINANCIAL STATEMENTS
The unaudited financial statements were approved by the board of
Directors of Honeycomb Investment Trust plc (a public limited
company incorporated in England and Wales with company number
09899024) and authorised for issue on 4 September 2018.
4 Shareholders' Information
Directors, Portfolio Manager and Advisers
Directors Administrator
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
65 Gresham Street The Pavilions, Bridgewater Road
London EC2V 7NQ 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 Company Secretary
Custodian Link Company Matters Limited
Sparkasse Bank Malta PLC 6th Floor, 65 Gresham Street
101 Townsquare London EC2V 7NQ
Sliema SLM3112 England
Malta
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: GB00BYQDNR86
Sedol: BYZV3G2
Ticker: HONY
5 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 value Net asset value represents the total value of the
(NAV) 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 offer to
Inter-Bank Offered other banks for loans on the London market.
Rate)
==================== ===========================================================
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 do not
due nor impaired meet the impaired asset definition. This segment
can include assets subject to forbearance solutions.
==================== ===========================================================
Consumer Loan An amount of money lent to an individual for personal,
family, or household purposes.
==================== ===========================================================
Servicers Comprehensive loan servicing to support the full
loan lifecycle, from origination, through account
servicing to arrears management.
==================== ===========================================================
Hedging An investment to reduce the risk of adverse price
movements in an asset.
==================== ===========================================================
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR LIMFTMBAMBLP
(END) Dow Jones Newswires
September 05, 2018 02:00 ET (06:00 GMT)
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