Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 2
Table of Contents
1 Strategic Report .................................................................................................................................. 3
The Company .................................................................................................................................................................................4
Investment Objective ....................................................................................................................................................................4
Investment Manager .....................................................................................................................................................................4
Performance Highlights ...............................................................................................................................................................4
Investment Characteristics ..........................................................................................................................................................5
Impact ..............................................................................................................................................................................................6
Chairman’s Statement .................................................................................................................................................................7
Investment Manager’s Report .....................................................................................................................................................9
Top Ten Holdings ....................................................................................................................................................................... 15
Portfolio Composition ............................................................................................................................................................... 16
Business Review.......................................................................................................................................................................... 17
Principal Risks and Uncertainties ........................................................................................................................................... 25
Key Performance Indicators ..................................................................................................................................................... 29
2 Directors’ Report ........................................................................................................................... 30
Board of Directors .......................................................................................................................................................................... 31
Statutory Information ................................................................................................................................................................ 33
Corporate Governance Statement ......................................................................................................................................... 39
Report of the Audit Committee ............................................................................................................................................... 48
Directors’ Remuneration Report ............................................................................................................................................. 53
Statement of Directors’ responsibilities in respect of the financial statements. .......................................................... 59
Independent auditors’ report to the members of Honeycomb Investment Trust plc ................................................. 60
3 Financial Statements ................................................................................................................ 68
Consolidated Statement of Comprehensive Income ......................................................................................................... 69
Consolidated Statement of Financial Position .................................................................................................................... 70
Company Statement of Financial Position ........................................................................................................................... 71
Consolidated Statement of Changes in Shareholders’ Funds .......................................................................................... 72
Company Statement of Changes in Shareholders’ Funds ................................................................................................. 73
Consolidated Statement of Cash Flows ................................................................................................................................ 74
Company Statement of Cash Flows ....................................................................................................................................... 75
Notes to the Financial Statements ......................................................................................................................................... 76
4 Shareholders’ Information ................................................................................................ 121
Directors, Portfolio Manager and Advisers .......................................................................................................................... 122
5 Definitions and Reconciliation to Alternative Performance
Measures .......................................................................................................................................... 124
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 3
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 4
The Company
Honeycomb Investment Trust plc ("the Company" or “Honeycomb”) is a UK-listed investment trust dedicated to providing investors
with access to asset backed lending opportunities that Pollen Street Capital Limited ("Pollen Street" or the "Investment Manager")
believes have potential to generate high income returns together with strong capital preservation.
Investment Objective
The Company and its subsidiaries (together, “the Group”) operate an asset backed credit strategy that delivers stable income alongside
strong downside protection through providing predominantly senior lending to non-bank lenders secured on their underlying loan
portfolios. The investment strategy is supported by the ongoing structural changes in the financial services industry that create a
significant opportunity for non-bank lenders to reach customers who are underserved by mainstream banks with bespoke and
appropriate products. The strategy is focused on generating positive impact around five key areas where Honeycomb can make a
meaningful difference: environmental impact; affordable housing; financial inclusion; regional economic growth and the highest
standards of governance.
Investment Manager
Pollen Street serves as the Company’s investment manager. Pollen Street is an independent, alternative investment management
company specialising in the financial and business services sector and has extensive experience investing in both credit and private
equity strategies.
Performance Highlights
Dividend Yield: calculated as the total declared dividends for the period divided by IPO issue price.
NAV Return: calculated as Net Asset Value (Cum Income) at the end of the year, plus dividends
declared during the year, less NAV (Cum Income) at the end of the year, divided by NAV (Cum
Income) calculated on a per share basis. NAV per Share: Net Asset Value (Cum Income) at the end
of the year, divided by the number of shares. Share Price: closing mid-market share price at month
end (excluding dividends reinvested).
1
See section 5 for reconciliation to Alternative Performance Measures
8.0%
8.0%
8.0%
Dividend Yield
1
2020
2021
Target
8.5%
7.7%
NAV Return
1
2020
2021
1,019p
1,013p
NAV per Share
1
31 Dec 2020
31 Dec 2021
Strong NAV return at 8.5 percent with no down
months
NAV per share increasing
Dividend yield stable at 8.0 percent of IPO issue price -
in line with the published target
Note - target dividend is not a profit forecast
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 5
Investment Characteristics
NON-BANK LENDING
Non-bank lending is now an integral part of the lending
landscape, providing financing to millions of consumers and
businesses, including those that are underserved by high street
banks.
Since the global financial crisis, the role of non-bank lenders
has become increasingly an important part of a well-
functioning lending market as the large traditional banks
fundamentally changed their approach to the lending markets
that they were focussed on. Faced with both internal and
external pressures, they retrenched from many products and
services and focused on only vanilla, commodity markets
where scale and cost of funding enable them to remain
relevant and competitive.
Specialist players, able to tailor products to meet the needs of
target customer groups, often combining strong service
standards coupled together with deployment of data and
technology to curate highly attractive products in their selected
fields provide a critical role in ensuring important parts of the
economy continue to be serviced by high quality lending
products.
The non-bank lending market is already large at an estimated
£330 billion
1
in the UK alone, and these structural changes have
been accelerated by Covid-19 disruption.
IMPACT
Impact investments are a key focus, including environmental
impact; affordable housing; financial inclusion; regional
economic growth and the highest standards of governance.
As traditional banks retrench, they exclude an increasing
number of ordinary working people from their service levels.
Some reports suggest that 25% of all adults in the UK do not
meet the criteria for mainstream banking offerings and
therefore there is an important role to play for non-bank
lenders to offer tailored products to ensure supportive and
appropriate financial inclusion is accelerated across the
economy.
As the population becomes more engaged in having a positive
impact and seeking to live their lives on a sustainable basis, it
is expected that focused lending products such as to finance
energy efficient products in the home and transportation, will
become more in demand. These products have an important
role to play in enabling ordinary people to finance life
improvements.
Finally, as a highly respected partner to these lending
businesses, the Group, through the Investment Manager, can
bring a consistency of governance and ensure that ethical,
sustainable and responsible practices are built into all
investment processes.
HONEYCOMB PROPOSITION
The Group provides predominantly senior lending secured on
diverse portfolios of financial (typically loan portfolios) and
hard assets that generate predictable cash flows. This is
typically to non-bank lenders but can also encompass other
businesses that have large and diverse portfolios of assets (for
example, electric vehicle leasing providers).
This approach allows Honeycomb to benefit from the
advanced origination and underwriting capabilities of its
borrowers but maintaining significant downside protection
through typically taking a senior position. The borrower is fully
aligned with the Group and their return is realised after the debt
of the Group is serviced. The facilities Honeycomb provides are
typically of short duration, with an average life of 2 to 3 years.
The cash generated by the portfolio of assets on which the
facility is secured generates sufficient cash flow to repay our
loan removing refinancing and exit risk.
The investment objective is to deliver consistent returns and a
diversified portfolio with high quality borrowers, rigorous
investment process and robust downside protection. Sector
specialism, strong networks with partners and proprietary deal
flow are key facilitators in driving compelling returns, while
stringently monitoring and managing risk. The Company aims
to be the market-leading finance partner to the non-bank and
broader asset based finance sector.
The combination of this asset backed strategy and the speed
of growth amongst non-bank lenders drives high and stable
income generation alongside a large and growing market
opportunity for the Company to be highly selective in the loans
it provides. This means the Company has a low volatility in NAV
and dividend resilience.
1
Bank of England, Ernst & Young, Financing & Leasing Association and
Pollen Street Internal estimates
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 6
Impact
In lending, we see a large and growing opportunity for non-bank lenders to reach customers that are underserved by mainstream
banks with bespoke and appropriate products. Our focus on Impact is built around 5 key areas where Honeycomb makes a meaningful
difference:
1
Environmental Impact:
Reducing the carbon footprint and energy consumption of homes is one
of the key-ways that people can have a positive impact on the
environment. Our lenders help finance home improvements that improve
energy efficiency, and we are now also focused on the electrification of
transport.
2
Affordable Housing:
Our real estate lending strategy aims to improve the quality of the
property stock and support the creation of affordable, efficient and good
value homes.
3
Financial Inclusion:
Our lending supports financial inclusion at a time when mainstream
lenders are offering only vanilla automated products. Some reports
suggest that 25% of all adults in the UK do not meet the criteria for
mainstream banking offerings. There is an important role to play for non-
bank lenders to offer tailored products to ensure supportive and
appropriate financial inclusion across the economy.
4
Regional Economic Growth:
Lending to support SMEs and communities is ever more critical to
support regional growth across the UK. We work to support SME lenders
who are close to the customers and are able to offer tailored products to
support them in a prudent way. We also partner with experienced real
estate lenders with 96% of funding, across the Manager’s investments in
2021, going to projects outside of London.
5
Highest Standards of Governance:
All our lending partners are required to demonstrate and embed the
highest quality of governance and their own three lines of defence which
we ensure is being complied with as part of our on-going monitoring.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 7
Chairman’s Statement
I am pleased to present the Annual Report and Audited
Financial Statements for Honeycomb Investment Trust plc,
which covers the year ended 31 December 2021.
YEAR UNDER REVIEW
In an environment where the economy and businesses were
cautiously returning to a ‘new normal’ of trading, Honeycomb
Investment Trust plc has continued to perform well throughout
the year executing on a strong pipeline of opportunities. The
Company started the year with a robust cash position, and a
pipeline of opportunities presenting strong underlying asset
returns, and as a result of this was able to produce the
strongest year since 2017.
Earnings for the year were £30.3m (2020: £20.7m) and monthly
performance was consistent, delivering 8.5% NAV return for the
year, up from 7.7% over 2020. The stability of the returns is a
testament to the successful strategy.
The impairment charge for the year has reduced from £5.6
million in 2020 to a release of £0.8 million in 2021. The
reduction in impairment charge is attributable to the focus on
senior secured credit that protects the Company from adverse
credit losses and the improving economic outlook. The bridge
on page 16 provides more details on the composition of the
returns.
The Company continued to declare dividends at 20.00 pence per
share each quarter. This is in line with the target dividend yield
of 8.0 per cent annualised dividend on the issued share price at
the Company’s initial public offering.
The share price closed the year at 945p on 31 December 2021,
which is a modest discount of 7.3% (2020: 7.0%) to NAV.
ESG
The Board has supported the Investment Manager’s
Environmental Social and Governance (“ESG”) programme
over the course of the year, with progress made in embedding
ESG as an integral part of the investment process. There are 5
key impact areas that are described in more detail on page 6.
This is ever more critical in the current environment and the
Board is excited to advance our progress towards sustainability
in 2022 and beyond.
OUTLOOK
2021 has been a year of execution and consistency for
Honeycomb. Having demonstrated the stability of the strategy
over 2021 the Board is confident the Company will continue to
deliver attractive investment returns. Looking ahead there are a
number of factors that position Honeycomb strongly for 2022.
Firstly, market dynamics continue to drive compelling
investment opportunities. Non-bank lending is an increasingly
critical part of the lending landscape, providing financing to
millions, including those that are underserved by high street
banks. The Company continues to aim to be the finance partner
of choice for the non-bank sector. Thanks to deep expertise and
relationships, the Investment Manager is able to source most
investments internally and negotiate bi-laterally.
Second is the strategy employed by the Company to address
these investment opportunities. The strategy focuses on senior
secured, asset-based credit investments, which is a structure
that aligns interests between Honeycomb and its borrowers.
The strategy has driven stable NAV returns over 2021.
Finally, positive societal and environmental impact continues to
be an important feature of the Honeycomb investment strategy.
Lending over the course of 2021 has supported regional
economic growth, affordable homes and the transition towards
a net zero emissions economy.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 8
COMBINATION WITH POLLEN
STREET
On 15 February 2022, Honeycomb announced that it had
reached agreement on the terms of a recommended all share
combination with Pollen Street Capital Holdings Limited, the
parent company of the Investment Manager. Under the terms
of the agreement, Honeycomb will acquire the entire issued
share capital of Pollen Street Capital Holdings Limited in
exchange for shares in the combined group such that the
Honeycomb and Pollen Street businesses will be combined
into a premium listed entity, owned by the shareholders of
Honeycomb and Pollen Street. The combination is conditional
on shareholder and regulatory approval. At announcement,
shareholders representing c.56.4% of Honeycomb’s issued
share capital have given their support for the transaction.
As shareholders know, Honeycomb has been delivering strong
and stable performance since inception in 2015, consistently
delivering a net investment return of c.8%
We feel privileged to have many supportive shareholders, and
thank them for their longstanding support.
I strongly believe that this is an extremely attractive opportunity
for shareholders, as a combination with Pollen Street will
accelerate growth and unlock value, delivering recurring
income, retaining an attractive dividend yield (anticipated to
be 6.5% and 6.6% in 2022 and 2023 respectively
2
, on the basis
of Pollen Street shareholders having agreed to waive dividends
on 50% of consideration shares issued to them through 2022
and 2023) whilst presenting strong growth opportunities. The
transaction is also expected to be EPS accretive in the second
full year post closing for Honeycomb’s shareholders
3
.
Pollen Street is a highly successful and fast growing alternative
asset manager with:
- deep capabilities in both Private Equity and Credit
with well-established and outperforming flagship
strategies
- a business that is benefiting from strong tailwinds
from investor demand in its products; and
- a business that is at an inflexion point with highly
visible growth ahead
The Board conducted extensive due diligence and believes
that the combination will generate substantial value for
shareholders, both because of the attractive valuation on
which Honeycomb is acquiring the Pollen Street business
compared to listed peers in the alternative asset management
sector, and because of the profile of the combined group going
forward. In particular the combined group will have:
- a balance of recurring fee income and interest
income that delivers an attractive and growing
revenue profile; and
- exciting potential to accelerate high quality growth
as Honeycomb’s capital can be deployed to unlock a
multiplier effect on capital raising and, in doing so,
accelerate the growth of new strategies.
The combined business will benefit from a complementary set
of investment management and balance sheet activities, with
strong earnings growth. The investment portfolio will continue
to be predominantly invested in high quality, diversified and
low risk asset based direct lending investments, generating
stable returns. The investment portfolio profile of the
combined group is expected to remain in line with the
investment profile of Honeycomb on a stand-alone basis.
The transaction creates a business with a rare combination of
high growth and high income yield. It also presents strong
benefits for shareholders from a public market perspective:
- increased investor universe providing opportunity to
diversify the share register;
- larger scale and growth which is expected to attract
greater analyst coverage; and
- possibility for increased liquidity on account of the
larger market cap and potential future FTSE 250
inclusion.
A shareholder circular will be published in due course and sent
to shareholders to provide further details of, and request
shareholder approval for the transaction.
The Board notes the current share price and if this persists will
consider reactivating the Company’s share buyback
programme as the Board believes that at the current price the
Company’s shares offer significant value and a share buyback
will be value accretive. The Board’s policy is to consider
conducting share buybacks when the shares trade more than
5% below NAV subject to maintaining the Company’s gearing
target limit.
I would like to thank my Board colleagues and the Investment
Manager for their hard work over 2021 and I look forward to
continuing to work together over 2022.
Robert Sharpe
Chairman
1 March 2022
2
Based on the Honeycomb share price of 967.5 pence on 14 February 2022
(being the last business day prior to announcement).
3
The statement that the combination is expected to be EPS accretive
should not be construed as a profit forecast, and should not be interpreted
to mean that the EPS in any future financial period will necessarily match
or be greater than those for any preceding financial period.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 9
Investment Manager’s Report
The Investment Manager, Pollen Street, is an independent
asset manager working across private equity and credit
strategies. Pollen Street was formed in 2013 and possesses a
strong and consistent track record within the financial and
business services sectors.
INVESTMENT PERFORMANCE
The Group has maintained its track record of investment
performance with earnings of £30.3m (2020: £20.7m); NAV
returns of 8.5 percent (2020: 7.7 per cent) and dividend yield of
8.0 per cent (2020: 8.0 per cent).
The Manager targets new investment opportunities with
credit asset returns of approximately 8 to 10 percent. The
portfolio remains stable, both with further advances invested
in existing facilities, and with new relationships. Pollen Street
continues to focus the portfolio on structured and secured
loans, reducing the risk of underperformance in the portfolio.
Profit for the year was £30.3 million (2020: £20.7 million), which
translated into a basic earnings per share of 86p (2020: 56.5
pence). This is equivalent to an annualised NAV return of 8.5
percent (2020: 7.7 per cent). The growth is driven by an
increase in average investment assets with an average value
of £601.8million during the year (2020: £560.9m) combined
with a reduction in the ECL charge, from a charge of £5.8
million to a release of £0.8 million.
The Group ended the year with a net debt to equity of 70.9
4
per cent (31 December 2020: 59.1 per cent) which is within its
stated target of 50 per cent to 75 percent.
The Company has continued to meet its target dividend of 8.0
per cent based on the IPO issue price over the period and has
grown its NAV per share (cumulative of income) at the end of
the period of to 1,019 pence per ordinary share (31 December
2020: 1,013 pence).
We are pleased that the share price has been stable over the
course of 2021 closing at 945p (31 December 2020: 943p).
OTHER HIGHLIGHTS
In addition to the resilient investment performance, the
Company has continued to source and invest in senior
secured investments, with 76% of the portfolio in senior assets
and 97% structurally secured. In Q4 2021, the Company sold
all of the organic portfolio to enable it to focus on more
structured and secured loans.
4
See section 5 for reconciliation of Alternative Performance Measures
During 2021, the Company made commitments of £48.2m to
two credit investment vehicles that are managed by Pollen
Street Capital. These investments allow Honeycomb to gain a
diversified exposure to a broader range of Pollen Street’s new
investments when the Company is close to full deployment.
The Company also participated in a senior asset backed
facility to the largest pure-play electric vehicle subscription
business in Europe. The facility is directly secured on the fleet
of electric vehicles and will fund growth in the number of cars
to meet customer demand and drive increased access and
adoption of electric vehicles across Europe.
In June 2021 the Company sold Honeycomb’s listed bond
portfolio (including Amigo Holdings Plc) realising a small
profit of £0.02m with the sales proceeds of £22.41m marginally
exceeding the net book value of the portfolio of £22.39m.
PORTFOLIO OVERVIEW
The portfolio compromises of £576.8 million of investments
balanced across the property, SME, consumer and
sustainability sectors. The portfolio is well-diversified, with an
average exposure of £16.2m, maximum single exposure of
£54.6m and the ten largest investments representing 65.5% of
Net Investment Assets.
Investments are secured on diverse asset portfolios, providing
high cash generation and stable returns. The strategy has
focused predominately on senior loans, with 76% of portfolio
in senior assets and 97% asset backed. Investments are all
structured on a bespoke basis with a focus on capital
preservation with the strategy combining the structuring and
credit disciplines of asset-based finance with those of direct
lending.
The portfolio is focused on secured asset based Credit Assets.
These are loans to counterparties that benefit from two forms
of protection:
The Company has security over the underlying asset
portfolios that generate the cash flow for the
borrowers. Honeycomb can realise the collateral (sell
or run off) to cover any shortfall on its loan.
The Company has seniority over other creditors and
equity holders for many deals meaning that other
counterparties bear the first loss from any
underperformance before the Company.
The resilience of the portfolio through this challenging year
demonstrates the strategy of selecting only the assets that
meet the strict risk adjusted returns criteria and maintaining
strong credit quality.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 10
Investment Assets by Type
5
CREDIT PERFORMANCE & RISK
MANAGEMENT
The Company’s financial statements have been prepared in
accordance with International Financial Reporting Standards
(“IFRSs”) including interpretations issued by the IFRS
Interpretations Committee adopted in the UK. Under IFRS 9,
impairment losses are recognised on a forward-looking basis,
taking into account both the risk profile of the Credit Assets
and the macroeconomic outlook at the balance sheet date.
The impairment charge for the year has reduced from £5.6
million in 2020 to a release of £0.8 million in 2021. The
reduction in impairment charge is attributable to the
Company’s continued focus on senior secured Credit Assets.
As at 31 December 2021, 97% of the assets were structurally
secured (31 December 2020: 91%).
The Expected Credit Loss (“ECL”, “Impairment Provision”)
balance has reduced materially from £30.5 million as at 31
December 2020 to £10.8 million as at 31 December 2021. The
main driver of the reduction is sale of the consumer portfolio.
The risks arising from the investment assets are managed very
closely. The Group’s performance is linked to the health of the
economy and the Group could experience further
impairments and consequently reduced profits if economic
expectations deteriorate. However, the risk of this has been
mitigated by a focus on credit investments secured on loan
portfolios of non-bank lenders with strong downside
protection from senior ranking to the lender or borrower
equity as well as security over the cashflow generated by the
loan portfolio. This senior ranking provides insulation from
increasing defaults in the portfolio and provides stability of
returns.
5
Investment Assets includes equity assets held at fair value through profit
or loss, credit assets at amortised cost and credit assets held at fair value
through profit or loss
ESG & IMPACT
The Investment Manager has embedded Environmental,
Social and Governance “ESG” as a core part of its investment
process – from identifying ESG risks when selecting and
assessing investments, through to working with credit
partners to embed an ESG framework and monitor
performance against key criteria and measures, linked to the
UN Sustainable Development Goals. Alongside ESG in the
investment process, the Investment Manager has identified 5
key impact areas where the lending that Honeycomb
Investment Trust plc provides can make a meaningful
difference. These impact areas are listed on page 6. Progress
against ESG targets and positive impact for Investment
Manager as a whole is monitored and reported in the Pollen
Street Capital Annual ESG Report. The Investment Manager
collects data to measure the sustainability of operations as
well as the relevant ESG impact. As the nascent environment
for ESG data evolves, we are reviewing the data robustness
with our partners to improve and align reporting. This will
enable us to publish relevant ESG information in the future.
OUTLOOK
Honeycomb has built on a strong track record of consistent
credit performance and dividends with another successful
year in 2021. The strong financial performance has continued
following the end of the financial year with annualised NAV
returns of 8.1% in January 2022.
The role of non-bank lenders is ever increasing, as banks
narrow their focus and customers are attracted to platforms
that employ technology to deliver more tailored and efficient
service. Our strong pipeline of deals, with over £1bn of deals
under consideration by the investment manager, means we
are able to select those that align with our strategy and
ambitions in driving positive impact.
The outlook for the economy remains somewhat uncertain
with the potential impact of the various supply shortages, the
increasing cost-of-living and consequences of emerging
geopolitical events. Despite this we believe that Honeycomb
is well positioned for the future and we are proud to have
delivered strong returns for Honeycomb shareholders over
2021 and indeed since inception in 2015.
We are excited about the potential combination of Pollen
Street and Honeycomb and look forward to working with
Board in 2022 to manage and grow the Company.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 11
ESG AT THE HEART OF INVESTMENT MANAGEMENT
The Investment Manager has embedded Environmental, Social and Governance “ESG” as a core part of its investment process – from
identifying ESG risks when selecting investments, through to working with credit partners to embed an ESG framework and monitor
performance against key criteria, linked to the UN Sustainable Development Goals. We provide reporting on this framework annually
in the Pollen Street Capital ESG Report.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 12
ESG IN THE INVESTMENT PROCESS
The Investment Manager is committed to focus on actions that generate positive impact for our investors, people, portfolio
companies and the wider society. As a core part of our investment process, we engage with our Credit partners to identify impact
areas within ESG that are relevant to them and where we can support them to accelerate their positive impact.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 13
ESG MEASUREMENT
With an ever-growing focus on ESG reporting and transparency from all stakeholder groups, as well as alignment with regulatory
disclosures such as the EU Sustainable Financial Disclosure Regulation (“SFDR”), measuring impact is more important than ever.
As we strengthen our approach to ESG, we have defined a set of core metrics linked to ESG best practice which we collect from the
Trust’s credit partners, as well as collecting impact measures relevant to the investment (as set out below), and we continue to
improve and align reporting linked to our ESG framework.
ESG IN ACTION
Recent examples of how Pollen Street Capital’s credit facilities have supported a tangible ESG impact include:
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 14
ESG – ONGOING FOCUS
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 15
Top Ten Holdings
(1) Direct portfolios have been aggregated by originator and servicer
(2) Percentage of total investment assets of the Group (investment assets calculated as the carrying balance of all credit assets at amortised cost, credit assets
held at fair value through profit or loss and equity investments held at fair value through profit or loss).
As at 31 December 2021 the value of the top 10 assets totalled £403.0 million (2020: £359.2 million) which equated to 65.5 percent (2020:
63.2 percent) of investment assets (investment assets calculated as the carrying balance of all credit assets at amortised cost and
credit and equity investments held at fair value through profit or loss).
Country Deal Type Sector
Value of
holding
at year-end
(£m)
(1)
LTV
Percentage
of assets
(2)
1
UK Agriculture
Finance
United
Kingdom
Senior
Short Term
Property Loans
52.9 50% 8.6%
2
Sancus Loans
Limited
United
Kingdom
Senior
Short Term
Property Loans
52.8 54% 8.6%
3 Creditfix Limited
United
Kingdom
Senior
Discounted Fee
Receivables
51.3 39% 8.3%
4
Oplo Direct
Portfolio
United
Kingdom
Secured
Secured
Consumer
48.6 81% 7.9%
5
Nucleus Cash Flow
Finance Limited
United
Kingdom
Senior SME 40.6 96% 6.6%
6
Downing
Development
Loans
United
Kingdom
Senior
Short Term
Property Loans
35.9
63%
5.8%
7
Duke Royalty
United
Kingdom
Senior SME 35.2 40% 5.7%
8 GE Portfolio
United
Kingdom
Secured
Secured
Consumer
31.2 61% 5.1%
9 Oplo Structured
United
Kingdom
Mezzanine
Secured
Consumer
29.9 95% 4.9%
10 Queen Street
United
Kingdom
Senior
Short Term
Property Loans
24.6 75% 4.0%
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 16
Portfolio Composition
Returns
Bridge FY2
1
The above chart shows the composition of the NAV returns. See section 5 for reconciliation to Alternative Performance Measures.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 17
Business Review
The Strategic Report on pages 3 to 29 has been prepared to
help shareholders assess how the Group works and how it has
performed. The Strategic Report has been prepared in
accordance with the requirements of Section 414A to 414D of
the Companies Act 2006 (the “Act”). The business review
section of the Strategic Report discloses the Group and
Company principal and emerging risks and uncertainties as
identified by the Board, the key performance indicators used
by the Board to measure the Group’s performance, the
strategies used to implement the Group’s objectives, the
Group’s environmental, social and ethical policy and the
Group’s anticipated future developments.
KEY INFORMATION
ended investment company incorporated and domiciled in the
09899024. The Company is a publicly listed company. The
registered office is 6
PRINCIPAL ACTIVITIES
companies, please see: http://www.theaic.co.uk/guide-to-
investment-companies.
STRATEGIC AND INVESTMENT
POLICY
The Group’s investment objective is to provide shareholders
with an attractive level of dividend income through investing in
loans where the underlying collateral is Credit Assets together
with related investments that are aligned with the Group’s
strategy and that present opportunities to enhance the Group’s
returns from its investments (“Equity Assets”).
The Group targets the payment of dividends which equate to a
yield of at least 8.0 percent per ordinary share per annum on
the issue price for the IPO placing, based upon the average
number of shares in issue for the period, payable in quarterly
instalments (the ‘‘Target Dividend’’). Investors should note that
the Target Dividend, including its declaration and payment
dates, is a target only and not a profit forecast.
The Group believes that certain sub-segments of the speciality
finance market have the potential to provide attractive returns
for investors on a risk-adjusted basis, and that changes in the
focus of mainstream lenders, together with the
implementation of new models that make the best use of data,
analytics and technology, provide an opportunity to deliver
attractive products to borrowers while generating attractive
returns for the Group.
ASSET ALLOCATION AND RISK
DIVERSIFICATION
Credit Assets invested in by the Group consist of loans, within a
range of sub-sectors selected based on their risk/return
characteristics. These sub-categories may include, but are not
limited to, personal loans, point of sale financing, home
improvement loans and loans to small businesses.
The Group’s investment in Credit Assets encompasses the
following investment models:
1. Structured Loans. The Group identifies top performing
non-bank lenders that provide finance to a tightly defined
target audience. Senior financing is provided with security
over real assets and
2. Direct Portfolios. These portfolios of directly owned loans
are typically sourced from established relationships with
non-banks and are typically secured on underlying assets
i.e. property
The Group may undertake such investments directly, or via
subsidiaries or special purpose vehicles (“SPVs”). It is also
possible that the Group may seek to use alternative investment
structures which achieve comparable commercial results to
the investments described above (such as, without limitation,
sub-participations in loans, credit-linked securities or fund
structures), but which offer enhanced returns for the Group or
other efficiencies (such as, without limitation, efficiencies as to
origination, funding, servicing or administration of the relevant
Credit Assets).
The Group also invests in Equity Assets. The Group shall invest
no more than 10 percent of the aggregate net proceeds of any
issue of shares in Equity Assets. This restriction shall not apply
to any consideration paid by the Group for the issue to it of any
Equity Assets that are convertible securities. However, it will
apply to any consideration payable by the Group at the time of
exercise of any such convertible securities or any warrants
issued. The Group may invest in Equity Assets indirectly via
other investment funds (including those managed by the
Investment Manager or its affiliates).
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 18
IMPAIRMENT REVIEW
The Expected Credit Loss (“ECL”, “Impairment Provision”)
balance has reduced materially from £30.5 million as at 31
December 2020 to £10.8 million as at 31 December 2021 on a
NAV closing balance of £359m (2020: £357m). The main driver
of the reduction is sale of the consumer portfolio.
The impairment charge for the year has reduced from £5.6
million in 2020 to a release of £0.8 million in 2021. The
reduction in impairment charge is attributable to the
Company’s continued focus on senior secured Credit Assets
and the improving economic outlook. As at 31 December 2021,
97% of the assets were senior secured (31 December 2019: 82%).
The outbreak of Covid-19 is causing major disruption across
the globe. The principal effects of the outbreak in the UK began
in March 2020.
Over 2020 many borrowers made requests for forbearance in
line with regulatory guidance on the matter. By the end of 2020
a significant majority of borrowers had left payment holidays
and returned to paying.
The downside protection built into the majority of the portfolio
has limited the impact of Covid-19 on the ECL charge. However,
given the Group’s activities, its performance is linked to the
health of the economy and consequently if economic
expectations deteriorate against current expectations the
Group could experience further impairments.
INVESTMENT RESTRICTIONS
The Group will invest in Credit Assets originated across various
sectors and across credit risk bands to ensure diversification
and to seek to mitigate concentration risks. The following
investment limits and restrictions apply to the Group to ensure
that the diversification of the portfolio is maintained, that
concentration risk is limited and that limits are placed on risk
associated with borrowings.
The Group will not invest, in aggregate, more than 10 percent
of the aggregate value of total assets of the Group (“Gross
Assets”), at the time of investment, in other investment funds
that invest in Credit Assets.
The Group will not invest, in aggregate, more than 50 percent
of Gross Assets, at the time of investment, in Credit Assets
comprising investments in loans alongside or in conjunction
with Shawbrook Bank (“Shawbrook”) or referred to the
Origination Partner by Shawbrook.
The following restrictions apply, in each case at the time of the
investment by the Group:
No single Credit Asset comprising a consumer credit
asset shall exceed 0.15 percent of Gross Assets;
No single SME or corporate loan, or trade receivable,
shall exceed 5.0 percent of Gross Assets; and
No single facility, security or other interest backed by a
portfolio of loans, assets or receivables (excluding any
borrowing ring-fenced within any SPV which would be
without recourse to the Group) shall exceed 20 percent
of Gross Assets. For the avoidance of doubt, this
restriction shall not prevent the Group from directly
acquiring portfolios of Credit Assets which comply with
the other investment restrictions described in this
section.
The Group will not invest in Equity Assets to the extent that
such investment would, at the time of investment, result in the
Group controlling more than 35 percent of the issued and
voting share capital of the issuer of such Equity Assets.
No restrictions were breached at any point during the year
ended 31 December 2021, or the year ended 31 December 2020.
OTHER RESTRICTIONS
The Group may invest in cash, cash equivalents, money market
instruments, money market funds, bonds, commercial paper
or other debt obligations with banks or other counterparties
having single-A (or equivalent) or higher credit rating as
determined by an internationally recognised agency or
systemically important bank, or any ‘‘governmental and public
securities’’ (as defined for the purposes of the Financial
Conduct Authority’s Handbook of rules and guidance) for cash
management purposes and with a view to enhancing returns
to shareholders or mitigating credit exposure.
The Group will not invest in Collateralised Loan Obligations
(“CLO”) or Collateralised Debt Obligations (“CDO”). CLOs are a
form of securitisation whereby payments from multiple loans
are pooled together and passed on to different classes of
owners in various tranches. CDOs are pooled debt obligations
where pooled assets serve as collateral.
These restrictions were not breached in year ended 31
December 2021 or the year ended 31 December 2020.
ESG
As detailed in the ESG section of the report. The Investment
Manager has embedded Environmental, Social and
Governance “ESG” as a core part of its investment process. This
involves identifying ESG risks and opportunities when selecting
and assessing investments, and working with credit partners to
embed an ESG framework and monitor performance against
key criteria and measures, linked to the UN Sustainable
Development Goals.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 19
Alongside ESG in the investment process, the Investment
Manager has identified 5 key impact areas where the lending
that Honeycomb Investment Trust plc provides can make a
meaningful difference. Progress against ESG targets and
positive impact for Investment Manager as a whole is
monitored and reported in the Pollen Street Capital Annual
ESG Report. The Investment Manager collects both core ESG
practice metrics and relevant impact measures, and we
continue to improve and align reporting aligned to the ESG
framework and relevant regulatory developments.
BORROWING
Borrowings may be employed at the level of the Group and at
the level of any investee entity. Further, the Group may seek to
securitise all or parts of its Credit Assets and may establish one
or more SPVs in connection with any such securitisation.
The Group may borrow, whether directly or indirectly through
a subsidiary or an SPV, up to a maximum of 100 percent of Net
Asset Value in aggregate. The limit is calculated at the time of
draw down under any facility that the Group has entered into.
The maximum borrowing limit includes investments made by
the Group on a subordinated basis. The Group targets net
borrowings in the range of 50 percent to 75 percent of Net Asset
Value.
These restrictions were not breached in year ended 31
December 2021 or the year ended 31 December 2020.
In July 2021, the main debt facility was reduced by £50 million
to £200m (2020: £250m). During the year, the Sting and Bud
debt facilities remained on the same terms as at the end of
2020.
Reference rate reform
From 1 January 2022, the Sterling Overnight Index Average
(“SONIA”) became the new market accepted benchmark,
having a credit adjustment spread applied to it where required
to ensure that neither party had been adversely impacted by
the switch. Note 12 has further details on the effect of IBOR
reform. As at the end of the year the group had 51.268 million
of asset and 30,129 million of liabilities that had yet to transition
to SONIA.
The key differences between GBP LIBOR and SONIA are that
GBP LIBOR is a ‘term rate’, which means that it is published for
a borrowing period (such as three months or six months) and is
‘forward looking’, because it is published at the beginning of
the borrowing period. SONIA is currently a ‘backward-looking’
rate, based on overnight rates from actual transactions, and it
is published at the end of the overnight borrowing period.
Furthermore, LIBOR includes a credit premium over the risk-
free rate, which SONIA currently does not. To transition existing
contracts and agreements that reference GBP LIBOR to SONIA,
adjustments for term differences and credit differences are
applied to SONIA, to enable the two benchmark rates to be
economically equivalent on transition.
As at 31 December 2021, changes required to systems,
processes and models have been identified and implemented.
The Group has identified that the areas of most significant risk
arising from the replacement of GBP LIBOR are: systems and
processes which capture GBP LIBOR referenced contracts,
amendments to those contracts, or existing fallback/transition
clauses not operating as anticipated.
The US IBOR transition will continue into 2022 and no formal
interest rate has yet been decided.
HEDGING
Fluctuations in interest rates are influenced by factors outside
the Group’s control and can adversely affect the Group’s results,
operations and profitability in a number of ways. The Group
invests in Credit Assets which may be subject to a fixed rate of
interest, or a floating rate of interest (which may be linked to
base rates or other benchmarks). The Group expects that its
borrowings will be subject to a floating rate of interest. Any
mismatches the Group has between the income generated by
its Credit Assets, on the one hand, and the liabilities in respect
of its borrowings, on the other hand, may be managed, in part,
by matching any floating rate borrowings with investments in
Credit Assets that are also subject to a floating rate of interest.
The Group may use derivative instruments, including interest
rate swaps, to reduce its exposure to fluctuations in interest
rates.
To the extent that the Group does rely on derivative
instruments to hedge interest rate risk, it will be subject to
counterparty risk. Any failure by a hedging counterparty of the
Group to discharge its obligations could have a material
adverse effect on the Group’s results, operations and/or and
financial condition.
The Manager monitors the interest rate risk position
continuously and did not deem it appropriate to enter into any
interest rate hedges for the period ending 31 December 2021 or
the period ending 31 December 2020.
The Group intends to hedge currency exposure between
Sterling and any other currency in which the Group’s assets
may be denominated, including US Dollars and Euros.
The Group will, to the extent it is able to do so on terms that the
Investment Manager considers to be commercially acceptable,
seek to arrange suitable hedging contracts, such as currency
swap agreements, futures contracts, options and forward
currency exchange and other derivative contracts (including,
but not limited to, interest rate swaps and credit default swaps)
in a timely manner and on terms acceptable to the Company.
Details of hedging arrangements in place at 31 December 2021
and 2020 can be found on pages 108 and 109.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 20
CASH MANAGEMENT
Whilst it is intended that the Group will be close to fully invested
in normal market conditions, the Group may invest surplus
capital in cash deposits, cash equivalent instruments and fixed
income instruments. There is no restriction on the amount of
cash or cash equivalent instruments that the Group may hold
and there may be times when it is appropriate for the Group to
have a significant cash position instead of being fully or near
fully invested. The Group’s cash reserves decreased over the
period with £12.9million of assets held in cash at 31 December
2021 (31 December 2020: £62.5 million).
BUSINESS MODEL
The management of the Group’s assets and the Group’s
administration has been outsourced to third-party service
providers. The Board has oversight of the key elements of the
Group’s strategy, including the following:
The Group’s level of gearing. The Group has a maximum
limit of 100 percent of Net Asset Value in aggregate
(calculated at the time of draw down under any facility
that the Company has entered into) as detailed in the
Company’s prospectuses dated 18 December 2015, 25
May 2017 and 21 December 2018 (the “Prospectus”);
The Group’s investment policy which determines the
diversity of the Group’s portfolio. The Board sets limits
and restrictions with the aim of reducing risk and
maximising returns;
The appointment, amendment or removal of the Group’s
third-party service providers;
An effective system of oversight over the Group’s risk
management and corporate governance; and
Premium/discount control mechanism, such as share
buyback programmes.
In order to effectively undertake its duties, the Board may seek
expert legal advice. It can also call upon the advice of the
company secretary. In 2015, the Board appointed Slaughter
and May to provide ongoing legal services to the Group.
The Board have acted in a way that they consider, in good faith,
would be most likely to promote the success of the Group for
the benefit of its shareholders as a whole, and in doing so have
regard (amongst other matters) to:
The likely consequences of any decision in the long-term;
The impact of the Group’s operations on the community
and the environment;
The desirability of the Group maintaining a reputation for
high standards of business conduct; and
The need to act fairly to avoid conflicts between the
interests of the Directors and those of the Group.
Based on the Group’s current position and the performance of
the assets acquired, the principal risks that it faces and their
potential impact on its future development and prospects, the
Directors have concluded that there is a reasonable
expectation that the Group will be able to continue its business
model and meet its liabilities as they fall due over the three-
year period to the AGM in 2025. Please see the viability
statement on page 35 for more detail.
COMBINATION WITH POLLEN
STREET
On 15 February 2022, the Company announced that it has
reached agreement on the terms of a recommended all share
combination with Pollen Street. Under the terms of the
agreement, the Company will acquire the entire issued share
capital of Pollen Street in exchange for shares in the combined
group such that the Honeycomb and Pollen Street will be
combined into a single business, owned by the shareholders of
Honeycomb and Pollen Street. The combination is conditional
on shareholder and regulatory approval, and certain other
customary conditions.
The Group’s anticipated future developments and outlook are
discussed in more detail in the Chairman’s Statement on pages
7 to 8 and the Investment Manager’s Report on pages 9 to 10.
PREMIUM/DISCOUNT MANAGEMENT
The Board closely monitors the premium or discount at which
the Company’s ordinary shares trade in relation to the
Company’s underlying Net Asset Value and acts accordingly.
The Board is of the view that an increase of the Company’s
ordinary shares in issue may provide benefits to shareholders,
including a reduction in the Company’s administrative
expenses on a per share basis and increased liquidity in the
Company’s shares. At the Company’s AGM in 2021, the Board
was authorised to allot 7,051,948 ordinary shares, such
authority lasting until the conclusion of the 2022 Annual
General Meeting (“AGM”) of the Company (or, if earlier, until
close of business on 31 August 2022). Of this, up to 7,051,948
ordinary shares could be allotted on a non-pre-emptive basis,
provided that the issue price is no lower than the latest
published NAV per ordinary share. No shares were issued by the
Company pursuant to these authorities.
The Board believes that it is in the shareholders’ best interests
to prevent the Company’s shares trading at a discount to Net
Asset Value because shareholders will be unable to realise the
full value of their investments.
As a means of addressing the discount to Net Asset Value at
which the Company’s shares may, from time-to-time trade,
shareholders have authorised the Company to buy back
ordinary shares. No buy backs were executed over 2021 (2020:
4,190,178 share were purchased by the Company during the
year under review at an average price of 821 pence). The last
published NAV statement at the date of signing these financial
statements was the NAV for 31 January 2022.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 21
DIRECTORS’DUTIES
Section 172 of the Companies Act 2006
The Directors’ overarching duty is to act in good faith and in a
way that is the most likely to promote the success of the Group
as set out in Section 172 of the Companies Act 2006.
The Board of Directors confirm that during the year
under review, it has acted to promote the long-term
success of the Company for the benefit of shareholders,
whilst having due regard to the matters set out in section
172(1)(a) to (f) of the Companies Act 2006, being:
(a) the likely consequences of any decision in the long
term
(b) the interests of the Company’s employees
(c) the need to foster the Company’s business
relationships with suppliers, customers and others
(d) the impact of the Company’s operations on the
community and the environment
(e) the desirability of the Company maintaining a
reputation for high standards of business conduct; and
(f) the need to act fairly between members of the
Company.
Fulfilling this duty naturally supports the Group in achieving its
Investment Objective and helps to ensure that all decisions are
made in a responsible and sustainable way. In accordance with
the requirements of the Companies (Miscellaneous Reporting)
Regulations 2018, the Group explains how the Directors have
discharged their duty under Section 172 below.
To ensure that the Directors are aware of, and understand, their
duties, they are provided with the pertinent information when
they first join the Board as well as receive regular and ongoing
updates and training on the relevant matters. They also have
continued access to the advice and services of the company
secretary, and when deemed necessary, the Directors can seek
independent professional advice.
DECISION-MAKING
The importance of the stakeholder considerations, in the
context of decision-making, is taken into account at every
Board and Committee meeting. All discussions involve careful
considerations of the longer-term consequences of any
decisions and their implications for stakeholders. For example,
in any strategic planning discussions, the Board will consider in
detail the portfolio’s performance and forecasts; asset
allocation within the portfolio; as well as financial performance,
liquidity and balance sheet management. In addition, the
Board and the Investment Manager hold separate strategy
focused sessions at least once per annum to consider and
analyse the investment strategy. Performance of the Group is
closely monitored on an ongoing basis by the Investment
Manager and the Board and is reviewed in detail at each Board
meeting. The Board has set investment restrictions and
guidelines which the Investment Manager monitors and
reports on quarterly to the Board
The table below sets out four principal decisions made by the
Board in 2021, in addition to consideration of the proposed
combination with Pollen Street (more details of which are set
out in the Chairman’s Statement on pages 7 to 8): the response
to Covid-19, the sale of the organic book, a cyber risk review
and an operational resilience review. The table also includes
the ways in which stakeholder considerations were factored in
and addressed during the decision-making process:
Response to Covid-19
The Covid-19 pandemic has presented unprecedented
challenges. A focal area for the Board over 2020 and 2021
has been on engaging with stakeholders to ensure that
these challenges have been managed as effectively as
possible.
How were stakeholders considered
The Board met regularly with the Manager to discuss the
evolving situation and the performance of the portfolio.
The Board also received regular updates on regulatory
changes, shareholder views and on how to manage
potential issues for creditors. The Board considered the
credit partners to ensure they were being dealt with fairly
whilst also protecting the interests of the shareholders
What was the outcome of such engagement
The Board supported the actions taken by the Investment
Manager to steer the portfolio through the period. The
Board approved changes to the Company’s debt facility
during the year. These ensured that the Group could
benefit from an increased funding capacity and more
diversified funding providers than it did at the start of the
year.
The Sale of the Organic Book
The Company has previously held a portfolio of loans
that were originated specifically for the Company to
acquire (the “Organic Book”). Subsequently, it became
apparent that these loans delivered less stable returns
than other portfolios.
How were stakeholders considered?
The Manager is in regular contact with shareholders of
the Company in addition to other stakeholders such as
analyst and debt providers. It was clear that the selling
the Organic book would benefit stakeholders by making
returns more stable and simplifying the business.
What was the outcome?
The Organic Book was sold to a third party.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 22
Cyber Risk Review
Cyber Risk has been an area of increasing focus recently
given the wide prevalence of cyber incidents in corporates
and other areas of society. The Risk Committee lead a
review of cyber risk in conjunction with the Manager.
How were stakeholders considered?
The Manager commissioned a review of its systems and
controls from a third-party cyber risk expert. The review
and its conclusions were discussed with the board
members.
What was the outcome?
The Manager implemented all recommendations of the
review and agreed to update the review on an annual
basis.
Operational Resilience Review
The Covid-
19 pandemic presented intense challenges to the
operations of all companies. The Risk Committee maintained
oversight of the operational risks and the corresponding
business continuity plans put in place by the M
anager and
third-party service providers.
How were stakeholders considered
The Board met with the Investment Manager and third-
party
service providers regularly throughout the year to ensure that
all critical services continued to be delivered to a high
standard.
What was the outcome of such engagement
The Company successfully managed through the crisis with
all critical services maintained despite the work from home
environment.
How we engage with stakeholders
The Board seeks to understand the needs and priorities of the
Group’s stakeholders, and these are taken into account during
all its discussions and as part of its decision-making. As an
externally managed investment firm, the Group does not have
any employees or customers, nor does it have a direct impact
on the community or environment in the conventional sense.
Further explanation on environmental, human rights,
employee, social and community issues is set out on pages 11
to 14.
The description of the way the Group operates on page 5
explains the various stakeholders in the lending market
involved in the investment strategy of the Group. The Board
defines the Group’s key stakeholders as individuals or groups
who have an interest in, or are affected by, the activities of our
business; accordingly, the Board has considered its key
stakeholders to be as follows:
Shareholders
Continued shareholder support and engagement are critical to
existence of the business and the delivery of the long-term
strategy of the business.
The Group’s shareholders include institutional, professional
and professionally advised and knowledgeable investors. The
Group understands the need to effectively communicate with
existing and potential shareholders, briefing them on strategic
and financial progress and attaining feedback. The Board is
committed to maintaining open channels of communication
and to engage with shareholders in a manner which they find
most meaningful, in order to gain an understanding of the
views of shareholders. The Board engagement includes:
Annual General Meeting – The Group welcomes
engagement from shareholders at the AGM as it sees it as an
important opportunity for all shareholders to engage directly
with the Board. Further details are included in the Notice of
AGM which will be posted to shareholders along with this
Annual Report and Audited Financial Statements.
The Board values any feedback and questions it may receive
from shareholders ahead of and during the AGM and will take
action or make changes, when and as appropriate. All directors
attended the 2021 AGM, which was held as a closed meeting
due to the Covid-19 pandemic. All voting at general meetings
of the Company is conducted by way of a poll. All shareholders
have the opportunity to cast their votes in respect of proposed
resolutions by proxy, either electronically or by post. Following
the AGM, the voting results for each resolution are published
and made available on the Company’s website
Publications - The Annual Report and Audited Financial
Statements and half-year results are made available on the
Group’s website and are circulated to shareholders. These
reports provide shareholders with a clear understanding of
the underlying portfolio and the financial position of the
Group. The Group also publishes monthly the NAV per share
and a monthly factsheet which are available on the website
and the publication of which is announced via the London
Stock Exchange. The monthly factsheet updates the market
with underlying performance and commentary around this
for that month. Feedback and/or questions the Group and
the Investment Manager receive from the shareholders and
analysts help the Board evolve its reporting;
Shareholder concerns - In the event shareholders wish
to raise issues or concerns with the Directors, they are
welcome to do so at any time by writing to the Chairman at
the registered office. Other members of the Board are also
available to shareholders if they have concerns that have not
been addressed through the normal channels. Feedback can
also be gained via the Group’s corporate brokers, which is
communicated to the Board and Investment Manager; and
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 23
Working with external partners – the Investment
Manager and the Group’s corporate brokers maintain an
active dialogue with shareholders and potential investors at
scheduled meetings or analyst briefings following financial
results and provide the Board regular reports and feedback
on key market issues and shareholder concerns. This
includes market dynamics and corporate perception.
The Investment Manager
The Investment Manager’s performance is critical for the Group
to successfully deliver its investment strategy and meet its
objective to provide shareholders with an attractive level of
dividend income and capital growth through investing in
primarily asset secured loans (“Credit Assets”) and selected
equity investments that are aligned with the Group’s strategy
and that present opportunities to enhance the Group’s returns
from its investments (”Equity Assets”).
Maintaining a close and constructive working relationship with
the Investment Manager is crucial as the Board and the
Investment Manager both aim to continue to achieve
consistent, long-term returns in line with its investment
objective. Important components in the collaboration with the
Investment Manager, representative of the Group’s culture are:
Encouraging open discussion with the Investment
Manager;
Adopting a tone of constructive challenge when
appropriate;
Drawing on Board Members’ individual experience
and knowledge to support the Investment Manager
in its monitoring the portfolio of investments; and
That the Board and the Investment Manager should
act within the agreed investment restrictions and risk
appetite statement and not seek to add further
investment risk.
The Company Secretary, the Administrator, the Registrar, the
Depositary, The Broker
In order to function as an investment trust and a constituent of
the premium segment of the Main Market of the London Stock
Exchange, the Group relies on a diverse range of advisors for
support with meeting all relevant obligations.
The Board maintains regular contact with its key external
providers, primarily at the Board and committee meetings, as
well through the Investment Manager from its own interactions
with the external providers outside of the regular meeting cycle.
In addition, the Management Engagement Committee is
tasked with periodic reviews of the external service providers,
assessing their performance, fees and continuing appointment
at least annually to ensure that the key service providers
continue to function at an acceptable level and are
appropriately remunerated to deliver the expected level of
service.
Lenders
Availability of funding and liquidity are crucial to the Group’s
ability to take advantage of investment opportunities as they
arise.
Therefore, the Group aims to demonstrate to lenders that it is
a well-managed business, capable of consistently delivering
stable returns with limited risk.
Regulators
The Group regularly considers how it meets various regulatory
and statutory obligations and follows voluntary and best-
practice guidance, and how any governance decisions it makes
can have an impact on its stakeholders, both in the shorter and
in the longer-term.
CORPORATE AND OPERATIONAL
STRUCTURE
Corporate Structure
On 20 June 2019 the Group incorporated Sting Funding Limited
(“Sting”), a limited Company incorporated under the law of
England and Wales. The Group is considered to control Sting
through holding 100 percent of the issued shares.
Sting became active on 28 August 2019 when it drew down on
a debt facility backed by commercial and second charge
residential mortgages.
The Company also controls Bud Funding Limited (“Bud”), a
limited company incorporated under the law of England and
Wales. The Company is considered to control Bud through its
exposure to the variable returns of the vehicle through holding
of a junior note issued by it. Bud was incorporated on 2
November 2020.
As a result, the financial statements for the year ended 31
December 2021 and 31 December 2020 are prepared on a
consolidated basis.
Operational and portfolio management
The Group has outsourced its operations and portfolio
management to various service providers as detailed below:
Pollen Street Capital Limited has been appointed as the
Group’s investment manager and Alternative Investment
Fund Manager (“AIFM”) for the purposes of the Alternative
Investment Fund Managers Directive (“AIFMD”);
Apex Fund Services (UK) Limited has been appointed to
act as the Group’s Administrator (the “Administrator”);
Link Company Matters Limited has been appointed to
act as the Company’s Secretary (the “Company
Secretary”);
Indos Financial Limited has been appointed to act as the
Group’s Depositary (the “Depositary”);
Sparkasse Bank Malta plc has been appointed to act as
the Group’s Custodian (the “Custodian”);
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 24
Computershare Investor Services plc has been
appointed as the Group’s Registrar (the “Registrar”); and
Liberum Capital Limited and Cenkos Securities plc have
been appointed to act as the Group’s joint corporate
broker and financial adviser.
Slaughters and May have been appointed to provide
legal services to the Group.
Alternative Investment Fund Managers Directive
(“AIFMD”)
In accordance with the AIFMD, the Group has appointed Pollen
Street Capital Limited to act as the Group’s AIFM for the
purposes of the AIFMD. The AIFM ensures that the Group’s
assets are valued appropriately in accordance with the relevant
regulations and guidance. The Group has appointed Indos
Financial Limited as depositary. In addition, the Group entered
into an amended Depository Agreement enabling it to delegate
certain custody functions as required by the AIFMD to
Sparkasse Bank Malta plc (the “Custodian”) on 17 November
2017.
Anti-bribery and corruption policy
The Group has no employees or operations but has adopted
the anti-bribery and corruption policy of the Investment
Manager, ensuring compliance with all applicable anti-bribery
and corruption laws and regulations, including the UK Bribery
Act 2010.
Environment, human rights, employee, social and
community issues
The Group is required by law to provide details of
environmental matters (including the impact of the Group’s
business on the environment), employee, human rights, social
and community issues (including information about any
policies it has in relation to these matters and the effectiveness
of those policies). The Group does not have any employees and
the Board is composed of independent non-executive
Directors. As an investment trust, the Group does not have any
direct impact on the environment and is currently exempt from
the requirement to disclose TCFD disclosures. The Group aims
to minimise any detrimental effect that its actions may have by
adhering to applicable social legislation, and as a result does
not maintain specific policies in relation to these matters.
The Group has no internal operations or physical assets such
as property and therefore no greenhouse gas emissions to
report nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations 2013, including
those within its underlying investment portfolio. However, the
Group believes that high standards of corporate social
responsibility such as the recycling of paper waste will support
its strategy and make good business sense.
In carrying out its investment activities and in relationships with
suppliers, the Group aims to conduct itself responsibly,
ethically and fairly.
The Investment Manager is committed to maintaining and
enhancing its focus on the societal impact of its actions in a
way that generates enduring long-term returns for investors
and society. Further detail on this is included in the ESG section
on pages 11 to 14.
Modern Slavery Act
The Board gives due regard to human rights considerations, as
defined under the European Convention on Human Rights and
the UK Human Rights Act 1998.
We are aware of our responsibilities and obligations under the
Modern Slavery Act and other relevant legislation relating to
the detection and prevention of modern slavery and human
trafficking. The Board is committed to implementing and
enforcing effective systems and controls that seek to ensure
that modern slavery is not taking place anywhere in its business
or in its supply chains.
Further details of our compliance with the Modern Slavery Act
can be found on our website.
BOARD DIVERSITY
The Board recognises the benefits of greater diversity,
including gender and ethnic diversity and remains committed
to ensuring that the Directors bring a wide range of skills,
knowledge, experience, backgrounds and perspectives.
All appointments are made on merit against objective criteria
identified with regard for the benefits of diversity on the Board,
so as to achieve the overall balance of skills and experience
that the Board judges that it needs in order to remain effective
in meeting the challenges and opportunities that it anticipates.
The Board of Directors consists of four non-executive Directors,
one of whom is female. During 2019, the Board adopted a
Board Diversity and Inclusion policy and has established
measurable objectives for achieving diversity on the Board and
has undertaken to only engage executive search firms who
have signed up to the voluntary Code of Conduct on gender
diversity and best practice. With the appointment of Joanne,
the Board is pleased to note that it has achieved its aim within
the Board Diversity and Inclusion Policy to secure at least 25%
female representation on the Board; the Board and the
Nomination Committee will continue to review whether this
25% target remains appropriate or should be increased in
going forward, along with other potential initiatives to further
support and encourage diversity and inclusion.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 25
Principal Risks and Uncertainties
The Group faces a number of risks, both principal and
emerging, and as a result management of the risks we face is
central to everything we do. These risks could have a material
impact on financial performance and position and could cause
actual results to differ materially from expected and historical
results.
The Board maintains comprehensive risk management
methodology overseeing the risks which are considered to be
material to its business and maintaining surveillance of its
operating environment for emerging risks. This approach
balances risks and opportunities, and contributes to the
achievement of the Group’s strategic objectives. It maintains a
risk register which records risk management process for the
Group’s identified risks, and assesses each risk on a scale,
classifying the probability of the risk and the potential impact
that an occurrence of the risk could have on the Group. The risk
register was last reviewed by the Risk Committee and Board on
20 January 2022.
The main change to the risk register since the prior year is a
reduction in borrowing risk given that all debt facilities are
operating comfortably within their limits and enhanced
mitigation actions have been implemented. The day-to-day
risk management functions of the Group have been delegated
to the Investment Manager, which reports to the Risk
Committee.
INVESTMENT RISKS
Achievement of the Investment Objective
There can be no assurance that the Investment Manager will
continue to be successful in implementing the Company’s
investment objective potentially resulting in performance
degradation, reduced profitability, and reputational damage.
Mitigation
The Group’s investment decisions are delegated to the
Investment Manager. Performance of the Group against its
investment objectives is closely monitored on an ongoing basis
by the Investment Manager and the Board and is reviewed in
detail at each Board meeting. The Board has set investment
restrictions and guidelines which the Investment Manager
monitors and reports on quarterly to the Board. In the event it
is required, any action required to mitigate underperformance
is taken as deemed appropriate by the Investment Manager.
We expect the economic environment to create some
compelling new opportunities for the Group which the
Investment Manager will selectively review and deploy capital
into.
Fluctuations in the market price of Issue Shares
The market price of the Group’s shares may fluctuate widely in
response to different factors and there can be no assurance
that the Group’s shares will be repurchased by the Group even
if they trade materially below their Net Asset Value. Similarly,
the shares may trade at a premium to Net Asset Value whereby
the shares can trade on the open market at a price that is higher
than the value of the underlying assets. There can be no
assurance, express or implied, that shareholders will receive
back the amount of their investment in the Group’s shares.
Mitigation
The Investment Manager and the Board closely monitor the
level of discount or premium at which the Company’s shares
trade on the open market. The Company may purchase the
shares in the market with the intention of enhancing the Net
Asset Value per ordinary share. However, there can be no
assurance that any repurchases will take place or that any
repurchases will have the effect of narrowing any discount to
Net Asset Value at which the ordinary shares may trade. When
the Company’s shares trade at a premium the Company may
issue shares to reduce the premium at which shares trade. The
Investment Manager engages actively with shareholders and
analysts to help communicate the Company's financial
success and positive outlook and an attractive dividend policy
has been adopted. As at 31 December 2021, the Company’s
shares were trading at a discount to Net Asset Value.
Revenue reserves have increased by 1.6million over the year,
consequently increasing NAV per share to 1,019pence from
1,013pence. The Company has paid a consistent dividend of
20.00p per ordinary share throughout 2021, representing an
8.00% annualised yield on the IPO issuance price, in line with
the Board's dividend policy. The last published NAV statement
at the date of signing these financial statements was the NAV
for 31 January 2022.
Exposure to Credit Risk
The Group is expected to invest a significant proportion of its
assets in Credit Assets which, by their nature, are exposed to
credit risk and may be impacted by adverse economic and
market conditions, including through higher impairment
charges, increased capital losses and reduced opportunities
for investment.
The Covid-19 pandemic has continued to cause disruption
across the globe throughout 2021. Although grass roots of
economic rebound have been observed, at the time of writing
a new variant has emerged threatening the return to normality
that economies depend on for their continued recovery.
However, the portfolio has continued to perform robustly
throughout the year, delivering stable returns. The Group could
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 26
experience impairments and consequently reduced profits,
particularly if economic expectations deteriorate further. The
overall effect of this cannot be quantified reliably because of
uncertainty surrounding further waves, and the macro
environment.
Mitigation
The Manager has substantial sector expertise and experience
in transformation, driving growth for the portfolio and
performance for investors. The Group will invest in a granular
portfolio of assets, diversified by the number of borrowers, the
type, and the credit risk of each borrower. Each loan is subject
to, amongst other restrictions, a maximum single loan
exposure limit. Additionally, the Group has made assumptions
around loss and arrears rates within the portfolio in its financial
projections. Further, the Investment Manager diligences the
established underwriting criteria of the platforms which
includes (where applicable) credit referencing, income
verification and affordability testing, identity verification and
various forward-looking indicators of a borrower's likely
financial strength. The Group also provides structured lending
facilities to corporate entities which can be larger value loans.
Please see Note 13 to the financial statements for more details
on Credit Risk.
The Manager has access to a diversified range of sources from
which to select attractive assets. For structured lending
facilities the Group undertakes a robust process. Facilities are
secured and typically structured with minimum asset coverage
ratios and covenants to provide early warning of credit
deterioration and adequate asset cover in the event of stress.
The Group operates within the Investment policy guidelines
and lends on a secured basis against identifiable and
accessible assets.
Borrowing
The Group may use borrowings in connection with its
investment activities including, where the Investment Manager
believes that it is in the interests of shareholders to do so, for
the purposes of seeking to enhance investment returns. Such
borrowings may subject the Group to interest rate risk and
additional losses if the value of its investments fall. Whilst the
use of borrowings should enhance the Net Asset Value of the
Group’s issued shares when the value of the Group’s underlying
assets is rising, it will have the opposite effect where the
underlying asset value is falling. In addition, in the event that
the Group’s income falls for whatever reason, the use of
borrowings will increase the impact of such a fall on the
Group’s return and accordingly will have an adverse effect on
the Group’s ability to pay dividends to shareholders.
Mitigation
The Investment Manager and the Board closely monitors the
level of gearing of the Group. The Group has a maximum
limitation on borrowings of 100 percent of net debt to equity
ratio (the target is 75 percent net debt to equity). The
Investment Manager may draw debt facilities at its discretion
when conditions and opportunities exist to enhance
investment returns, the facilities have long maturity dates, and
amortisation and cash sweep mechanics built into the facility
agreements.
2021 closed in a strong position with ample headroom on the
existing facilities. Further detail on these facilities can be found
in Note 17.
Interest Rate Risk
The Group intends to invest in Credit Assets which may be
subject to a fixed rate of interest, or a floating rate of interest
(which may be linked to base rates or other benchmarks) and
expects that its borrowings will be subject to a floating rate of
interest. Any mismatches the Group has between the income
generated by its Credit Assets (e.g., as a result of loss of
earnings), on the one hand, and the liabilities in respect of its
borrowings, on the other hand, may subject the Group to
interest rate risk.
Mitigation
Interest rate risk exposures may be managed, in part, by the
natural hedge between floating rate borrowings (debt) with
investments in Credit Assets that are also subject to a floating
rate of interest. The Group may use derivative instruments,
including interest rate swaps, to reduce its exposure to
fluctuations in interest rates, however some unmatched risk
may remain.
Liquidity
The Group may invest in assets that are aligned with the
Group’s strategy and that present opportunities to enhance the
Group’s return on its investments. Such assets are likely to be
illiquid and therefore may be more difficult to realise, or
excessive losses may occur in the event of the fire sale of assets.
Mitigation
The Group actively manages its liquidity position to ensure
there is sufficient liquidity to meet liabilities as they fall due
(note 19). The Group benefits from long term debt facilities with
amortisation periods rather than bullet repayments;
amortising assets that are highly cash generative; strong
covenant packages that give the Group ability to influence the
borrower’s behaviours in times of stress.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 27
Climate Risk
Climate change presents potential financial risks that have far
reaching implications, potentially impacting the group’s
investments. The risks arise through two primary channels: the
physical effects of climate change and the impact of changes
associated with the transition to a lower carbon economy.
Climate risk is expected to manifest itself over the medium to
long term as emerging regulations are implemented. The
greatest risk is expected to lie within our partners businesses
and the investment portfolio. In this context, Honeycomb has
comparatively short duration assets. This substantially
mitigates the exposure to climate risk. No material impact on
the financial statements has been identified from the risks
arising from climate change.
Mitigation
The Group has performed an initial high-level materiality
assessment of climate risk across its investment portfolio and
is developing a comprehensive action plan that takes into
account the components of the Taskforce for Climate-related
Financial Disclosures (TCFD). Through this, the Group is
progressing a range of activities to better understand the
impacts of the Group’s operations on the climate and the
impacts of climate change on the Group’s portfolios. The
Group is focusing on its business resilience in order to enhance
the Group’s capabilities for the identification, management,
monitoring and disclosure of climate related risks and
opportunities.
OPERATIONAL RISKS
Third Party Service Providers
Whilst the Group has taken all reasonable steps to establish
and maintain adequate procedures, systems, and controls to
enable it to comply with its obligations, the Group is reliant
upon the performance of third-party service providers for its
executive function. In particular, the Investment Manager,
Depositary, Custodian, Administrator, Registrar and servicers,
amongst others, will be performing services which are integral
to the day-to-day operation of the Group.
As part of this, the operations of the third-party service
providers are highly dependent on IT systems. Any critical
system failure, prolonged loss of service availability or material
breach of data security could cause serious damage to the
third-party’s ability to provide services to the Group, which
could result in significant compensation costs or regulatory
sanctions or a breach of applicable regulations. Failures or
breaches resulting in the loss or publication of confidential
customer data could cause long-term damage to reputation
and could affect regulatory approvals and competitive position
which could undermine their ability to attract and retain
customers.
The termination of service provision by any service provider, or
failure by any service provider to carry out its obligations either
by fraud or error to the Group, or to carry out its obligations to
the Group in accordance with the terms of its appointment,
could have a material adverse effect on the Group’s operations
and its ability to meet its investment objective.
Mitigation
The Group has appointed third party service providers who are
experienced in their field and have a reputation for high
standards of business conduct. Further, day-to-day oversight of
third-party service providers is exercised by the Investment
Manager and each of the service providers is subject to regular
performance and compliance monitoring. The performance of
the Investment Manager in its duties to the Group is subject to
ongoing review by the Board on a quarterly basis as well as
formal annual review by the Group’s Management Engagement
Committee.
The appointment of each service provider is governed by
agreements which contain the ability to terminate each of
these counterparties with limited notice should they
continually or materially breach any of their obligations to the
Group.
As part of the response to Covid-19 all outsourced third party
service providers have successfully implemented business
continuity processes such as working from home. This has
meant that the service levels received by the Group have been
maintained.
Reliance on key individuals
The Group will rely on key individuals at the Investment
Manager to identify and select investment opportunities and to
manage the day-to-day affairs of the Group. There can be no
assurance as to the continued service of these key individuals
at the Investment Manager. The departure of key individuals
from the Investment Manager without adequate replacement
may have a material adverse effect on the Group’s business
prospects and results of operations. Accordingly, the ability of
the Group to achieve its investment objective depends heavily
on the experience of the Investment Manager’s team, and more
generally on the ability of the Investment Manager to attract
and retain suitable staff.
Mitigation
The interests of the Investment Manager are closely aligned
with the performance of the Group through the management
and performance fee structures in place and direct investment
by certain key individuals of the Investment Manager.
Furthermore, investment decisions are made by a team of
professionals, mitigating the impact loss of any single key
professional within the Investment Manager’s organisation.
The performance of the Investment Manager in its duties to the
Group is subject to ongoing review by the Board on a quarterly
basis as well as formal annual review by the Group’s
Management Engagement Committee.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 28
REGULATORY RISKS
Tax
Any changes in the Group’s tax status or in taxation legislation
could affect the Group’s ability to provide returns to
shareholders and affect the tax treatment for shareholders of
their investments in the Group.
Mitigation
The Group conducts its affairs so as to enable it to qualify as an
investment trust for the purposes of Section 1158 of the
Corporation Tax Act 2010. Both the Board and the Investment
Manager are aware of the requirements which are to be fulfilled
in any accounting period for the Group to maintain its
investment trust status. The conditions required to satisfy the
investment trust criteria are monitored by the Investment
Manager and performance of the same shall be reported to the
Board on a quarterly basis. Where new SPVs are created or
acquired these are done in such a way to not impact the
potential tax liability of the Group.
Breach of applicable legislative obligations
The Group and its third-party service providers are subject to
various legislative and regulatory regimes, including, but not
limited to, the Consumer Credit Act General Data Protection
Regulation and the Data Protection Act 2018. Any breach of
applicable legislative and/or regulatory obligations could have
a negative impact on the Group and impact returns to
shareholders.
Mitigation
The Group engages only with third party service providers
which hold the appropriate regulatory approvals for the
function they are to perform and can demonstrate that they
can adhere to the regulatory standards required of them. Each
appointment is governed by agreements which contain the
ability for the Group to terminate the arrangements with each
of these counterparties with limited notice should such
counterparty continually or materially breach any of their
legislative obligations, or their obligations to the Group more
broadly. Additionally, each of the counterparties is subject to
regular performance and compliance monitoring by the
Investment Manager, as appropriate to their function, to ensure
that they are acting in accordance with applicable regulations
and are aware of any upcoming regulatory changes which may
affect the Group. Performance of third-party service providers
is reported to the Board on a quarterly basis, whilst the
performance of the Investment Manager in its duties to the
Group is subject to ongoing review by the Board on a quarterly
basis as well as formal annual review by the Group’s
Management Engagement Committee.
EMERGING RISKS
The Group monitors its emerging risks, supporting
organisational readiness for external volatility, incorporating
input and insight from both a top-down and bottom-up
perspective:
Top-down: Emerging risks identified by directors at a
group level via the Risk Committee and the Board
helping to define the overall attitude of the Group to risk.
Bottom-up: Emerging risks identified at a business level
and escalated, where appropriate by the Investment
Manager, Manager, via risk updates into the Risk
Committee and the Board.
Recent developments such as the emergence of new markets
and technologies, and the existence of increasingly complex
supply chains have given rise to new challenges, uncertainties
and opportunities in the macro-economy.
Over the period, the risk committee has considered market,
political, and operational risks such as ESG, operational
resilience, financial instability, and cyber risks. These risks are
considered as new risks in known context; risks that have
emerged in the external environment but are associated with
the existing strategy of the Group.
It is anticipated that climate risk (including natural resources
management) will continue to dominate the emerging risk
landscape together with technology risk. There has been
particular focus recently on cyber risk and its potential impact
on companies and society.
Mitigation
Emerging risks are monitored by the Risk Committee on an
ongoing basis. Actions are tracked to ensure the Group’s
preparedness should an emerging risk crystallise.
During 2021, the Risk Committee led a deep dive on cyber risk
and, together with the Investment Manager, commissioned an
external review of Pollen Street’s cyber security arrangements.
The review did not identify any major weaknesses and all
recommendations have since been implemented.
The Risk Committee will continue to monitor these risks and
respond to the evolving risk landscape.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 29
Key Performance Indicators
The Board monitors success in implementing the Group’s strategy against a range of key performance indicators (“KPIs”), which are
viewed as significant measures of success over the longer term. Although performance relative to the KPIs is also monitored over
shorter periods, it is success over the long-term that is viewed as more important, given the inherent volatility of short-term investment
returns. The principal KPIs are set out below with commentary included throughout the Strategic Report:
31 December 2021 31 December 2020
NET ASSET VALUE
NET ASSET VALUE (CUM INCOME) (£’000)
(1)
359,342 357,232
MARKET CAPITALISATION (£’000)
(2) (3)
333,204 332,323
PER SHARE METRICS
SHARE PRICE (AT CLOSE)
(4)
945.0p 942.5p
NAV PER SHARE (CUM INCOME)
(1)
1,019.1p 1,013.1p
SHARES IN ISSUE
35,259,741 35,259,741
PERFORMANCE INDICATORS AND KEY RATIOS
PREMIUM / (DISCOUNT)
(2)
(5)
(7.3%) (7.0)%
ANNUAL NAV RETURN
(2) (6)
8.5% 7.7%
PROFIT (£’000)
(7)
30,318 20,701
ITD TOTAL NAV RETURN
(2) (8) (9)
49.9% 41.1%
DEBT TO EQUITY
(2)
(10)
74.5% 76.6%
NET DEBT TO EQUITY
(2) (11)
70.9% 59.1%
DIVIDEND RETURN
(2) (12)
8.0% 8.0%
ONGOING CHARGES
(2) (13)
2.3% 2.0%
APPROVAL
The Strategic Report was approved by the Board of Directors on 1 March 2022 and signed on its behalf by:
Robert Sharpe
Chairman
1 March 2022
(1) NET ASSET VALUE (CUM INCOME): include
s
the value of investments, other assets and cash, including current year revenue, less liabilities. NAV per share is calculate
d by dividing the calculated figure by the
total number of shares.
(2) ALTERNATIVE PERFORMANCE MEASURES: Alternative Performance Measures (“APMs”) are used to improve the comparability of information between reporting periods, either by adjusting for uncontrollable
or one-off factors which impact upon IFRS measures or, by aggregating measures, to aid the user understand the activity taking place. The Strategic Report includes both statutory and adjusted measures, the
latter of which, reflects the underlying performance of the business and provides a more meaningful comparison of how the business is managed. APMs are not considered to be a substitute for IFRS measures
but provide additional insight on the performance of the business. Reconciliations to amounts appearing in the financial statements can be found in section 5.
(3) MARKET CAPITALISATION: the closing mid-market share price multiplied by the number of shares outstanding at month end.
(4) SHARE PRICE (AT CLOSE): closing mid-market share price at period end.
(5) PREMIUM / (DISCOUNT): the amount by which the price per share of an investment trust is either higher (at a premium) or lower (at a discount) than the net asset value per share (cum income), expressed as
a percentage of the net asset value per share.
(6) ANNUAL NAV RETURN: is calculated as Net Asset Value (Cum Income) at the end of the year, plus dividends declared during the year, divided by NAV (Cum Income) calculated on a per share basis at the start
of the year.
(7) PROFIT: as profit after taxation
(8) ITD: inception to date – excludes issue costs.
(9) TOTAL NAV RETURN: is calculated as Net Asset Value (Cum Income) at the end of the year, plus dividends declared during the year, divided by NAV (Cum Income) calculated on a per share basis at the start of
the year. There was a 1.06 percent uplift on the inception to date total NAV per share return due to the effect of shares being issued at a premium during May-17 capital raise and 0.73 percent in relation to the
April-18 capital raise.
(10) DEBT TO EQUITY: is calculated as the Group ’s interest bearing debt divided by the net asset value, expressed as a percentage.
(11) NET DEBT TO EQUITY: is calculated as the Group’s interest bearing debt, less cash and cash equivalents divided by the net asset value, expressed as a percentage..
(12) DIVIDEND RETURN: is calculated as the total declared dividends for the period divided by IPO issue price.
(13) ONGOING CHARGES RATIO: The Annualised Ongoing Charge is calculated using the Association of Investment Companies recommended methodology. It is calculated as a percentage of annualised ongoing
charge over average reported Net Asset Value. Ongoing charges are those expenses of a type which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the
operation of the investment company as a collective fund, excluding the costs of acquisition/disposal of investments, financing charges and gains/losses arising on investments. Ongoing charges are based on
costs incurred in the year as being the best estimate of future costs. The AIC excludes performance fees from the Ongoing Charges calculation
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 30
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 31
Board of Directors
The directors of the company who were in office during the year and up to the date of signing the financial statements were Robert
Sharpe, Jim Coyle, Richard Rowney and Joanne Lake.
ROBERT SHARPE
(1)
Chairman of the Board, the Nomination Committee and the Management Evaluation Committee.
Member of the Remuneration Committee.
Robert has over 45 years’ experience in retail banking. He is currently chairman at MetroBank plc, Hampshire Trust Bank plc and
Aspinall Financial Services Limited. He has had an extensive number of appointments both in the UK and the Middle East including
non-executive Director (“NED”) at Aldermore Bank plc, George Wimpy plc, Barclays Bank UK Retirement Fund, Vaultex Limited, LSL
Properties plc, RIAS plc and several independent NED roles at banks in Qatar, UAE, Oman and Turkey. Robert was previously chief
executive officer at West Bromwich Building Society, a role he took to chart and implement its rescue plan. Prior to this, he was chief
executive officer at Portman Building Society and Bank of Ireland in the UK.
JIM COYLE
(1)
Senior Independent Director to the Board.
Chairman of the Audit Committee.
Member of the Risk Committee, the Nomination Committee, the Remuneration Committee and the Management
Evaluation Committee. Jim is a non-executive Director, chair of the Audit Committee and member of the Risk Committee at HSBC
UK Bank plc, chairman of HSBC Trust Company (UK) Ltd and Marks & Spencer Unit Trust Management Limited. He is also Chairman at
Supply@ME Capital plc, a non-executive Director and Chairman of the audit and risk committee at Scottish Water, non-executive
director at Marks & Spencer Financial Services plc and an independent non-executive member of Deloitte UK Oversight Board. He was
previously Chairman at Worldfirst, non-executive director at the Scottish Building Society, non-executive director and chairman of the
Audit Committee of Vocalink plc, and group financial controller at Lloyds Banking Group, having earlier held a role as divisional finance
director, Group Operations. Prior to this, Jim was group chief accountant for the Bank of Scotland, having joined the bank in 1991. He
qualified as a Chartered Accountant with KPMG before spending 10 years in the oil industry, holding senior positions with BP. Jim is a
Fellow of the Chartered Institute of Bankers in Scotland, a former member of the Council of the Institute of Chartered Accountants of
Scotland and the Financial Reporting Council Committees.
RICHARD ROWNEY
(2)
Chairman of the Risk Committee.
Member of the Audit Committee, the Nomination Committee, the Remuneration Committee and the
Management Evaluation Committee.
Richard is currently Group CEO of James Hay Partnership (“JHP”) and Nucleus Financial Group (“NFG”) a leading retirement and wealth
management specialist managing over £48bn of assets. Backed by Private Equity specialist Epiris, JHP is a consolidator in the platform
market. He is also a non-executive Director at MSP Capital Limited. Prior to this, Richard was group chief executive of LV= a leading
financial services provider and a mutual where he worked as an executive member of the board for 13 years. Richard left LV= at the
end of 2019 following the sale of the General Insurance business to the Allianz Group. Richard had led the business to win the
Moneywise Most Trusted Life Insurer award as well as YouGov’s UK’s Most Recommended Insurer. Prior to his position as chief
executive officer he had been Managing Director of the group’s Life & Pensions business which he successfully turned into one of the
UK’s leading Protection and Retirement specialist companies. Prior to his time at LV= Richard held various chief operating officer and
risk roles across Barclays corporate and retail banking. Richard holds a first-class degree in Geography from the University of Leeds,
an MBA from Henley Business School and has completed the Harvard Management Programme in 2006.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 32
JOANNE LAKE
(3)
Chairman of the Remuneration Committee.
Member of the Audit Committee, the Risk Committee, the Nomination Committee and the Management
Evaluation Committee.
Joanne has over 35 years’ experience in financial and professional services. She is currently independent non-executive chair of
Made Tech Group plc, the AIM-listed leading provider of digital, data and technology services to the UK public sector, independent
non-executive chairman of Mattioli Woods Plc, the AIM-listed specialist wealth and asset management business, independent non-
executive deputy chairman of Main Market-listed land promotion, property development and investment, and construction group,
Henry Boot PLC, and is an independent non-executive director at AIM-listed Gateley Holdings plc, the legal and professional services
group, and Morses Club Plc, an established provider of non-standard financial services, and Braemar Shipping Services PLC, an
established international provider of shipping, marine and energy services. Joanne is a Chartered Accountant and has previously
held senior roles at UK investment banks including Panmure Gordon, Evolution Securities and Williams de Broe and in audit and
business advisory services with PwC. Joanne is a Fellow of the ICAEW and a member of its Corporate Finance Faculty and is a Fellow
of the Chartered Institute for Securities and Investment.
(1)
Appointed 14 December 2015
(2)
Appointed 1 July 2019
(3)
Appointed 1 January 2021
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 33
Statutory Information
The Directors of Honeycomb Investment Trust plc (Registered:
09899024) present their report and audited financial
statements of the Company and its subsidiaries (together, the
“Group”) for the year ended 31 December 2021. The shares are
listed on the Main Market of the London Stock Exchange.
The strategic report on pages 3 to 29 includes section 172 of the
Companies Act 2006 highlighting the Directors’ overarching
duty.
BOARD MEMBERS, AND DIRECTORS’
AND OFFICERS’ INSURANCE
The names and biographical details of the Board members
who served on the Board as at the year-end can be found on
pages 31 and 32.
During the year under review the Group maintained directors'
and officers' liability insurance for its Directors and officers as
permitted by section 233 of the Companies Act 2006. The
directors’ and officers’ liability insurance has been renewed
and will remain in place under the current renewal until
February 2023.
STATUS OF THE COMPANY
The Company is an investment company within the meaning
of section 833 of the Companies Act 2006.
The Company operates as an investment trust in accordance
with Section 1158 of the Corporation Tax Act 2010 and the
Investment Trust (Approved Company) (Tax) Regulations 2011.
HM Revenue & Customs approved the Company as an
investment trust upon its listing on 23 December 2015. In the
opinion of the Directors, the Company has conducted its affairs
so that it is able to maintain its status as an investment trust.
The Company is an externally managed closed-ended
investment company with an unlimited life and has no
employees (2020: no employees).
The Company was incorporated in England and Wales on 2
December 2015 and started trading on 23 December 2015,
immediately upon the Company’s listing.
INTERNAL CONTROLS AND RISK
MANAGEMENT
The Board has established an ongoing process for identifying,
evaluating and managing risk on behalf of the Group. The
Board has carried out a robust assessment of its principal and
emerging risks and the controls to help mitigate these. Further
details of the Group’s principal and emerging risks and
uncertainties can be found in the Strategic Report on pages 25
to 28 and details of the Group’s internal controls can be found
on pages 45 and 46. Details of the Group’s hedging policies are
set out in the Strategic Report on page 19.
SHARE CAPITAL – VOTING AND
DIVIDEND
As at 31 December 2021, the Company had 39,449,919 ordinary
shares in issue, of which 4,190,178 Ordinary Shares were held
by the Company as treasury shares. (31 December 2020
39,449,919 ordinary shares in issue, of which 4,190,178 were
held in treasury). As at the date of this report, the Company had
39,449,919 ordinary shares in issue, of which 4,190,178 ordinary
shares are held in Treasury. As at the date of this report, the
total number of voting rights in the Company is 35,259,741.
On 8 June 2021, at the Company’s last Annual General Meeting
( “ AGM ” ), the Board was granted authority to allot the
Company’s ordinary shares of £0.01 each or grant rights to
subscribe for, or convert any security into ordinary shares in the
Company up to an aggregate nominal amount of £35,259.74
representing 3,525,974 ordinary shares. The authority will
expire (unless previously renewed, varied or revoked) on the
conclusion of the 2022 AGM of the Company (or, if earlier, at the
close of business on 31 August 2022).
The ordinary shares carry the right to receive dividends and
have one voting right per ordinary share. There are no shares
which carry specific rights with regard to the control of the
Company. The shares are freely transferable. There are no
restrictions or agreements between shareholders on the voting
rights of any of the ordinary shares or the transfer of shares.
The Company does not have a fixed life, and pursuant to the
Articles of Association, a continuation vote will be put to
shareholders every five years. The Directors convened a
General Meeting on 16 December 2019 at which a resolution for
the continuation of the Company was proposed and passed by
Shareholders. The next such proposal shall be made no earlier
than the AGM in 2023 and no later than the AGM in 2024.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 34
At the AGM held on 8 June 2021, the Directors were granted the
authority to purchase in the market up to 5,285,435 ordinary
shares, such authority expiring at the conclusion of the 2022
AGM of the Company (or, if earlier, until close of business on 31
August 2022). The Company intends to seek approval from the
shareholders, by special resolution, to renew this authority at
the next AGM.
Further to the authority granted by shareholders at the 2020
AGM, the Company commenced a share buyback programme
on 10 August 2020. All ordinary shares purchased by the
Company pursuant to the buyback programme were held in
treasury. No shares were purchased by the Company during
the reporting period.
In addition, where in a financial period of the Company ending
on or after 31 December 2016 the ordinary shares have traded,
on average over that financial period, at a discount in excess of
10 percent to Net Asset Value per ordinary share, the Company
will be required to propose a special resolution at the next AGM
for the discontinuation of the business of the Company in its
present form. If such a discontinuation resolution is passed,
proposals will be put forward by the Directors to shareholders
within four months to address the trading discount to Net Asset
Value per ordinary share (which may include proposals for the
reorganisation, reconstruction or winding up of the
Company).This requirement was triggered for 2020 and a
discontinuation vote was held at the 2021 AGM., at which
98.55% of the shares voted were against the resolution to
discontinue the business of the Company. The requirement to
propose a special resolution for the discontinuation of the
business of the Company at the 2022 AGM has not been
triggered.
On a winding up or a return of capital by the Company, the
ordinary shareholders are entitled to the capital of the
Company.
The Company’s policy is to pay dividends on a quarterly basis,
as set out in the Company’s prospectuses dated 18 December
2015, 25 May 2017 and 21 December 2018 (the “Prospectus”).
As such the dividends are declared as interim dividends rather
than final dividends. The dividends paid or payable in respect
of the year ended 31 December 2021 are set out Note 9 to the
financial statements. A reconciliation of movements in reserves
is presented in the Statement of Changes in Shareholders’
Funds on pages 72 to 73 of the financial statements. The
Company may make distributions from the Revenue Reserve,
the Special Distributable Reserve or from realised capital gains.
There were no unrealised gains in the year.
SUBSTANTIAL SHARE INTERESTS
Between 31 December 2021 and the date of this report, the
Company had been notified in accordance with Disclosure
Guidance and Transparency Rule 5 of the following interests in
the voting rights attaching to the Company’s issued share
capital:
INDEPENDENT AUDITORS
The Company’s independent auditors,
PricewaterhouseCoopers LLP (“PwC”), were re-appointed at
the Company’s AGM in 2021 and have expressed willingness to
continue to act as the Group’s auditors for the forthcoming
financial year.
As detailed in the Audit Committee report for 2021, Richard
McGuire had served as audit partner for five years and was
replaced by Claire Sandford during the reporting period. The
Audit Committee ensured there were appropriate
arrangements in place to secure an orderly and effective
change of audit partner over the last financial year.
The Audit Committee has carefully considered the auditors’
appointment, as required in accordance with its Terms of
Reference, and, having regard to its effectiveness and the
services it has provided the Group during the year under review,
has recommended to the Board that the independent auditors
be re-appointed at the forthcoming 2022 AGM. At the 2022 AGM,
resolutions are therefore to be proposed for the re-
appointment of the independent auditors and to authorise the
Directors to agree its remuneration for the forthcoming
financial year. In reaching its recommendation, the Audit
Committee considered the points detailed on pages 48 to 52 of
the Audit Committee’s report.
AUDIT INFORMATION
As required by section 418 of the Companies Act 2006, the
Directors who held office at the date of this report each confirm
that, so far as they are aware, there is no relevant audit
information of which the Group’s auditor are unaware and each
Director has taken all the steps required of a Director to make
themselves aware of any relevant audit information and to
establish that the Group’s auditors are aware of that
information.
ARTICLES OF ASSOCIATION
Any amendments to the Company’s Articles of Association
must be made by special resolution.
Holder
Ordinary
shares
Percentage of
total voting
rights
Aberdeen Asset
Management PLC
Undisclosed <5%
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 35
GOING CONCERN
The Directors have reviewed the financial projections of the
Group from the date of this report, which shows that the Group
will be able to generate sufficient cash flows in order to meet
its liabilities as they fall due. These financial projections have
been performed for Honeycomb under various origination
volumes and stressed scenarios and in all cases the Group is
able to meet its liabilities as they fall due. The stressed
scenarios considered included halting future originations, late
repayments of the largest structured facilities and individual
exposures experiencing ongoing performance at the worst
monthly impact experienced throughout 2020 and 2021; which
incorporated one-off macro-economic charges for Covid-19.
The Directors consider these scenarios to be the most relevant
risks to the Group’s operations. As part of these projections, the
Directors have also reviewed any financial and non-financial
covenants in place for all debt facilities with no breaches
anticipated, even in the stressed scenario.
The Directors have also reviewed the potential effect of the
combination with Pollen Street on financial projections of the
combined group. These financial projections have been stress
tested under different scenarios, including delaying all
additional fund raises to demonstrate that the combined
group will be able to generate sufficient cash flows in order to
meet its liabilities as they fall due.
The Group has performed these prudent financial scenarios to
ensure that it has sufficient cash resources to weather any
remaining impact of Covid-19, as it continues to cause
disruption across the globe. The conclusion of the stress
testing is that the business has more than adequate cash
resources, including under the proposed combination with
Pollen Street, to meet its liabilities as they fall due over the next
12 months from the date of approval of these financial
statements being the 1 March 2022.
Accordingly, the Directors are satisfied that the going concern
basis remains appropriate for the preparation of the financial
statements. The Group also has detailed policies and
processes for managing the risk, set out in the Strategic Report
on pages 25 to 28.
VIABILITY STATEMENT
In accordance with provision 31 of the UK Corporate
Governance Code, published by the Financial Reporting
Council in 2018 (the “Code”) and the corresponding provision
36 of The AIC Code of Corporate Governance (the “AIC Code”),
the Directors have assessed the prospects of the Group over
the three-year period to the AGM in 2025. The Board believes
this period to be appropriate taking into account the current
trading position and the potential impact of the principal risks
that could affect the viability of the Group.
At the year-end, the Group had cash balances of £12.9 million.
The Company also has £396 million excess of non-current
assets to non-current liabilities. There are therefore limited
risks to the viability of the Company.
To prepare the viability statement the Board have considered
the prospects of the Company in light of its current position
and have considered each of the Company’s principal risks,
uncertainties and mitigating factors that are detailed on pages
25 to 28. Taking the current performance as a base, the
projection considers the Company’s income, underlying Net
Asset Value and the cash flows over the three-year period
selected. In addition, the Board have reviewed the potential
effect of the combination with Pollen Street. The projection is
not a business plan in itself, but rather is a prudent view of how
the Company may evolve, based principally upon its growth to
date, in order to demonstrate its viability. Analysis to assess
viability has focused on the risks in delivery of the growth of the
business and a series of projections have been considered
changing origination volumes and the performance of the
assets acquired.
The experience of Covid-19 over 2020 and 2021 has been
considered in these projections as part of the stress testing in
the going concern analysis which has also been used as part of
the analysis for the Company’s viability. In this case the Group
continues to be viable, though with the prospect of the
continued vaccine ‘booster’ rollout in the UK, and around the
globe, the Directors expect the actual impact to be more
favourable than the levels projected.
All the analysis indicates that due to the stability and cash
generating nature of the portfolios and structured agreements,
as well as the debt facilities in place, the Company would be
able to withstand the impact of the risks identified, including
under the proposed combination with Pollen Street. Based on
the robust assessment of the principal risks, prospects and
viability of the Company, the Board confirms that they have
reasonable expectation that the Company will be able to
continue operation and meet its liabilities as they fall due over
the three-year period to the AGM in 2025. The Board also
continuously monitors the financial performance of the
Company against key financial ratios ensuring a strict discipline
in the financial management of the business.
CAPITAL RE QUIREMENTS
The Group is subject to externally imposed capital
requirements:
The Company’s Articles of Association restrict
borrowings to the value of its share capital and
reserves;
As a public company, the Company has a minimum
share capital of £50,000;
To be able to pay dividends out of profits available for
distribution by way of dividends, the Company must be
able to meet one of the two capital restriction tests
imposed on investment companies by company law;
and
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 36
The Company’s borrowings are subject to covenants
limiting the total exposure based on interest cover
ratios, a minimum total net worth and a cap of
borrowings as a percentage of the eligible borrowing
base.
The Company has complied with all the above requirements
during this financial year.
MANAGEMENT AND
ADMINISTRATION
Administrator
The Group’s Administrator is Apex Fund Services (UK) Ltd (the
“Administrator”), a company authorised and regulated by the
Financial Conduct Authority (“FCA”). The Administrator
provides the day-to-day administration of the Group. The
Administrator is responsible for the Group’s general
administrative functions, such as the calculation of the Net
Asset Value and maintenance of the Group’s accounting
records.
Under the terms of the administration agreement, the
Administrator charges a fee for its fund administration services
equal to the greater of: (i) £5,305 per month (increased by 3
percent on 1 January in each year); and (ii) an amount equal to
the sum of 1/12 of 0.06 percent of the portion of Net Asset Value
up to £150 million, and 1/12 of 0.05 percent of the excess of Net
Asset Value above £150 million. The monthly fee is then
reduced by £2,083.33 to reflect the fact that the Administrator
no longer provides company secretarial services to the Group.
The Administrator is also entitled to reimbursement of all
reasonable out of pocket expenses incurred by it in connection
with the performance of its duties. The administration
agreement can be terminated by either party by providing 90
days’ written notice.
Company Secretary
Link Company Matters Limited has been appointed as the
company secretary of the Group. The Company Secretary was
appointed in September 2018. The Company Secretary
undertakes the general secretarial functions required by the
Companies Act and is responsible for the maintenance of
specified statutory registers of the Company. The Company
Secretary is entitled to a general annual fee of £60,000 (all fees
excluding VAT). The Company Secretary shall also be entitled
to reimbursement of reasonable out of pocket expenses
incurred in connection with the performance of its duties
(without prior consent of the Company, but such expenses are
subject to limits).
Registrar
Computershare Investor Services plc has been appointed as
the Company’s registrar to provide share registration services.
Under the terms of the Registrar Agreement, the Registrar is
entitled to an annual register maintenance fee from the
Company equal to £1.30 per Shareholder per annum or part
thereof, subject to a minimum of £3,800 per annum and a
potential annual fee increase capped by inflation.
Other activity beyond the agreed services will be charged for in
accordance with the Registrar’s normal tariff as published from
time to time.
Investment Manager
The Investment Manager, a UK-based company authorised and
regulated by the FCA, has been appointed the Group’s
investment manager and Alternative Investment Fund Manager
(“AIFM”) for the purposes of the Alternative Investment Fund
Managers Directive (“AIFMD”). The Investment Manager is
responsible for the discretionary management of the Group’s
assets and ensures that these are valued appropriately in
accordance with the relevant regulations and guidance.
Under the terms of the management agreement, the
Investment Manager is entitled to a management fee and a
performance fee together with reimbursement of reasonable
expenses incurred by it in the performance of its duties. From
the period from first admission, the management fee payable
was based on 1.0 percent of the Gross Asset Value (which
includes only value attributable to credit assets and equity
assets held by the Group for investment purposes). Once more
than 80.0 percent of the listing proceeds of any placing were
invested the management fee payable was based on 1.0
percent of the Gross Assets. Further details on the
management fee and the performance fee can be found in
Note 5 to the financial statements. The management
agreement can be terminated by either party providing twelve
months’ written notice.
Depositary
The Group’s depositary is Indos Financial Limited (the
“Depositary”), a company authorised and regulated by the FCA.
Under the terms of the depositary services agreement the
Depositary is entitled to a periodic fee calculated as follows:
(A) Where NAV is less than or equal to £200 million, 0.02
percent of NAV per annum, subject to a minimum
monthly fee of £2,500; and
(B) Where NAV is greater than £200 million, 0.02 percent of
NAV per annum in respect of the first £200 million of NAV
and:
i. 0.0175 percent per annum of that part of NAV which
is in excess of £200 million but less than or equal to
£400 million; plus
ii. 0.015 percent per annum of that part of NAV which is
in excess of £400 million.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 37
The Depositary invoices the Group monthly in arrears in
respect of the periodic fee (together, if applicable, with any VAT
thereon), which shall be payable by the Group within 30 days of
the relevant invoice.
The Depositary is entitled to charge an additional fee where the
Group undergoes a lifecycle event (e.g. a reorganisation or a
distribution) which entails additional work for the Depositary.
Such a fee is agreed with the Group on a case by case basis.
All charges may be subject to change from time to time, with
the agreement of the Depositary and the Group. All charges are
exclusive of VAT, if applicable.
The Depositary is entitled to be reimbursed for certain
expenses properly incurred in performing or arranging for the
performance of functions conferred upon it under the
agreement.
The Group may terminate the depositary services agreement
for convenience on nine months’ written notice. If the
Depositary wishes to retire and stop providing the services
under the agreement, it must give the Group not less than nine
months’ written notice of its wish to do so. To the extent that
the Group is required to have a depositary under applicable law,
the Depositary may not retire until a successor is appointed.
The depositary agreement may be terminated immediately by
either the Group or the Depositary on the occurrence of certain
events, including: (i) if the other party has committed a material
and continuing breach of the terms of the agreement; or (ii) in
the case of the other’s insolvency.
Custodian
The Depositary has delegated its obligations in respect of the
safe keeping of the Group’s financial instruments to Sparkasse
Bank Malta plc. The Depositary is primarily liable to the Group
and investors for losses of financial instruments held by the by
the Custodian, however, the Group and Investment Manager
have permitted the transfer of that obligation to the Custodian
in compliance with Articles 21(13) or 21(14) of the AIFMD. The
Depositary has transferred such obligation and therefore the
Custodian, and not the Depositary, will be liable to the Group
for a loss of financial instruments held in custody, but the
Depositary must take reasonable steps to pursue and enforce
any associated claim on behalf of the Group. No amount is
payable by the Group to the Custodian.
Corporate broker and financial adviser
Liberum Capital Limited (“Liberum”) and Cenkos Securities plc,
companies authorised and regulated in the United Kingdom by
the FCA, have been appointed as the Group’s joint corporate
broker and financial advisers.
CHANGE OF CONTROL
There are no agreements to which the Company is party that
might be affected by a change of control of the Company
except for the agreement in relation to the Company’s debt
facility. Pursuant to the terms of that agreement, on a change
of control of the Company, the Company shall promptly notify
the lender. The lender is not obliged to fund a utilisation except
in relation to a rollover loan and if negotiations to continue the
facility are not concluded within 30 days, the liability may be
repayable.
The Manager has been discussing the potential combination of
Pollen Street and the Company with the Company’s debt
facility provider and expects that consent will be granted for the
transaction.
SUBSEQUENT EVENTS
On 23 February 2022 a dividend of 20.0 pence per ordinary
share was approved for payment on 25 March 2022.
DONATIONS
The Group made no political or charitable donations during
the year under review to organisations either within or outside
the UK (2020: None).
GREENHOUSE GAS EMISSIONS
The Group has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other
emissions producing sources under the Companies Act 2006
(Strategic Report and Directors’ Report) Regulations 2013,
including those within its underlying investment portfolio.
FUTURE DEVELOPMENTS
Indications of likely future developments in the business,
including the proposed combination of the Honeycomb and
Pollen Street businesses, are discussed in more detail in the
Chairman’s Statement on pages 7 to 8.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 38
REGULATORY DISCLOSURES
The disclosures below are made in compliance with the requirements of Listing Rule 9.8.4.
Listing Rule
9.8.4(1) – capitalised interest The Group has not capitalised any interest in the year under review.
9.8.4(2) – unaudited financial
information
The Company publishes a monthly NAV statement. The Company also published its interim
report and unaudited financial statements for the period from 1 January 2021 to 30 June 2021
9.8.4 (4) – incentive schemes The Group has no incentive schemes in operation.
9.8.4 (5) and (6) – waiver
No Director of the Company has waived or agreed to waive any current or future emoluments
from the Group.
9.8.4 (7), (8) and (9)
During the year under review, Honeycomb Investment Trust plc did not issue shares.
9.8.4 (8) and 9.8.4 (9) – relate to
companies that are part of a group
of companies
Not applicable
9.8.4 (10) – contract of significance During the year under review, there were no contracts of significance subsisting to which the
Group is a party and in which a Director of the Group is or was materially interested or
between the Group and a controlling shareholder
9.8.4 (11)
The Company is not party to any contracts for the provision of services to the Company by a
controlling shareholder
9.8.4 (12) and (13) –
waiving dividends
During the year under review, there were no arrangements under which a shareholder has
waived or agreed to waive any dividends or future dividends
9.8.14 Not applicable
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 39
Corporate Governance Statement
The corporate governance statement explains how the Board has sought to protect shareholders’ interests by protecting and
enhancing shareholder value. Since the Company’s listing, the Financial Reporting Council’s UK Corporate Governance Code (the
“Code”) has been voluntarily followed by the Company. The Directors are ultimately responsible for the stewardship of the Company
and this section explains how they have fulfilled their corporate governance responsibilities. This corporate governance statement
forms part of the Directors’ report.
Following the Company’s entire share capital (being 39,449,919 ordinary shares) being admitted to the premium listing segment of the
Main Market on 28 October 2020, the UK Listing Rules applicable to closed-ended investment companies that are listed on the
premium listing segment of the UK Listing Authority now apply in full to the Company. The Board remains fully committed to high
standards of corporate governance and, as introduced by the Board in the Company’s 2020 Annual Report and Audited Financial
Statements, has taken steps to revise its committee structure and membership to be in line with developing good practice. This is set
out in fuller detail in subsequent sections of this report.
The Listing Rules and the Disclosure Guidance and Transparency Rules (“DTR”) require the Board to disclose how it has applied the
principles of the Code, published by the Financial Reporting Council (“FRC”) in July 2018. A copy of the Code is available from the
website of the Financial Reporting Council at www.frc.org.uk.
The Association of Investment Companies (“AIC”) revised and published the AIC Code of Corporate Governance (the “AIC Code”) in
February 2019. The AIC Code provides a comprehensive guide to best practice in certain areas of governance where the specific
characteristics of investment trusts suggest alternative approaches to those set out in the Code. For the purposes of this Statement,
the Board considers that reporting against the principles and recommendations of the AIC Code will provide more relevant and
insightful information to shareholders. The AIC Code is available from the AIC’s website at www.theaic.co.uk.
STATEMENT OF COMPLIANCE
The Company has complied with the recommendations of the AIC Code and the relevant provisions of the Code, except as set out
below.
For the reasons set out in the AIC Code, the Board considers the role of the Chief Executive and Executive Directors’ remuneration as
being not relevant to the Company. In particular, all of the Company’s day-to-day management and administrative functions are
outsourced to third parties. As a result, the Company has no executive Directors, employees or internal operations. The Company has
therefore not reported further in respect of these provisions.
The Board has decided that the systems and procedures employed by the Investment Manager and the other third-party providers in
relation to the Company give sufficient assurance that a sound system of internal control, which safeguards the Company’s assets, is
maintained, without the need for an in-house internal audit function. Updates on the work carried out by the Investment Manager’s
outsourced internal audit function are presented to the Board on a quarterly basis. An internal audit function specific to the Company
is therefore not considered necessary at this time. The need for an internal audit function will be considered on an annual basis.
The Board reported in the Company’s 2020 Annual Report and Audited Financial Statements that Joanne Lake was appointed as a
Director of the Company with effect from 1 January 2021, to bring further skills and experience to the Board. Following Joanne’s
appointment, and with regard to the increased size of the Board and the Company’s life cycle as well as the provisions in the AIC Code,
the Board confirmed the following changes:
Jim Coyle was appointed as Senior Independent Director with effect from 1 March 2021;
The functions of the Audit and Risk Committee were split into two separate committees, an Audit Committee and a Risk
Committee; and the functions of the Remuneration and Nomination Committee were split into two separate committees, a
Remuneration Committee and Nomination Committee. These changes became effective 1 March 2021;
Joanne Lake was appointed Chairman of the Remuneration Committee with effect from 1 March 2021, with Robert Sharpe
remaining as a member of the committee;
Richard Rowney was appointed Chairman of the Risk Committee with effect from 1 March 2021; and
Robert Sharpe, as Chairman of the Company, stepped down as a member of the Audit Committee and the Risk Committee, as
recommended by the AIC Code, with effect from 8 September 2021.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 40
The Board is of the view that, following these changes, the Company now complies with the relevant provisions of the AIC Code in
respect of the SID position and constitution and membership of the Audit Committee, Risk Committee, Remuneration Committee and
Nomination Committee.
The Board and committee structure and membership is therefore as follows:
Board
Robert Sharpe (Chairman)
Jim Coyle
Richard Rowney
Joanne Lake
Audit Committee
Jim Coyle (Chairman)
Richard Rowney
Joanne Lake
Risk Committee
Richard Rowney (Chairman)
Jim Coyle
Joanne Lake
Remuneration Committee
Joanne Lake (Chairman)
Robert Sharpe
Jim Coyle
Richard Rowney
Management Evaluation
Committee
Robert Sharpe (Chairman)
Jim Coyle
Richard Rowney
Joanne Lake
THE BOARD OF DIRECTORS
The Board consists of four Directors, all of whom are independent non-executive Directors.
Biographies of the Directors are shown on pages 31 and 32 and demonstrate the wide range of skills and experience that they bring to
the Board. The Directors possess business and financial expertise relevant to the direction of the Company and consider themselves
to be committing sufficient time to the Company’s affairs.
None of the Directors has a service contract with the Company, nor are any such contracts proposed. Each Director has been appointed
pursuant to a letter of appointment entered into with the Company in accordance with the Company’s articles of association. The
Directors’ appointment can be terminated in accordance with the Company’s articles of association and without compensation. There
are no agreements between the Company and any Director which provide for compensation for loss of office in the event that there is
a change of control of the Company.
Copies of the letters of appointment are available on request from the Company Secretary and will be available at the Company’s 2022
AGM.
The Chairman, Robert Sharpe, is independent and considers himself to have sufficient time to commit to the Company’s affairs. The
Chairman’s other commitments are detailed in his biography on pages 31 to 32. The responsibilities of the Chairman have been agreed
by the Board and are available to view on the Company’s website.
The Directors appointed Jim Coyle as Senior Independent Director, with effect from 1 March 2021, and will, amongst his other duties
in that role, lead the evaluation of the Chairman on behalf of the other Directors as part of the annual evaluation process.
THE OPERATION OF THE BOARD
The Board of Directors meets at least four times a year and more often if required. The table below sets out the Directors’ attendance
at scheduled Board and Committee meetings from March 2021 to February 2022, following the split of the Audit and Risk Committee,
and the Remuneration and Nomination Committee.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 41
Director Board
1
Audit
Committee
2
Risk
Committee
2
Remuneration
Committee
Nomination
Committee
Management
E
ngagement
Committee
Robert Sharpe
5 5
5
1
1
1
Jim Coyle
5 5
5
1
1
1
Richard Rowney
5 5
5
1
1
1
Joanne Lake 5 5
5
1
1
1
Total
5 5
5
1
1
1
1
A number of additional ad-hoc meetings of the Board were held throughout the year to discuss transactional matters, including the proposed
combination of Honeycomb and Pollen Street.
2
The Audit and Risk Committee met twice prior to the split in the committees effective 1 March 2021 and all Directors were in attendance.
No individuals other than the committee or Board members are entitled to attend the relevant meetings unless they have been invited
to attend by the Board or relevant committee.
Directors are provided with a comprehensive set of papers for each Board or Committee meeting, which equips them with sufficient
information to prepare for the meetings.
The Board has a formal schedule of matters specifically reserved to it for decision and also has oversight of the Investment Manager’s
operations and certain corporate actions to ensure effective control of strategic, financial, operational and compliance issues, which
includes:
The Group’s structure including share issues and setting a discount/premium management programme;
Risk management;
Appointing the Investment Manager and other service providers and setting their fees;
Reviewing and approving Board changes;
Considering and authorising Board conflicts of interest;
Reviewing and approving the Group’s audited annual financial statements and half yearly financial statements including
accounting policies;
Reviewing Investment Manager’s conflicts of interest and whistleblowing policies;
Reviewing and approving the Group's level of gearing;
The review and approval of terms of reference and membership of Board Committees; and
Reviewing and approving liability insurance. There is a procedure in place for the Directors to take independent professional
advice at the expense of the Company.
The Company has taken out directors’ and officers’ liability insurance, such cover to be maintained for the full term of each Director’s
appointment.
Culture
The Directors have considered and defined the Company’s culture, purpose and values. By formally identifying the important elements
of the Company’s culture, the Directors are able to assess and monitor it and ensure that it remains well aligned with the Company’s
purpose, values and strategy.
The Company has a well-defined and communicated purpose, as set out in the investment objective on page 4. The Directors have
considered the values to be transparency and clarity in its reporting to shareholders, constructive challenge in maintaining a strong
relationship with the Investment Manager whilst preventing the addition of avoidable risk in the Company’s operations. In its strategy,
the Board have committed to work closely with and support the Investment Manager to deliver the returns from opportunities in
speciality lending.
The culture of the Board is considered as part of the annual review of the Company’s culture policy, performance evaluation and
strategy review processes, and the review of the Investment Manager’s engagement.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 42
Independence of Directors
Each of the Directors was considered, on appointment, to be independent of the Investment Manager and free from any business or
other relationship that could materially interfere with the exercise of his independent judgement and remained so throughout the year.
The Board is of the view that there are no relationships or circumstances relating to the Company that are likely to affect the judgement
of any of the Directors.
The Board notes that Joanne Lake is a Director of Morses Club plc, an entity for which the Company provided a facility during 2021.
This was considered by the Board upon her appointment. The Board has determined that, in view of the size of the current facility
provided to Morses Club plc, her directorship of Morses Club plc does not impinge upon Joanne’s independence. The Board has
nonetheless agreed that, should any matters need to be considered by the Board in the future in the context of the Morses Club plc
exposure, Ms Lake could be excluded from voting or discussions as appropriate. The Company no longer lends to Morses Club plc
Care will be taken at all times to ensure that the Board is composed of members who, as a whole, have the required knowledge,
abilities and experience to properly fulfil their role and are sufficiently independent.
Board evaluation
The performance of the Board, its committees and Directors and the independence of the Directors during 2021 was evaluated by
means of a Director self-assessment questionnaire. The results of the evaluation process were reviewed by the Board in November
2021 and actions arising from the evaluation process were agreed. Continuing to closely monitor and observe the Company’s risk and
control systems, maintaining business performance and resilience, looking for further opportunities for sustainable growth.
In terms of Director training, the Company Secretary, the Board or the Investment Manager upon request of the Board or any Director
individually, will offer induction training to new Directors about the Company, its key service providers, the Directors’ duties and
obligations and other matters as may be relevant from time to time.
The Board members are encouraged to keep up to date and attend training courses on matters which are directly relevant to their
involvement with the Company.
Board appointment, election and tenure
The rules concerning the appointment and replacement of Directors are contained in the Company’s articles of association and the
Companies Act 2006.
None of the Directors consider length of service as an impediment to independence or good judgement but, if they felt that this had
become the case, the relevant Director would stand down.
The Board considers that all of the current Directors contribute effectively to the operation of the Board and the strategy of the
Company. The Board has considered each Board member's independence from the Company and Investment Manager. As such the
Board believes that it is in the best interests of shareholders that each of the Directors be re-elected at the forthcoming AGM. The next
AGM will be held during or before June 2022.
Directors’ succession Policy
At the start of 2019, the Association of Investment Companies (the “AIC”) published an updated AIC Code of Corporate Governance.
The Committee welcomed the AIC’s approach to tenure of chairs of investment companies which, recognising that the circumstances
of chairs of investment companies differed from other companies, the AIC recommended that instead of adhering to a nine-year limit
on chair tenure, the Boards could determine and disclose their policy on the chair tenure instead.
Taking the AIC recommendations into account, the Board has adopted a policy on Directors’ Succession. In accordance with the policy,
the Company has put into effect an orderly rotation of the Board which commenced at the 2019 AGM and will subsequently occur
every other year. The Board will continue to review succession arrangements at Board level and determine the most appropriate time
for the next phase of the succession policy to be implemented.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 43
MANAGEMENT AGREEMENT AND CONTINUING APPOINTMENT
Details of the Investment Manager’s agreement and fees are set out in Note 5 to the financial statements.
Directors’ Interests
As at 31 December 2021 Joanne Lake held 2,713 shares in the Company; No other Director held shares in the Company. The Board
keeps the performance of the Investment Manager under continual review. The Company’s Management Engagement Committee
undertook its annual appraisal of the Investment Manager during the year under review on 23 February 2022.
The Management Engagement Committee recommended to the Board that the appointments of all the Company's third-party service
providers continue. It was felt that their continued appointment was in the best interests of the shareholders as the Investment
Manager had performed in line with expectations and the Board is of the opinion that the continuing appointment of the Investment
Manager on the terms agreed is in the interests of the Company’s shareholders as a whole.
The committee noted that the proposed combination with Pollen Street would likely result in changes to service providers. These
matters were under active consideration by the board.
CONFLICTS OF INTEREST
The Company’s articles of association provide that the Directors may authorise any actual or potential conflict of interest that a
Director may have, with or without imposing any conditions that they consider appropriate on the Director in question. Directors are
not able to vote in respect of any contract, arrangement or transaction in which they have a material interest, and, in such
circumstances, they are not counted in the quorum at the relevant Board meeting. A process has been developed to identify any of
the Directors’ potential or actual conflicts of interest. This includes declaring any potential new conflicts before the start of each Board
meeting. A schedule is maintained of each Director’s potential conflicts of interest.
COMMITTEES
As set out on page 39, the Committee structure was reviewed by the Board in early 2021. The Board now constitutes the following
Committees:
Audit Committee
Risk Committee
Remuneration Committee
Nomination Committee
Management Evaluation Committee
Jim Coyle, Richard Rowney and Joanne Lake are members of each Committee. Robert Sharpe is a member of the Remuneration
Committee, Nomination Committee and Management Evaluation Committee. The Terms of Reference of each Committee is available
from the office and the Company’s website at www.honeycombplc.com.
Each Committee reports to the Board on its proceedings after each meeting.
Audit Committee
The Board has delegated certain responsibilities to its Audit Committee. An outline of the remit of the Audit Committee (as constituted
for the reporting period) and its activities during the year are set out on page 49.
The Audit Committee is chaired by Jim Coyle and meets at least on a quarterly basis. It is responsible for ensuring that the financial
performance of the Group is properly reported and monitored and provides a forum through which the Group’s external auditors may
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 44
report to the Board. The Audit Committee reviews and recommends to the Board the annual and half-yearly reports and financial
statements, and financial announcements.
Throughout the course of the year. The Audit Committee received updates on the Manager’s internal audit programme. Further details
on the work of the Audit Committee can be found in the report of the Audit Committee on pages 48 to 52.
Risk Committee
The Risk Committee is chaired by Richard Rowney and meets on a quarterly basis. The Risk Committee is responsible for:
reviewing the Group’s internal control and risk management systems, in collaboration with the Audit Committee;
setting and monitoring the Company’s risk appetite;
carrying out a robust assessment of the Company’s emerging and principal risks; and
key policies and processes for identifying and assessing both financial and non-financial business risks, (including compliance,
fraud detection and whistleblowing arrangements), the management of these risks (including quality, ethics and independence)
along with an assessment of their robustness, appropriateness and effectiveness.
The Risk Committee reviews and approves statements to be included in the Annual Report and Audited Financial Statements
concerning internal controls and risk management; assessment of the adequacy of the levels of professional indemnity insurance and
other insurance cover maintained for the Company.
During the year under review, the Risk Committee met five times, twice as the Audit and Risk Committee and three times subsequently.
The Risk Committee considered the following items during the year under review:
The Company’s risk appetite statement and risk dashboard, taking in consideration the Company’s risk profile;
Risk Reports received from the Investment Manager, which included information relating to business continuity in view of Covid-
19, compliance monitoring activities, debt facilities and compliance with covenants,
The Investment Manager’s Whistleblowing and Conflicts Policy;
A presentation on the Manager’s information security review, in the context of the Company’s cyber risk; and
A compliance report setting on regulatory developments potentially impacting the Company.
The Principal Risks and Uncertainties for the Group are set out in detail on pages 25 to 28.
Remuneration Committee
The Remuneration Committee is chaired by Joanne Lake and meets at least once a year.
The primary responsibility of the Committee is to consider and make recommendations to the Board on Directors’ remuneration.
Further details on the work of the Remuneration Committee can be found in the Directors’ Remuneration Report on pages 53 to 58.
Nomination Committee
The Nomination Committee is chaired by Robert Sharpe and meets at least once a year. The responsibilities of the Nomination
Committee include:
To review the structure, size and composition of the Board;
To ensure plans are in place for orderly succession to the board and oversee the development of a diverse pipeline for succession;
To evaluate the balance of skills, knowledge, experience and diversity of the Board;
Responsibility for nominating for the approval by the board candidates to fill board vacancies as they arise;
To consider additional external appointments of Directors;
To consider the membership of any other Board committees as appropriate, in consultation with the Chairman of those
committees;
To consider the re-appointment of any non-executive director and to provide an explanation as to why the Committee
recommends that the Board member be re-appointed for shareholder consideration. All Board Members to be subject to annual
re-election; and
To determine and disclose a policy on the tenure of the chair. A clear rationale for the expected tenure should be provided, and
the policy should explain how this is consistent with the need for regular refreshment and diversity.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 45
Management Evaluation Committee
The Management Evaluation Committee is chaired by Robert Sharpe and meets at least once a year. Its principal duties are:
On an annual basis, to formally review the contractual relationships with, and scrutinize and hold to account the performance of,
the Investment Manager and report on the review in the Annual Report and Audited Financial Statements.
To review and consider, at least annually, the Investment Manager fees and services as set out in the Management Agreement; and
In conjunction with the Investment Manager, monitor and evaluate other service providers.
COMBINATION WITH POLLEN STREET
The Board has led the negotiations leading to the proposed combination with Pollen Street, which was announced on 15 February
2022. The Company appointed financial and legal advisers to advise on the terms of the transaction, as well as a sponsor to advise on
the Company’s compliance with its regulatory obligations under the Listing Rules. The Company’s professional advisers conducted
legal, financial and tax due diligence on the Pollen Street corporate group prior to agreeing the terms of the transaction. The Board is
reviewing the Company’s governance structure and arrangements to ensure they are robust and appropriate in light of the proposed
combination.
COMPANY SECRETARY
The Board has direct access to the advice and services of the Company Secretary, which is responsible for ensuring that the Board and
Committee procedures are followed, and that applicable rules and regulations are complied with. The Company Secretary is also
responsible for ensuring good information flows between all parties.
REVIEW OF SHAREHOLDER PROFILE
The Board reviews reports provided by qualified independent industry consultants and the Company’s brokers on the Company’s
shareholder base and its underlying beneficial owners. The Investment Manager and brokers disclose any concerns raised by
shareholders to the Board.
RELATIONS WITH SHAREHOLDERS
All shareholders will ordinarily have the opportunity to attend and vote, in person or by proxy, at the AGM and any general meetings of
shareholders. While shareholders were unable to attend and vote in person at the 2021 AGM due to the restrictions introduced in
response to the Covid-19 pandemic, alternative arrangements were provided to shareholders to facilitate engagement with the Board
prior to, and at, the AGM.
The notice of the AGM, which is sent out at least 21 days in advance of the AGM, sets out the business of the meeting and any item not
of an entirely routine nature is explained in the Directors’ report. Separate resolutions are proposed in respect of each substantive
issue.
Shareholders are encouraged to attend the AGM and to participate in proceedings. The Chairman of the Board and the Directors,
together with representatives of the Investment Manager, will be available to answer shareholders’ questions at the AGM. Proxy voting
figures are available to shareholders at the AGM.
The Investment Manager holds regular discussions with major shareholders, the feedback from which is provided to and greatly valued
by the Board. The Directors are available to enter into dialogue and correspondence with shareholders regarding the progress and
performance of the Company. Further information about the Company can be found on the Company’s website
www.honeycombplc.com.
INTERNAL CONTROL REVIEW
The Board has elected not to have an internal audit function as the Company delegates its operations to third-party service providers
and does not employ any staff. Instead, it has been agreed that the Company will rely on the internal controls which exist within its
third-party providers.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 46
The Administrator, Depositary and Investment Manager have established internal control frameworks to provide reasonable assurance
on the effectiveness of the internal controls operated on behalf of their clients. The Investment Manager, the Administrator, the
Depositary and the Company Secretary will report on any breaches of law or regulation, if and when they arise, periodically in
scheduled Board reports. The Audit Committee considers annually whether there is any need for an internal audit function, and they
have agreed that it is appropriate for the Company to rely on the internal audit controls which exist within its third-party providers.
Updates on the Investment Manager’s outsourced internal audit function are bought to the Board on a quarterly basis.
The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group
and for reviewing the effectiveness of the Group’s system of internal controls including financial, financial reporting, operational,
compliance and risk management. The Board has in place a robust process to assess and monitor the risks of the Group. The Board
has reviewed the effectiveness of the Administrator and the Investment Manager’s systems of internal control and risk management.
During the year under review, the Board has not identified any significant failings or weaknesses in the internal control systems of its
service providers.
The Group has established a risk matrix, consisting of the key risks and controls in place to mitigate those risks. The Board confirms
that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Group. Details of the Group’s
risks can be found on pages 25 to 28 of the Strategic Report, together with an explanation of the controls that have been established
to mitigate each risk. The risk matrix provides a basis for the Risk Committee and the Board to regularly monitor the effective operation
of the controls and to update the matrix when new risks are identified.
The system of internal control and risk management is designed to meet the Group’s particular needs and the risks to which it is
exposed. The Board recognises that these control systems can only be designed to manage, rather than eliminate, the risk of failure
to achieve business objectives and to provide reasonable, but not absolute, assurance against material misstatement or loss.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE DISCLOSURE
Quantitative remuneration disclosure
In accordance with 3.3.5 (5) of the FCA’s Investment Funds Sourcebook (“FUND”) and in accordance with FCA Finalised guidance –
General guidance on the AIFM Remuneration Code (SYSC 19B) (“the Guidelines”), dated January 2014, the total remuneration paid by
Pollen Street Capital Group companies which include the AIFM during the year was £18.9 million, split £8.1 million into variable and
£10.8 million in fixed remuneration. During the year, the average number of beneficiaries at the Group which includes the AIFM were
73 and the aggregate amount of remuneration paid in relation to the Senior Management of the firm was £5.5 million. Fixed
remuneration is amounts paid as salaries. Variable remuneration is amounts paid under bonus and similar remuneration
arrangements. The AIFM does not consider that any individual member of staff of the AIFM has the ability to materially impact the risk
profile of the Company.
Other disclosures
The AIFMD requires that the AIFM ensures that certain other matters are actioned and or reported to investors. Each of these is set out
below.
Provision and content of an Annual Report (FUND 3.3.2 and 3.3.5). The publication of the Annual Report and Audited Financial
Statements of the Company satisfies these requirements.
Material changes of information. The AIFMD requires certain information to be made available to investors in the Company
before they invest and requires that material changes to this information be disclosed in the Annual Report and Audited Financial
Statements.
Periodic disclosure (FUND 3.2.5 and 3.2.6)
There are no assets subject to special arrangements due to their illiquid nature and no new arrangements for the managing of the
liquidity of the Company. There is no change to the arrangements, as set out in the Prospectus, for managing the Company’s liquidity.
The current risk profile of the Company is set out in the Strategic Report: Principal Risks and Uncertainties on pages 25 to 28 and in
Note 12 to the financial statements, Financial Risk Management. The Company is permitted to be leveraged and has borrowing
restrictions in place. In accordance with the Company’s prospectuses dated 18 December 2015, 25 May 2017 and 21 December 2018
(the “Prospectus”), the Company has a maximum limit of 100 percent of NAV, the actual leverage employed by the Company as a
percentage of NAV was 74.5 percent as at 31 December 2021. There have been no breaches of the permitted leverage limits within the
year and no changes to maximum level of leverage employed by the Company.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 47
The table below sets out the current maximum permitted and actual leverage under the gross and commitment method in accordance
with Annex IV Article 8 of the AIFMD. This differs from the Company’s borrowing restriction, which is an absolute measure. The gross
and commitment method are ratios between the Company’s gross assets and NAV. The gross method represents the sum of the
Company’s positions (total assets) after deducting cash balances. The commitment method represents the sum of the Company’s
positions without deducting cash balances. The Company is required to state its maximum and actual leverage levels, calculated as
prescribed by the AIFMD as at 31 December 2021, and are as follows:
As a
percentage
of net asset value
Gross
method
Commitment method
Maximum level of leverage
200%
200%
Leverage as at
31 December 2021
173%
177%
Other matters
The Investment Manager has confirmed that the required reporting to the FCA has been undertaken in accordance with FUND 3.4.
APPROVAL
This Directors’ Report was approved by the Board of Directors on 1 March 2022.
On behalf of the Board
Robert Sharpe
Chairman
1 March 2022
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 48
Report of the Audit Committee
As Chairman of the Audit Committee, I am pleased to present
the Audit Committee report for the year ended 31 December
2021. Full details of the number of committee meetings and
attendance by individual committee members can be found
on pages 31 to 32.
As noted in the previous Audit and Risk Committee report for
reporting period to 31 December 2020, the Board made the
decision in February 2021 to split the functions of the Audit and
Risk Committee into two separately constituted committees of
the Board – the Audit Committee and the Risk Committee. The
committee met twice prior to this decision, in January and
February 2021. For the purposes of this report, the activities of
the Audit Committee will be presented here, while those of the
Risk Committee are explained on page 44.
MEMBERSHIP OF THE AUDIT
COMMITTEE
For the reporting period, the Audit Committee was chaired by
Jim Coyle. Please see pages 31 and 32 for the members’
biographies. All members of the Committee have recent and
relevant financial experience, as a result of their involvement in
financial services and other industries.
As Chairman of the Audit Committee, I can confirm that I am a
Chartered Accountant and I maintain my membership of the
Institute of Chartered Accountants of Scotland. As such, I have
relevant financial experience.
Following Ms Lake’s appointment in January 2021, the Board
reviewed the composition of each Board committee and it was
considered appropriate during the reporting period that Mr
Sharpe, as Chairman of the Board, step down as a member of
the Audit Committee, due to the increased size of the Board.
THE ROLE OF THE AUDIT
COMMITTEE
The role of the Audit Committee is defined in its terms of
reference, which can be found on the Company’s website at
www.honeycombplc.com.
For the year ended 31 December 2021, the roles and
responsibilities of the Audit Committee include the following:
Financial and
narrative
reporting
To monitor the financial reporting
process;
To review and monitor the
integrity of the half-year and
annual financial statements and
review and challenge where
necessary the accounting policies
and judgements of the
Investment Manager and
Administrator
Internal
controls and
risk
management
In collaboration with the Risk
Committee, to review the
adequacy and effectiveness of the
Group’s internal financial and
internal control and risk
managements systems;
External audit
To make recommendations to
the Board on the reappointment
or removal of the external
auditors and to approve its
remuneration and terms of
engagement;
To review and monitor the
external auditors’ independence
and objectivity;
Internal audit
To review and consider on an
annual basis the need for an
internal audit function.
THE COMMITTEE’S CHALLENGE OF
INFORMATION
The Committee recognises the importance of its role, on behalf
of shareholders and wider stakeholders, to ensure the integrity
of the Group’s financial reporting and risk management
processes. We rely on a number of sources to ensure this
integrity, including the views of the external auditor.
The Committee has worked with the Investment Manager and
other service providers over the course of 2021 to continue to
improve the quality and timeliness of written and verbal
reporting to the Committee and we are pleased with progress
to date. These continued improvements have enriched the
debate and discussion at the meetings of the Committee and
supported the Committee to fulfil its responsibilities, which are
set out below.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 49
MATTERS CONSIDERED DURING THE
YEAR
The Audit Committee met five times during the year under
review, twice prior to the split as the Audit and Risk Committee
and three times subsequently as the Audit Committee (please
see pages 40 to 41 for member’s attendance) and considered
the following items:
The Group’s Annual Report and Audited Financial
Statements for the year ended 31 December 2020 and
advised the Board accordingly in 2021;
The Group’s Annual Report and Audited Financial
Statements for the year ended 31 December 2021 and
advised the Board accordingly in 2022; The Company’s
half-year financial statements for the period ended 30 June
2021 and advised the Board accordingly;
The rotation of the external audit partner, which concluded
in a recommendation to the Board to appoint following Ms.
Claire Sandford as audit partner. The audit partner rotation
was completed in accordance with the Financial Reporting
Council’s Revised Ethical Standard 2019;
The independence and re-appointment of the external
auditor;
The audit plan for the Group’s annual audit shared by the
external auditors;
The Company’s policy on non-audit services provided by
the external auditor;
Monitored the Investment Manager’s impairment
approach required by IFRS 9;
In order to support the Board’s approval of the going
concern assessment and viability statement on page 35 as
to the longer-term viability of the Group, the Committee
reviewed papers from the Investment Manager supporting
the going concern and the viability statement; and
The ongoing impact and risks associated with the Covid-19
crisis.
The Audit Committee also reviewed the following items:
Whether there was a requirement for an internal audit
function;
Before the split of the Audit and Risk Committee in March
2021, the risk management report presented by the
Investment Manager along with the Group’s risk appetite
statement, risk matrix and the internal controls
implemented to manage those risks; and
The appropriateness of the Group’s accounting policies
and whether appropriate estimates and judgements have
been made.
FAIR BALANCE AND
UNDERSTANDABLE REPORTING
Following the year end, the Audit Committee has reviewed the
2021 Annual Report and Audited Financial Statements to
consider whether they provide a true and fair view of the
Group’s affairs at the end of the year and provided
shareholders with the necessary information in a fair, balanced
and understandable way to enable them to assess the Group’s
position, performance, business model and strategy.
There was a rigorous review process and challenge at different
levels within the Group to ensure balance and consistency. The
Committee also reviewed copies of the 2021 Annual Report and
Audited Financial Statements during the drafting process to
ensure key messages and themes being followed throughout
the Annual Report were aligned with the Company’s position,
performance and strategy intentions, and that the Annual
Report and Audited Financial Statements' narrative reporting
was consistent throughout.
When forming its opinion, the Committee considered the
following questions to encourage challenge and assess
whether the Annual Report and Audited Financial Statements
was fair, balanced and understandable:
Is the Report fair?
Is the whole story presented?
Have any sensitive material
areas
been omitted?
Are the KPIs disclosed at an
appropriate level based on the
financial reporting?
Is the Report
balanced?
Is there a good level of consistency
between the front and back sections
of the
Annual Report and Audited
Financial Statements?
Is the Annual Report and Audited
Financial Statements a document for
shareholders and other stakeholders?
Is the Report
understandable?
Is there a clear and understandable
framework to the
Annual Report and
Audited Financial Statements?
Are the Annual Report and Audited
Financial Statements user-
friendly,
easy to understand and
presented in straightforward
language?
CONCLUSION
After completion of its detailed review, the Committee was
satisfied, when taken as a whole, the Company’s Annual Report
and Audited Financial Statements were fair, balanced and
understandable, and provides the information necessary for
shareholders to assess the Company’s performance, business
model and strategy.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 50
SIGNIFICANT ACCOUNTING MATTERS
The Audit Committee met on 23 February 2022 to review the report and financial statements for the year ended 31 December 2021.
The Audit Committee considered the following significant issues, including principal risks and uncertainties in light of the Group’s
activities and matters communicated by the external Auditors during their audit, all of which were satisfactorily addressed:
Issue considered How the Committee gained assurance
Risk of misappropriation of
assets and ownership of
investments
The Audit Committee has reviewed reports from its service providers on key controls over the assets of th
e
Group over the course of 2021. Any significant issues are reported to the Board by the
Investment
Manager or the Company's Depositary. The Investment Manager has put in place procedures to
ensure that investments can only be made to the extent that the appropriate
contractual
and legal
arrangements
are in place to protect the Group’
s assets. The Company’s Depositary issues a quarterly
report on the status of the assets to the Directors for review.
Risk on valuations of
unlisted equities at fair
value
The Audit and Risk Committee received presentations in 2021 and 2022
from the Investment
Manager including valuations of equity assets held at fair value and justification for these. After
challenging the Investment Manager, the Committees concluded that the valuations held were
reasonable.
The risk of material
misstatement of expected
credit losses under IFRS 9
Financial instruments
The Audit and Risk Committee view credit provisioning as the key accounting estimate area for the
Group. As in previous
years, the Audit Committee and Risk Committee received presentations in
2022 from the Investment Manager explaining
key judgement areas, such as, consistency of
approach and the Group’s business mix. After challenging the Investment Manager, the Committees
concluded that the provisioning approach and key judgements were reason
able. The Investment
Manager also reviews impairment performance monthly and reviews its impairment policy for
appropriateness and ac
curacy on a regular basis to ensure they meet the accounting policy set out
in Note 1 to the financial statements.
A particular focal area for the Committees in 2021
has been on the actual and forecasted impact of
Covid-19 on expected credit losses. The Committees have
carefully challenged a number of the
assumptions underpinning reporting under IFRS 9. The impact of Covid-19
more widely is described
in the Strategic Report on pages 3 to 29; and the Board’
s role in managing this impact over the
course of 2021 is set out in the s172 statement on page 21.
Going concern and viability
statement
The Audit Committee reviewed a paper from the Investment Manager in support of the going concern
basis and the longer-term viability of the Group.
The Committee noted the stability of the Group’s business model, its successful track record, the
Group’s three-year financial projections and the results of internal stress testing in relation to Covid-19
and concluded this provided sufficient evidence to support the Board’s viability statement set out on
page 35. The Committee will continue to monitor this are
a closely given the expected material impact
of Covid-19 on the profitability of the business as the longer-term effects on the UK economy continue
to be seen.
Fair, balanced and
understandable
The approach taken by the Committee in determining whether th
e Annual Report is, when taken as a
whole; fair, balanced and understandable,
is described in greater detail in this Audit Committee report
on page 49.
Retention of Investment
Trust Status
The Audit Committee received a report from the Investment Manager in February 2022 confirming
that
the Company has remained compliant with the requirements to maintain
its Investment Trust status.
The Directors regularly review the investments and their mix to ensure they remain diversified, i
ts
retained income levels to ensure sufficient distributions are made and the Company’s shareholdings
to determine if the Company has become a close company.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 51
External auditors
The Group’s external auditors, PricewaterhouseCoopers LLP (“PwC”), were appointed on 16 May 2016 and last re-appointed on 8 June
2021 at the Company’s AGM. Under the Financial Reporting Council’s transitional arrangements, the Company is required to re-tender,
at the latest, by 2025. The Audit Committee intends to re-tender within the timeframe set by the Financial Reporting Council.
The individual at PwC who acts as the Group's appointed audit partner is Ms. Claire Sandford. Ms Sandford was appointed in 2021
following Mr. Richard McGuire’s fifth and final year as audit partner. The audit partner rotation was completed in accordance with the
Financial Reporting Council’s Revised Ethical Standard 2019.
The audit and non-audit fees for the year under review can be found in Note 6 to the financial statements.
NON-AUDIT SERVICES
In relation to non-audit services, the Audit Committee has reviewed and implemented a policy on the engagement of the auditors to
supply non-audit services and this is reviewed on an annual basis. All requests or applications for other services to be provided by the
auditors over a threshold are submitted to the Audit Committee and will include a description of the services to be rendered and an
anticipated cost. The Audit Committee will review the scope and size of any such services provided and any consequent impact upon
the auditors’ independence.
The Group's policy follows the requirements of the Financial Reporting Council's Revised Ethical Standard for Auditors published in
December 2019. The policy specifies a number of prohibited services which it is not permitted for the auditors to provide under the
revised Ethical Standard.
The auditors did not provide any non-audit services to the Group in 2021 (2020: nil).
EXTERNAL AUDIT INDEPENDENCE
The Committee has undertaken a formal assessment of PwC’s independence, which included a review of:
a report from PwC describing their arrangements to identify, report and manage any conflicts of interest;
their policies and procedures for maintaining independence and monitoring compliance with relevant requirements; and
the value of non-audit services provided by PwC (as described above).
The Audit Committee monitors the auditors’ objectivity and independence on an ongoing basis. In determining PwC’s independence,
the Audit Committee has assessed all relationships with PwC and received confirmation from PwC that it is independent and that no
issues of conflicts arose during the year. The Audit Committee is therefore satisfied that PwC is independent.
EXTERNAL AUDIT EFFECTIVENESS
The Audit Committee monitors and reviews the effectiveness of the external audit process on an annual basis and makes
recommendations to the Board on its re-appointment, remuneration and terms of engagement of the auditors. Over the reporting
period, the Audit Committee met with the audit partner and assessed PwC’s performance to date. The review involved an examination
of the auditors’ remuneration, the quality of its work including the quality of the audit report, the quality of the audit partner and audit
team, the expertise of the audit firm and the resources available to it, the identification of audit risk, the planning and execution of the
audit and the terms of engagement.
Accordingly, the Audit Committee recommended to the Board that it proposes to shareholders via an ordinary resolution that PwC be
reappointed as auditors at the AGM. PwC has confirmed its willingness to continue in office.
The Audit Committee has direct access to the Group’s auditors and provides a forum through which the auditor’s report to the Board.
Representatives of PwC attend Audit Committee meetings at least twice annually.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 52
INTERNAL AUDIT
The Audit Committee believes that the Group does not require an internal audit function, principally because the Group delegates its
day-to-day operations to third parties, which are monitored by the Audit Committee, and which provide control reports on their
operations at least annually. Updates on the Investment Manager’s outsourced internal audit function are bought to the Board via the
Audit Committee on a quarterly basis.
APPROVAL
This Report was approved by the Audit Committee on 23 February 2022.
Jim Coyle
Chairman of the Audit Committee
1 March 2022
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 53
Directors’ Remuneration Report
STATEMENT FROM THE CHAIRMAN
As Chairman of the Remuneration Committee, I am pleased to
present the Directors’ remuneration report for the year ended
31 December 2021, prepared in accordance with The Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 and the Companies Act 2006.
The Group’s auditors are required to verify certain information
within this report subject to statutory audit by the Companies
Act 2006. Where information set out below has been audited it
is indicated as such.
In February 2021, the Board made the decision to split the
functions of the Remuneration and Nomination Committee
into two separately constituted Committees of the Board – the
Remuneration Committee and the Nomination Committee.
As at the date of this report, the Remuneration Committee
comprises all Directors and is chaired by Joanne Lake. Pages
31 and 32 include the member’s biographies, and full details of
the number of committee meetings and attendance by
individual committee members can be found on page 41.
We are required to seek shareholder approval of the Directors’
remuneration policy at least every third year and the
remuneration report annually. Any changes to the Directors’
remuneration policy will require shareholder approval. An
ordinary resolution was passed to approve the Directors’
remuneration policy at the Company’s 2020 AGM held on 26
June 2020. This policy was adopted at that meeting with effect
from the date of the AGM and remained in force for the year
ended 31 December 2021. An ordinary resolution to approve
the Directors’ remuneration policy will be put to shareholders
at least once every three years, and will next be put to
shareholders at the AGM in 2023. At the 2022 AGM, shareholders
will also be asked to consider an advisory resolution on the
contents of the Directors’ remuneration report.
As at 31 December 2021, the Board comprised four non-
executive Directors, all of whom are independent of the
Investment Manager. For the year ended 31 December 2021,
the responsibilities of the Remuneration a Committee were to:
consider and approve Directors’ remuneration;
consider and approve the framework and policy for the
remuneration of the Directors; and
consider the need to appoint external remuneration
consultants.
The Committee met on 23 February 2022 and considered the
continued time commitment required to carry out their duties.
In that discussion, the Committee noted the additional duties
and responsibilities to be placed upon directors of the
Company following the Company’s move to a premium listing.
The Committee also had regard to market trends in
remuneration in comparable UK-listed companies. Following
that discussion, the Board approved, following the
recommendation of the Committee, the following fee structure
for Directors with effect from 1 March 2022:
Chairman
£60,000 per
annum
Senior Independent
Director
£50,000 per
annum
Non-Executive Director
£45,000 per
annum
Chair of Audit Committee
Additional
supplement of
£5,000 per annum
Chair of Risk Committee
Additional
supplement of
£5,000 per annum
Chair of Remuneration
Committee
Additional
supplement of
£5,000 per annum
DIRECTORS’ REMUNERATION
POLICY
The fees for the Board as a whole are limited to £250,000 per
annum in accordance with the Prospectus, divided between
the Directors as they may determine. Subject to this limit, the
Board’s policy is that remuneration of non-executive Directors
should reflect the experience of each Board member and the
time commitment required by Board members to carry out
their duties and is determined with reference to the
appointment of Directors of similar investment companies.
The level of remuneration has been set with the aim of
promoting the future success of the Group. With this in mind,
the Board considers remuneration in order to attract
individuals of a calibre appropriate to promote the long-term
success of the Company and to reflect the specific
circumstances of the Company and its field of investment, the
duties and responsibilities of the Directors and the value and
amount of time commitment required of Directors to the
Group’s affairs.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 54
Due regard is taken of the Board’s requirement to attract and
retain individuals with suitable knowledge and experience and
the role that individual Directors fulfil. There are no specific
performance-related conditions attached to the remuneration
of the Board and the Board members are not eligible for
bonuses, pension benefits, share options, long-term incentive
schemes or other non-cash benefits or taxable expenses. No
other payments are made to Directors other than reasonable
out-of-pocket expenses which have been incurred as a result of
attending to the affairs of the Company.
In addition to the Board's remuneration, Board members are
entitled to such fees as they may determine in respect of any
extra or special services performed by them, having been called
upon to do so. Such fees would only be incurred in exceptional
circumstances. An example of such a circumstance would be if
the Company was to undertake a corporate action, which
would require the Board to dedicate additional time to review
associated documents and to attend additional meetings.
Such fees would be determined at the Board's absolute
discretion and would be set at a similar rate to other
comparable investment companies who have undertaken
equivalent activities. The fees would be set with the Company's
long-term success in mind and the interests of the Company's
members as a whole would be considered prior to the setting
of such fees.
None of the Directors have a service contract with the Company,
nor are any such contracts proposed. Instead, Directors are
appointed pursuant to a letter of appointment entered into
with the Company. There is no notice period specified in the
letters of appointment or Articles of Association for the removal
of Directors. Directors are not appointed for a specific term,
subject to any policy on tenure or orderly succession which
may be adopted by the Board from time to time. Copies of the
Directors’ letters of appointment are available at each of the
Company’s AGMs and can be obtained from the Company’s
registered office.
The Directors are not entitled to exit payments and are not
provided with any compensation for loss of office.
As with most investment trusts there is no Chief Executive
Officer and no employees. The Company’s remuneration policy
will apply to new Board members, who will be paid the
equivalent amount of fees as current Board members holding
similar roles.
Following shareholder approval, this policy took effect from the
2020 Annual General Meeting and is next scheduled for
approval by shareholders by the Company’s 2023 Annual
General Meeting.
The components of the remuneration package for non-
executive Directors, which are comprised in the Directors’
remuneration policy of the Company, are set out below with a
description and approach to determination:
Remuneration Type - Fixed Fees
The fees for the Board as a whole are limited to £250,000 per
annum in accordance with the Prospectus, divided between
the Directors as they may determine.
Annual fees are set to reflect the experience of each Board
member and the time commitment required by Board
members to carry out their duties and is determined with
reference to the appointment of Directors of similar
investment companies.
Directors do not participate in discussions relating to their
own fee.
Remuneration Type - Additional Fees
Additional fees may be paid to any Director who fulfils the
role of Chairman, who chairs any committee of the Board or
who is appointed Senior Independent Director. Such fees will
be set at a competitive level to reflect experience and time
commitment.
Board members are entitled to such fees as they may
determine in respect of any extra or special services
performed by them, having been called upon to do so. Such
fees would be determined at the Board's absolute discretion
and would be set at a similar rate to other comparable
investment companies who have undertaken equivalent
activities.
Remuneration Type - Expenses
The Directors are entitled to be paid all expenses properly
incurred by them in attending meetings with shareholders or
other Directors or otherwise in connection with the discharge
of their duties as Directors.
Remuneration Type - Other
Board members are not eligible for bonuses, pension
benefits, share options, long-term incentive schemes or
other non-cash benefits or taxable expenses.
VOTING AT ANNUAL GENERAL
MEETING
The Directors’ Remuneration Report for the year ended 31
December 2020 and the Directors’Remuneration Policy were
approved by shareholders at the Annual General Meetings held
on 8 June 2021 and 26 June 2020 respectively. The votes cast
were as follows:
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 55
Directors’
Remuneration Report
Directors’
Remuneration Policy
Number
of Votes
% of
Votes Cast
Number
of Votes
% of
Votes Cast
For 25,932,353 99.12
26,934,019
99.99
Against 229,225 0.88
2,875
0.01
Total
votes cast
26,161,578 100
26,936,894
100
Number
of votes
withheld
2,118 -
-
-
The Directors’ remuneration report, excluding the
implementation of the Directors’ remuneration policy, is
subject to an annual advisory vote via an ordinary resolution.
An advisory vote is a non-binding ‘advisory’ resolution. In the
event that shareholders vote against the ‘advisory’ resolution,
the Board will be required to put its remuneration policy to
shareholders for approval at the next AGM, regardless of
whether the remuneration policy was approved by
shareholders. The votes cast at the 2022 AGM on the advisory
resolutions will be disclosed in the remuneration report for the
year to 31 December 2022.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 56
DIRECTORS’ FEES (AUDITED)
Single total aggregate Directors’ remuneration for the year under review was £208,000 (2020: £178,000). The Directors who served
during the year under review received the following emoluments:
Director
Fixed fees paid
or receivable
during the year
Fixed fees paid
or receivable
during the year
Variable fees
paid or
receivable
during the year
Variable fees
paid or
receivable
during the year
Total
remuneration
paid or
receivable
during the year
Total
remuneration
paid or
receivable
during the year
2021 2020 2021 2020 2021 2020
£’000 £’000 £’000 £’000 £’000 £’000
Robert Sharpe (Chair) 58 48 - 15 58 63
Jim Coyle 53 45 - 15 53 60
Richard Rowney
(1)
48 40 - 15 48 55
Joanne Lake
(2)
48 - - - 48 -
Total 207 133 - 45 207 178
(1) Fees paid to the Directors during the year do not include employers’ national insurance costs
(2) Joanne Lake was appointed on 1 January 2021
No payments were made to past Directors for loss of office. The overall remuneration of each Director will continue to be monitored
by the Board, taking into account those matters referred to in the annual statement above. The Company did not pay any other
benefits including bonuses, pension benefits, share options, long-term incentive schemes or other non-cash benefits or taxable
benefits.
The Company has not made any loans to the Directors, nor has it ever provided any guarantees for the benefit of any Director or the
Directors collectively nor does it intend to.
The following table sets out the annual percentage change in Directors’ fees for the year ending 31 December 2021. The amounts
shown were effective from the 1 March 2021 and remain effective at the year ending 31 December 2021.
Director Fixed fees
Fixed fees
Variable fees
Variable fees
Change in fixed
fees
Change in
variable fees
2021 2020 2021 2020 2021 2020
£’000 £’000 £’000 £’000 % %
Robert Sharpe (Chair) 60 48 - 15 25% (100%)
Jim Coyle 55 45 - 15 22% (100%)
Richard Rowney
(1)
50 40 - 15 25% (100%)
Joanne Lake
(2)
50 - - - - -
Total
215 133 - 45
The previous change to Directors fees was effective 1 March 2019. There was no change to Directors fees in 2020. The requirements to
disclose this information came into force for companies with financial years starting on or after 10 June 2019 and, as such, this is the
first year the Company has disclosed this information. The Company does not have any employees and therefore no comparisons are
given in respect of Directors’ and employees’ pay increases.
Many parts of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 do not
apply to the Company as the Board is comprised entirely of non-executive Directors and the Company has no employees.
The Board has considered and approved a formal policy for the approval of Directors' expenses.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 57
COMPANY PERFORMANCE
The Board is responsible for the Company’s investment strategy and performance, although day-to-day management of the
Company’s affairs, including the management of the Company’s portfolio, has been delegated to third-party service providers. An
explanation of the performance of the Company is given in the Chairman's statement on pages 7 to 8 and Investment Manager's Report
on pages 9 to 10.
The graph below compares the total shareholder return on the Company’s share classes from January 2021 to 31 December 2021 with
that of the FTSE All-Share Total Return Index (ASXTR Index).
EXPENDITURE BY THE COMPANY
ON DIRECTORS’ REMUNERATION COMPARED WITH DISTRIBUTIONS
TO SHAREHOLDERS
The following table is provided in accordance with The Small and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 which sets out the relative importance of spend on pay in respect of the year ended 31 December 2021.
The table shows the remuneration paid to Directors for the year under review, compared with the distribution payments to
shareholders.
31 December 2021
£’000
31 December 2020
£’000
Total remuneration
paid to Directors
203 178
Shareholder distributions
– dividends or share buybacks
29,809 63,830
DIRECTORS’ INTERESTS (AUDITED)
The Company does not have any requirement for any Director to own shares in the Company. As at 31 December 2021, Joanne Lake
held 2,713 shares in the Company and no other Director held shares in the Company (2020: None)
There have been no changes to any holdings between 31 December 2021 and the date of this report.
90
95
100
105
110
115
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21
HONY Share Price Performance
FTSE all share HONY
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 58
APPROVAL OF THE ANNUAL REPORT ON REMUNERATION AND THE
DIRECTORS’ REMUNERATION POLICY
The Annual Report on remuneration was approved by the Board on 23 February 2022 and signed on behalf of the Board by:
Joanne Lake
Chairman of the Remuneration Committee
1 March 2022
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 59
Statement of Directors’ responsibilities in
respect of the financial statements.
Listed companies are required by the Financial Conduct Authority’s
Disclosure Guidance and Transparency Rules (the “Rules”) to include
a management report in their annual financial statements. The
information required to be in the management report for the purpose
of the Rules is included in the Chairman’s Statement (pages 7 and 8),
the Investment Manager’s Report (pages 9 to 10), Top Ten Holdings
(page 15), Portfolio composition (page 16), the Business Review (page
17 to 24) and the Directors’ Report (pages 30 to 59). Therefore, a
separate management report has not been included.
DIRECTORS’ RESPONSIBILITIES
STATEMENT IN RELATION TO THE
FINANCIAL STATEMENTS
The directors are responsible for preparing the Annual Report and
Audited Financial Statements and the financial statements in
accordance with applicable law and regulation.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have prepared
the group and the company financial statements in accordance with
UK-adopted international accounting standards.
Under company law, directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the group and company and of the profit or
loss of the group for that period. In preparing the financial statements,
the directors are required to:
select suitable accounting policies and then apply them
consistently;
state whether applicable UK-adopted international
accounting standards have been followed, subject to any
material departures disclosed and explained in the
financial statements;
make judgements and accounting estimates that are
reasonable and prudent; and
prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the group
and company will continue in business.
The directors are responsible for safeguarding the assets of the group
and company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are also responsible for keeping adequate accounting
records that are sufficient to show and explain the group’s and
company’s transactions and disclose with reasonable accuracy at
any time the financial position of the group and company and enable
them to ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006.
The directors are responsible for the maintenance and integrity of the
company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
DIRECTORS’ CONFIRMATIONS
Each of the directors, whose names and functions are listed in the
Directors' Report confirm that, to the best of their knowledge:
the group and company financial statements, which have
been prepared in accordance with UK-adopted
international accounting standards, give a true and fair
view of the assets, liabilities and financial position of the
group and company, and of the profit of the group; and
the management report, as represented by Chairman's
Statement, the Investment Manager's Report, Top Ten
Holdings, Portfolio composition, the Business Review and
the Directors' Report, includes a fair review of the
development and performance of the business and the
position of the group and company, together with a
description of the principal risks and uncertainties that it
faces.
Robert Sharpe
Chairman
1 March 2022
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 60
Independent auditors’ report to the
members of Honeycomb Investment Trust
plc
Report on the audit of the financial statements
Opinion
In our opinion, Honeycomb Investment Trust plc’s group financial statements and company financial statements (the “financial
statements”):
● give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2021 and of the group’s profit
and the group’s and company’s cash flows for the year then ended;
● have been properly prepared in accordance with UK-adopted international accounting standards; and
● have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report and Audited Financial Statements (the ‘’Annual Report’’),
which comprise: the Consolidated and Company Statements of Financial Position as at 31 December 2021; the Consolidated
Statement of Comprehensive Income, the Consolidated and Company Statements of Changes in Shareholders' Funds and the
Consolidated and Company Statements of Cash Flows for the year then ended; and the notes to the financial statements, which
include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section
of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided.
We have provided no non-audit services to the company or its controlled undertakings in the period under audit.
Our audit approach
Overview
Audit scope
● The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment
and the financial significance of components.
● We performed audit procedures over components considered financially significant in the context of the group (full scope audit).
For two other components, specific audit procedures were performed over selected significant account balances.
Key audit matters
● Valuation of the allowance for expected credit losses on credit assets at amortised cost (group and company)
● Valuation of equity investments held at fair value through profit and loss (group and company)
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 61
Materiality
● Overall group materiality: £3,600,000 (2020: £3,570,000) based on 1% of net assets.
● Overall company materiality: £3,400,000 (2020: £3,390,000) based on 1% of net assets, capped at 95% of group materiality.
● Performance materiality: £2,700,000 (2020: £2,680,000) (group) and £2,500,000 (2020: £2,550,000) (company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Compared to last year the number of key audit matters has reduced from five to two. The following are no longer considered to be
key audit matters.
● Interest income on credit assets at amortised cost (group) - the risk is reduced due to the low estimation uncertainty
involved in determining the accuracy of interest income.
● Consideration of the impact of Covid-19 (group and Company) - there has been limited impact on the resources and
operations of the group and Company during 2021 and there is reduced uncertainty of the impact of Covid-19 on the
group and Company as markets and economies continue to recover;
● Ability to continue as a going concern (shareholder discontinuation vote) (group and Company) - the requirement for a
special resolution to be proposed at the next Annual General Meeting of the shareholders for the discontinuation of the
business of the Company in its present form has not been triggered.
The remaining two key audit matters are consistent with the last year.
Key audit matter How our audit addressed the key audit matter
Valuation of the allowance for expected credit
losses on credit assets at amortised cost (group
and company)
Refer to Report of the Audit Committee ‘Significant
accounting matters’; Note 1 Principal accounting
policies ‘Expected credit loss allowance for
financial assets measured at amortised cost’; Note
2 Significant accounting judgements, estimates
and assumptions ‘Expected credit loss allowance
for financial assets measured at amortised cost’;
and Note 10 Investments at amortised cost.
Credit assets recorded at amortised cost
amounted to £565,994k for the group and
Company as at 31 December 2021. The amount is
net of the allowance for expected credit losses
(‘ECL’) in accordance with IFRS 9 of £10,786k
(group and Company)
Determining ECL involves judgement and is
subject to a high degree of estimation uncertainty.
Various assumptions are required when estimating
ECL. The significant assumptions that we focused
on in our audit included those with greater levels
We understood and evaluated the design of controls over the estimation
of ECLs over credit assets at amortised cost.
We understood and assessed the ECL methodology and assumptions
applied by the group by reference to accounting standards and industry
practice and tested the techniques used in estimating the ECL. We
performed substantive testing over the following, with the assistance of
our credit specialists:
● We tested the compliance of ECL methodologies and
assumptions applied by the group and company with the
requirements of IFRS 9;
● We assessed the appropriateness of the significant
assumptions and methodologies used for models and
judgemental adjustments, including the selection of key
parameters such as probabilities of default and the selection
of macroeconomic scenarios. We independently reperformed
the calculations for a sample of those models and
judgemental adjustments.
● We tested the appropriateness and application of the
quantitative and qualitative criteria used to assess significant
increases in credit risk; and
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 62
of judgement and for which variations had the
most significant impact on ECL. These were the
following:
● forward looking economic scenarios and
their probability weightings;
● quantitative and qualitative criteria used
to assess significant increases in credit
risk (‘SICR’); and
● judgemental adjustments to the
modelled ECL.
The impact of Covid-19, including the nature and
extent of government support, has resulted in
unprecedented economic conditions leading to
uncertainty around judgements made in
determining the severity and probability weighting
of macroeconomic variable forecasts across the
different economic scenarios used in ECL models.
These uncertainties are addressed with
judgemental adjustments to the modelled ECL.
● We further considered whether the judgements made in
selecting the significant assumptions would give rise to
indicators of possible management bias.
We evaluated and tested the disclosures over credit assets recorded at
amortised cost less ECL made in the financial statements.
We found that the calculations and assumptions used to estimate the
ECL on credit assets at amortised cost were supported by the audit
evidence we obtained.
Valuation of equity investments held at fair value
through profit and loss (group and company)
Refer to Report of the Audit Committee ‘Significant
accounting matters’; Note 2 Significant accounting
judgements, estimates and assumptions ‘Equity
investments’; and Note 11 Assets at fair value
through profit or loss.
Equity investments held at fair value amounted to
£15,659k at 31 December 2021 (group and
Company). These investments are unlisted and, as
such, the valuation requires the use of inputs
which are not readily observable in the market.
Determining unobservable inputs in fair value
measurement involves judgement and is subject
to a high degree of estimation uncertainty.
We understood and evaluated the design of controls over estimating the
fair value of unlisted equity investments.
With the assistance of our valuation experts, we understood and
assessed the valuation methodology applied by reference to accounting
standards and industry practice and tested the techniques used in
determining the fair value of the unlisted equity investments.
We performed substantive testing over the following, with the assistance
of our valuation experts:
● On a sample basis, we corroborated the accuracy and
reasonableness of inputs used in valuations, including
comparison to recent relevant transactions and other market
performance information.
● We tested the appropriateness of underlying investment
company financial information and the impact and sensitivity
of the valuation to other plausible scenarios.
We further considered whether the judgements made in selecting the
significant assumptions would give rise to indicators of possible
management bias.
We evaluated and tested the disclosures over equity investments made
in the financial statements.
We found that the fair valuation of equity investments was consistent
with the accounting policies and supported by the audit evidence we
obtained.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 63
How we tailored the audit scope
We tailored the scope of the audit to ensure that we performed sufficient audit work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the group and the Company, the accounting processes and controls, and
the industry in which they operate.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
We performed a risk assessment, giving consideration to relevant external and internal factors, including Covid-19, climate change,
economic risks and the group's strategy. We also considered our knowledge and experience obtained in the prior year audits. In
particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Financial statements - group Financial statements - company
Overall materiality
£3,600,000 (2020: £3,570,000).
£3,400,000 (2020: £3,390,000).
How we determined it
1% of net assets 1% of net assets, capped at 95% of group
materiality
Rationale for benchmark
applied
We have applied this benchmark, which is a
generally accepted auditing practice for
investment trust companies.
We have applied this benchmark, which is a
generally accepted auditing practice for
investment trust companies.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The
range of materiality allocated across components was £3.4m - £3.6m. Certain components were audited to a local statutory audit
materiality that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our
audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining
sample sizes. Our performance materiality was 75% (2020: 75%) of overall materiality, amounting to £2,700,000 (2020: £2,680,000) for
the group financial statements and £2,500,000 (2020: £2,550,000) for the company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was
appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.2m (group
audit) (2020: £0.18m) and £0.2m (company audit) (2020: £0.17m) as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the group's and the company’s ability to continue to adopt the going concern basis of
accounting included:
● Reviewing the Directors' assessment of the group and Company's financial position and forecasts, including the liquidity of its
assets, updated loan covenant analysis of facilities and understanding the severity of stress testing performed; and
● Reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the group's and the company’s ability to continue as a going concern for a
period of at least twelve months from when the financial statements are authorised for issue.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 64
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the
company's ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add
or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this
report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report,
any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors' report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and
matters as described below.
Strategic report and Directors' report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors'
report for the year ended 31 December 2021 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements.
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we
did not identify any material misstatements in the Strategic report and Directors' report.
Directors’ Remuneration
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the
corporate governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are
described in the Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we
have nothing material to add or draw attention to in relation to:
● The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
● The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks
and an explanation of how these are being managed or mitigated;
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 65
● The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern
basis of accounting in preparing them, and their identification of any material uncertainties to the group’s and company’s ability
to continue to do so over a period of at least twelve months from the date of approval of the financial statements;
● The directors’ explanation as to their assessment of the group's and company’s prospects, the period this assessment covers and
why the period is appropriate; and
● The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the group was substantially less in scope than an audit
and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement
is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is
consistent with the financial statements and our knowledge and understanding of the group and company and their environment
obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
● The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and
provides the information necessary for the members to assess the group’s and company's position, performance, business
model and strategy;
● The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
● The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s
compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing
Rules for review by the auditors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors' responsibilities in respect of the financial statements, the directors are
responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that
they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and
regulations related to the qualification as an Investment Trust under the Corporation Tax Act 2010, and we considered the extent to
which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that
have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management’s incentives and
opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that
the principal risks were related to posting inappropriate journal entries to increase revenue, and management bias in accounting
estimates. Audit procedures performed by the engagement team included:
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 66
● Discussions with the Investment Manager and the Audit Committee, including consideration of known or suspected instances of
non-compliance with laws and regulation;
● Assessment of the Company's compliance with the requirements of Section 1158 of the Corporation Tax Act 2010, including
recalculation of the various numerical aspects of the eligibility conditions;
● Reviewing relevant meeting minutes including those of the Board and Audit Committee;
● Challenging assumptions and judgements made by the Directors in their significant accounting estimates, in particular in relation
to the valuation of equity investments held at fair value and allowance for expected credit losses on amortised cost assets; and
● Identifying and testing journal entries meeting specific fraud criteria, including those posted with certain descriptions or to certain
account combinations, backdated journals or posted by unexpected users.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-
compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also,
the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud
may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We
will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling
to enable us to draw a conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
● we have not obtained all the information and explanations we require for our audit; or
● adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from
branches not visited by us; or
● certain disclosures of directors’ remuneration specified by law are not made; or
● the company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the directors on 16 May 2016 to audit the financial
statements for the year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement is
6 years, covering the years ended 31 December 2016 to 31 December 2021.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 67
Other matter
In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial
statements will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial
Conduct Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no
assurance over whether the annual financial report will be prepared using the single electronic format specified in the ESEF RTS.
Claire Sandford (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
1 March 2022
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 68
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 69
Consolidated Statement of Comprehensive
Income
For the year ended 31 December 2021
For the year ended 31 December 2021 For the year ended 31 December 2020
Notes
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Net Income
Interest Income on credit
assets at amortised cost
4 56,484 - 56,484 5 4,970 - 54, 970
(Loss) / Income on credit and
equity assets at fair value
through profit and loss
11 1,874 (1,337 ) 537 - 400 400
Credit impairment reversal /
(losses)
10 844 - 844 (5,581 ) - (5,581 )
Third party servicing (2, 810 ) - (2,810 ) (3,918 ) - (3,918 )
Net operating
income/(expense) before
financing and fund costs
Finance costs 17 (12,859 ) - (12,859 ) (14,323 ) - (14,323 )
Net operating
income/(Expense) before
fund costs
Management fee 5 (6,191 ) (158 ) (6,349 ) (5,823 ) (1 19 ) (5, 942 )
Performance fee 5 (3,369 ) - (3,369 ) (2,300 ) - (2,300 )
Fund expenses
6 (2,1 60 ) - (2,160 ) (2,605 ) - (2,605 )
Total operating expenses (11 ,720 ) (158 ) (11,87 8 ) (10, 728 ) (119 ) (10,847 )
Profit/(Loss) before taxation 31,813 (1,495 ) 30,318 20,4 20 281 20,701
Tax expense 7 - - - - - -
Profit/(Loss) after taxation
Earnings per share (basic and
diluted)
8 9 0.2 p (4.2 )p 86.0 p 55.7 p 0.8 p 56.5 p
The total column of this statement represents the Statement of comprehensive income prepared in accordance with UK-adopted
International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting
under those standards. The supplementary revenue return and capital return columns are both prepared under guidance issued by
the Association of Investment Companies (“AIC”). All items in the above statement derive from continuing operations.
No operations were discontinued during the year.
The Company does not have any income or expense that is not included in net profit for the year. Accordingly, the net profit for the
year is also the Total Comprehensive Income for the year, as defined in IAS1 (revised). There is no other comprehensive income for the
year.
The notes on pages 76 to 120 form an integral part of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 70
Consolidated Statement of Financial Position
As at 31 December 2021
Notes
31 December 2021
£’000
31 December 2020
£’000
Non-current assets
Assets held at fair value through profit or loss
11 48,770
Credit assets at amortised cost
10 565,994
Derivative assets held at fair value through profit or loss
Fixed assets
14 -
Current assets
Cash and cash equivalents
Receivables
15 6,554
Total assets
Current liabilities
Management fee payable
5 (1,037 )
(1,040 )
Performance fee payable
5 (3,431 )
(2,300 )
Other payables
16 (2,691 )
(3,832 )
Derivative liability held at fair value through profit or loss
(108 )
Interest bearing borrowings
17 (49,3 39 )
(20,865 )
(56,6 06 )
(28,037 )
Total assets less current liabilities
Non-current liabilities
Interest bearing borrowings
17 (218,318 )
(252,674 )
Net assets
Shareholders’ funds
Ordinary share capital
19 352
Share premium
Revenue reserves
Capital reserves
(2,244 )
(749 )
Special distributable reserves
Total shareholders’ funds
Net asset value per share
23
The notes on pages 76 to 120 form an integral part of the financial statements.
The financial statements on pages 68 to 120 were approved by the Board of Directors of Honeycomb Investment Trust plc (a public limited company incorporated
in England and Wales with company number 09899024 and authorised for issue on 1 March 2022. They were signed on its behalf by:
Robert Sharpe, Chairman
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 71
Company Statement of Financial Position
As at 31 December 2021
Notes
31 December 2021
£’000
31 December 2020
£’000
Non-current assets
Assets held at fair value through profit or loss
11 48,770
20,864
Credit assets at amortised cost
10 565,994
547,737
Derivative assets held at fair value through profit or loss
-
21
Fixed assets
14 -
-
614,764
568,622
Current assets
Cash and cash equivalents
10,500
59,673
Receivables
15 6,554
6,773
17,054
66,446
Total assets
631,818
635,068
Current liabilities
Management fee payable
5 (1,037)
(1,040)
Performance fee payable
5 (3,431)
(2,300)
Other payables
16 (2,392)
(3,429)
Derivative liability held at fair value through profit or loss
(108)
-
Deemed loan
18 (32,118)
-
Interest bearing borrowings
17 (15,072)
(73)
(54,158)
(6,842)
Total assets less current liabilities
577,660
628,226
Non-current liabilities
Deemed loan
18 (50,208)
(103,719)
Interest bearing borrowings
17 (168,110)
(167,275)
Net assets
359,342
357,232
Shareholders’ funds
Ordinary share capital
19 352
352
Share premium
299,599
299,599
Revenue reserves
4,790
1,185
Capital reserves
(2,244)
(749)
Special distributable reserves
56,845
56,845
Total shareholders’ funds
359,342
357,232
Net asset value per share
23 1,019.1
1,013.1p
Advantage has been taken of the exemption under section 408 of the Companies Act 2006 and accordingly the Company has not presented a Statement of
Comprehensive Income for the Company alone. The profit on ordinary activities after taxation of the Company for the year ended 31 December 2021 was £30.3
million (2020: £20.7 million). The financial statements on pages 68 to 120 were approved by the Board of Directors of Honeycomb Investment Trust plc (a public
limited company incorporated in England and Wales with company number 09899024) and authorised for issue on 1 March 2022. They were signed on its behalf
by:
Robert Sharpe, Chairman
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 72
Consolidated Statement of Changes in
Shareholders’ Funds
For the year ended 31 December 2021
Ordinary
Share
Capital
£’000
Share
Premium
£’000
Revenue
Reserves
£’000
Capital
Reserves
£’000
Special
Distributable
Reserves
£’000
Total
Equity
£’000
Shareholders’ funds at
1 January 2021
(749 )
Ordinary shares bought back -
Profit / (Loss) after taxation
(1,495 )
Dividends paid in the year
(28,208 )
(28,208 )
Shareholders’ funds at
31 December 2021
(2,244 )
For the year ended 31 December 2020
Ordinary
Share
Capital
£’000
Share
Premium
£’000
Revenue
Reserves
£’000
Capital
Reserves
£’000
Special
Distributable
Reserves
£’000
Total
Equity
£’000
Shareholders’ funds at
1 January 2020
(1,030 )
Ordinary shares bought back
(42 )
(34,783 )
(34,825 )
Profit after taxation
Dividends paid in the year -
(24,505 )
(4,500 )
(29,005 )
Shareholders’ funds at
31 December 2020
(749 )
For both year ended 2020 and 2021, the Group's capital reserve arising on investments sold and revenue reserve could have been distributed by way of a dividend.
The portion of capital reserve arising on investments held is wholly non-distributable. There may be factors that restrict the value of the reserves that can be
distributed and these factors may be complex to determine. Amounts fully distributable may therefore not be the total of the revenue reserve and the portion of
the capital reserve arising on investments sold.
The notes on pages 76 to 120 form an integral part of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 73
Company Statement of Changes in
Shareholders’ Funds
For the year ended 31 December 2021
Ordinary
Share
Capital
£’000
Share
Premium
£’000
Revenue
Reserves
£’000
Capital
Reserves
£’000
Special
Distributable
Reserves
£’000
Total
Equity
£’000
Shareholders’ funds at
1 January 2021
352
299,599
1,185
(749)
56,845
357,232
Ordinary shares bought back -
-
-
-
-
-
Profit / (Loss) after taxation
-
-
31,813
(1,495)
-
30,318
Dividends paid in the year
-
-
(28,208)
-
-
(28,208)
Shareholders’ funds at
31 December 2021
352
299,599
4,790
(2,244)
56,845
359,342
The Company's capital reserve arising on investments sold and revenue reserve may be distributed by way of a dividend. The portion of capital reserve arising
on investments held is wholly non-distributable. There may be factors that restrict the value of the reserves that can be distributed, and these factors may be
complex to determine. Amounts fully distributable may therefore not be the total of the revenue reserve and the portion of the capital reserve arising on
investments sold.
For the year ended 31 December 2020
Ordinary
Share
Capital
£’000
Share
Premium
£’000
Revenue
Reserves
£’000
Capital
Reserves
£’000
Special
Distributable
Reserves
£’000
Total
Equity
£’000
Shareholders’ funds at
1 January 2020
394
299,599
5,270
(1,030)
96,128
400,361
Ordinary shares bought back (42)
-
-
-
(34,783)
(34,825)
Profit after taxation
-
-
20,420
281
-
20,701
Dividends paid in the year
-
-
(24,505)
-
(4,500)
(29,005)
Shareholders’ funds at
31 December 2020
352
299,599
1,185
(749)
56,845
357,232
The Company's capital reserve arising on investments sold and revenue reserve may be distributed by way of a dividend. The portion of capital reserve arising
on investments held is wholly non-distributable. There may be factors that restrict the value of the reserves that can be distributed and these factors may be
complex to determine. Amounts fully distributable may therefore not be the total of the revenue reserve and the portion of the capital reserve arising on
investments sold.
The notes on pages 76 to 120 form an integral part of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 74
Consolidated Statement of Cash Flows
For the year ended 31 December 2021
Notes
31 December 2021
£’000
31 December 2020
£’000
Cash flows from operating activities:
Profit after taxation
Adjustments for:
(Advances) / repayments of Investments at amortised
cost
(22,883 )
Change in expected credit loss 10
(844 )
Net change in unrealised (gains)/losses
(854 )
(1,155 )
Finance costs
Amortisation 14
(Increase) / decrease in receivables 15
Decrease / (increase) in derivatives
(21 )
Increase in payables
(13 )
Net cash inflow from operating activities
Cash flows from investing activities:
Purchase of fair value investments
(21,583 )
(2,621 )
Net cash (outflow) / inflow from investing activities
(21,583 )
(2,621 )
Cash flows from financing activities:
Redemption of shares
(34,825 )
Drawdown of interest bearing borrowings 17
Repayments of interest-bearing borrowings 17
(34,375 )
(289,013 )
Interest paid on financing activities 17
(11,366 )
(18,211 )
Dividends declared and paid 9
(28,208 )
(29,005 )
Net cash (outflow) from financing activities
(46,949 )
(11,406 )
Net change in cash and cash equivalents
(49,600 )
Cash and cash equivalents at the beginning of the
year
Cash and cash equivalents
The notes on pages 76 to 120 form an integral part of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 75
Company Statement of Cash Flows
For the year ended 31 December 2021
Notes
31 December 2021
£’000
31 December 2020
£’000
Cash flows from operating activities:
Profit after taxation
30,318
20,701
Adjustments for:
(Advances) / repayments of Investments at amortised
cost
(22,883)
18,982
Change in expected credit loss 10
(844)
5,581
Net change in unrealised (gains)/losses
(854)
3,338
Finance costs
9,678
12,042
Amortisation 14
-
41
(Increase) / decrease in receivables 15
219
1,552
Decrease / (increase) in derivatives
130
(21)
Increase in payables
91
985
Net cash inflow from operating activities
15,855
63,201
Cash flows from investing activities:
Purchase of fair value investments
(21,583)
-
Sale of fair value investments
-
(2,621)
(Purchase) / receipt from deemed loans
(21,393)
25,107
Net cash inflow / (outflow) from investing activities
(42,976)
22,486
Cash flows from financing activities:
Redemption of shares
-
(34,825)
Drawdown of interest bearing borrowings 17
27,000
312,500
Repayments of interest-bearing borrowings 17
(12,000)
(272,752)
Interest paid on financing activities 17
(8,844)
(15,183)
Dividends declared and paid 9
(28,208)
(29,005)
Net cash (outflow) from financing activities
(22,052)
(39,265)
Net change in cash and cash equivalents
(49,173)
46,422
Cash and cash equivalents at the beginning of the
year
59,673
13,251
Cash and cash equivalents
10,500
59,673
The notes on pages 76 to 120 form an integral part of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 76
Notes to the Financial Statements
1. PRINCIPAL ACCOUNTING POLICIES
Basis of accounting
The financial statements have been prepared in accordance with UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies reporting under those standards. They comprise standards and
interpretations approved by the International Accounting Standards Board (“IASB”) and International Financial Reporting Committee,
including interpretations issued by the IFRS Interpretations Committee and interpretations issued by the International Accounting
Standard Committee (“IASC”) that remain in effect.
The financial statements have been prepared on a consistent basis year on year, on a going concern basis and under the historic cost
convention modified by the revaluation of financial assets held at fair value through profit and loss as applicable. The Directors
consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months
from the signing of these accounts, being the 1 March 2022. In order to reach this conclusion the Directors have reviewed the financial
projections of the Group from the date of this report, which shows that the Group will be able to generate sufficient cash flows in order
to meet its liabilities as they fall due. These financial projections have been performed under various origination volumes and stressed
scenarios and in all cases the Group is able to meet its liabilities as they fall due. The stressed scenarios considered included no future
originations by the Group, late repayments of significant structured facilities and individual exposures experiencing ongoing
performance at the worst monthly impact noted throughout 2020; which incorporated one-off macro-economic charges for Covid-19.
As part of these projections, the Directors have also reviewed any financial and non-financial covenants in place under all debt facilities
in place with no breaches anticipated, even in our stressed scenario.
The Directors have also reviewed the potential effect of the combination with Pollen Street on financial projections of the combined
group. These financial projections have been stress tested under different scenarios, including delaying all additional fund raises to
demonstrate that the combined group will be able to generate sufficient cash flows in order to meet its liabilities as they fall due.
The principal accounting policies adopted by the Company and Group are set out below. Where presentational guidance set out in
the Statement of Recommended Practice (“SORP”) for investment trusts issued by the Association of Investment Companies (“AIC”) in
July 2018 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis
compliant with the recommendations of the SORP.
All values are rounded to the nearest thousand pounds unless otherwise indicated.
Changes to Accounting Policies
At the date of authorisation of these financial statements, the following standards and interpretations have been applied in these
financial statements:
Interest Rate Benchmark Reform Phase 2 – Amendments to IFRS 9, IFRS 7, IFRS 4 and IFRS 16
In August 2020, the IASB made amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 to address the issues that arise during the
reform of an interest rate benchmark rate, including the replacement of one benchmark with an alternative one. The Phase 2
amendments provide the following reliefs:
When changing the basis for determining contractual cash flows for financial assets and liabilities (including lease liabilities), the
reliefs have the effect that the changes, that are necessary as a direct consequence of IBOR reform and which are considered
economically equivalent, will not result in an immediate gain or loss in the income statement.
The ‘Phase 2’ reforms are effective from 1 January 2021. The amendments require that, for financial instruments measured using
amortised cost measurement (that is, financial instruments classified as amortised cost and debt financial assets classified as FVOCI),
changes to the basis for determining the contractual cash flows required by interest rate benchmark reform are reflected by adjusting
their effective interest rate. No immediate gain or loss is recognised. These expedients are only applicable to changes that are required
by interest rate benchmark reform, which is the case if, and only if, the change is necessary as a direct consequence of interest rate
benchmark reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis (that
is, the basis immediately preceding the change).
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Where some or all of a change in the basis for determining the contractual cash flows of a financial asset and liability does not meet
the above criteria, the above practical expedient is first applied to the changes required by interest rate benchmark reform, including
updating the instrument’s effective interest rate. Any additional changes are accounted for in the normal way (that is, assessed for
modification or derecognition, with the resulting modification gain / loss recognised immediately in profit or loss where the instrument
is not derecognised). Refer to note 12 for further details on the group’s exposure to IBOR as at the year end.
Accounting standards issued but not yet effective
IFRS 17 Insurance Contract
IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The objective
of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a
basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial
performance and cash flows. IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1 January
2023.
The Directors do not anticipate that the adoption of this standard and interpretations will have a material impact on the financial
statements, given the nature of the Group’s business being that it has no insurance contracts.
Other future developments include the IASB undertaking a comprehensive review of existing IFRSs. The Group will consider the
financial impact of these new standards as they are finalised.
Accounting Policies
Consolidation
Subsidiaries are investees controlled by the Company. The Company controls an investee if it is exposed to, or has the rights to, variable
returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The
Company reassesses whether it has control if there are changes to one or more elements of control. Subsidiaries are valued at fair
value. The Company does not consider itself to be an investment entity for the purposes of IFRS 10, as it does not hold substantially
all of its investments at fair value. Consequently, it consolidates its subsidiaries rather than holding at fair value through profit or loss.
At the Company level, the Company’s investments in its subsidiaries are measured at fair value which is determined with reference to
the underlying net asset value of the subsidiary.
On 20 June 2019 the Group incorporated Sting Funding Limited (“Sting”), a limited Company incorporated under the law of England
and Wales. Sting became active on 28 August 2019 when it drew down on a debt facility backed by commercial and second charge
residential mortgages. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Group is
considered to control Sting through holding 100 percent of the issued shares. As a result, the financial statements for the year ended
31 December 2020 and 31 December 2021 are prepared on a consolidated basis.
Due to the nature of Sting, whereby the credit facility is guaranteed by the investments within Sting this constitutes as a restriction on
the Group’s ability to access or use the assets and settle the liabilities of the Group. There is a restricted ability on the Group to transfer
cash or other assets from Sting to the Group.
The Company controls Bud Funding Limited (“Bud”), a limited company incorporated under the law of England and Wales. The
Company is considered to control Bud through its involvement in the initial creation of Bud and in the absence of another entity now
having control over Bud. Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020.
In the consolidated financial statements, intra-group balances and transactions, and any unrealised income and expenses arising from
intra-group transactions, are eliminated in preparing consolidated financial statements.
All entities within the Group have co-terminus reporting dates.
Foreign Currency
The financial statements are prepared in Pounds Sterling because that is the currency of the majority of the transactions during the
year, so has been selected as the presentational currency.
The primary objective of the Group is to generate returns in Pounds Sterling, its capital-raising currency. The liquidity of the Group is
managed on a day-to-day basis in Pounds Sterling as the Group’s performance is evaluated in that currency. Therefore, the Directors
consider Pounds Sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events
and conditions and is therefore the functional currency.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 78
Transactions involving foreign currencies are converted at the exchange rate ruling at the date of the transaction. Foreign currency
monetary assets and liabilities are translated into Pounds Sterling at the exchange rate ruling on the year-end date. Foreign exchange
differences arising on translation would be recognised in the Statement of Comprehensive Income.
Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature
has been presented alongside the Statement of Comprehensive Income.
In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses
and finance costs, which are accounted for on an accruals basis, have been presented as revenue items except those items listed
below:
Expenses are allocated to capital where a direct connection with the maintenance or enhancement of the value of the investments
can be demonstrated; and
Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
The following are presented as capital items:
Gains and losses on the realisation of capital investments (equity investments reported in Note 11);
Increases and decreases in the valuation of capital investments held at the 31 December 2020 and 31
December 2021;
Realised and unrealised gains and losses on transactions undertaken to hedge an exposure of a capital nature;
Realised and unrealised exchange differences of a capital nature; and
Expenses, together with the related taxation effect, allocated to capital in accordance with the above policies.
Income
Interest from loans are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using
the effective interest rate method (“EIRM”).
The EIRM is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or
interest expense over the relevant period. The effective interest rate (“EIR”) is the rate that exactly discounts estimated future cash
flows through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the
financial asset or financial liability. When calculating the effective interest rate, the Group takes into account all contractual terms of
the financial instrument, for example prepayment options, but does not consider future credit losses. The calculation includes all fees
paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other
premiums or discounts.
Fees and commissions which are not considered integral to the EIRM and deposit interest income are recognised on an accruals basis
when the service has been provided or received.
Dividend income from investments is recognised when the Group’s right to receive payment has been established, normally the ex-
dividend date.
Expenses
All expenses are accounted for on the accrual basis. In respect of the analysis between revenue and capital items presented within the
Statement of Comprehensive Income, all expenses have been presented as revenue items except as follows:
Transaction costs which are incurred on the purchases or sales of Equity Assets designated as fair value through profit or loss are
expensed to capital in the Statement of Comprehensive Income; and
Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value
of the equity investments held can be demonstrated and, accordingly, the management fee for the financial year has been
allocated 98 percent to revenue and 2 percent to capital (being the management fee percentage applied to the Equity Assets
throughout the financial year), in order to reflect the Directors’ long-term view of the nature of the expected investment returns of
the Group.
Finance costs
Finance costs are accrued on the effective interest rate basis and are presented as a separate line on the statement of comprehensive
income.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 79
Shares
Ordinary and treasury shares are classified as equity. The costs of issuing or acquiring equity are recognised in equity (net of any related
income tax benefit), as a reduction of equity on the condition that these are incremental costs directly attributable to the equity
transaction that otherwise would have been avoided.
The costs of an equity transaction that is abandoned are recognised as an expense. Those costs might include registration and other
regulatory fees, legal fees, accounting and other professional advisers, printing costs and stamp duties.
Treasury shares have no entitlements to vote and are held directly by the Company.
Capital reserves
Capital reserves arise from:
Gains or losses on disposal of equity investments during the year
Increases and decreases in the valuation of equity investments held at the year end
Other capital charges and credits charged to this account in accordance with the accounting policies above or as applied to the
capital column of the Consolidated Statement of Comprehensive Income, prepared under guidance issued by the Associated of
Investment Companies.
All of the above are accounted for in the Consolidated Statement of Comprehensive Income. Any other gains or losses, charges or
credits from investments still held or otherwise are included in the revenue reserves.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable
profit for the year. The taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it
excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable
or deductible. The Group’s liability for current tax is calculated using a blended rate as applicable throughout the year.
In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital
returns in the supplementary information in the Statement of Comprehensive Income is the ‘marginal basis’. Under this basis, if taxable
income is capable of being entirely offset by expenses in the revenue column of the statement of comprehensive income, then no tax
relief is transferred to the capital return column.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the
Statement of Financial Position liability method. Deferred tax liabilities are recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised.
Deferred tax is charged or credited in the revenue return column of the Statement of comprehensive income, except when it relates to
items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Investment trusts which have approval under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.
The Company has been approved as an Investment Trust by HMRC and continues to monitor itself against the conditions required to
satisfy the investment trust criteria, including but not limited to making sufficient interest distributions.
Where additional SPVs are created these are structured in such a way that they either make no profit and as such pay no tax or that
they are exempt from taxation.
Irrecoverable withholding tax is recognised on any overseas dividends on an accruals basis using the applicable rate for the country
of origin.
Credit assets at amortised cost
Loans are initially recognised at a carrying value equivalent to the funds advanced to the borrower plus the costs of acquisition such
as broker and packaging fees. After initial recognition loans are subsequently measured at amortised cost using the effective EIRM less
expected credit losses (see Note 11 to the financial statements).
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 80
Investments held at fair value through profit or loss
All investments held by the Group which have been designated at fair value through profit or loss (“FVTPL”) but are also described in
these financial statements as investments held at fair value and are valued in accordance with the International Private Equity and
Venture Capital Valuation Guidelines (“IPEVCV”) effective 1 January 2019 and updated in March 2020 as recommended by the British
Private Equity and Venture Capital Association.
Purchases and sales of unquoted investments are recognised when the contract for acquisition or sale becomes unconditional.
Fixed assets
Fixed assets are shown at cost less accumulated depreciation. Depreciation is calculated by the Group on a straight-line basis by
reference to the original cost, estimated useful life and residual value. Cost includes the original purchase price of the asset and the
costs attributable to bringing the asset to its working condition for its intended use. The period of estimated useful life for this purpose
is one to three years. Residual values are assumed to be nil.
Receivables
Receivables do not carry any interest and are short term in nature. They are initially stated at their nominal value and reduced by
appropriate allowances for expected credit losses (if any). Given their short-term nature a lifetime ECL is not deemed necessary as
expected life is less than a month.
Cash and cash equivalents
Cash and cash equivalents (which are presented as a single class of asset on the Statement of Financial Position) comprise cash at
bank and in hand and deposits with an original maturity of three months or less. The carrying value of these assets approximates their
fair value.
Financial liabilities
Financial liabilities are classified according to the substance of the contractual arrangements entered into.
Payables
Payables are non-interest bearing. They are initially stated at their nominal value.
Interest bearing borrowings
Interest bearing borrowings are initially recognised at a carrying value equivalent to the proceeds received net of issue costs associated
with the borrowings. After initial recognition, interest bearing borrowings are subsequently measured at amortised cost using the
effective interest rate method.
Dividends
Dividends to shareholders are recognised in the year in which they are paid.
Investments in associates
Associates are entities over which the Company has significant influence, but does not control, generally accompanied by a
shareholding of between 20 percent and 50 percent of the voting rights.
No associates are presented on the Statement of Financial Position as the Group elects to hold such investments at fair value through
profit and loss. This treatment is permitted by IAS 28 Investment in Associates and Joint Ventures, which permits investments held by
entities that are venture capital organisations, mutual funds or similar entities to be excluded from its measurement methodology
requirements where those investments are designated, upon initial recognition, as at fair value through profit or loss and accounted
for in accordance with IFRS 9. All associate investments held by the Company are for capital appreciation where such an opportunity
has arisen, as opposed to being extensions of the Company’s business, and have been designated as at fair value through profit or loss
upon initial recognition. Changes in fair value of associates are recognised in the Statement of Comprehensive Income in the period
in which the change occurs.
The disclosures required by Section 409 of the Companies Act 2006 for associated undertakings are included in Note 24 to the financial
statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 81
Classification and measurement
Financial assets and financial liabilities are recognised in the Statement of Financial Position when the Group becomes a party to the
contractual provisions of the instrument. The Group shall offset financial assets and financial liabilities if it has a legally enforceable
right to set off the recognised amounts and interests and intends to settle on a net basis. Financial assets and liabilities are
derecognised when the Group settles its obligations relating to the instrument.
Classification and measurement - Financial assets
IFRS 9 contains a classification and measurement approach for debt instruments that reflects the business model in which assets are
managed and their cash flow characteristics. This is a principle-based approach and applies one classification approach for all types
of debt instruments. For debt instruments, two criteria are used to determine how financial assets should be classified and measured:
The entity’s business model (i.e. how an entity manages its debt Instruments in order to generate cash flows by collecting
contractual cash flows, selling financial assets or both); and
The contractual cash flow characteristics of the financial asset (i.e. whether the contractual cash flows are solely payments of
principal and interest).
A debt instrument is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value
through profit and loss (“FVTPL”): (a) it is held within a business model whose objective is to hold assets to collect contractual cash
flows; and (b) its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.
A debt instrument is measured at fair value through other comprehensive income (“FVOCI”) if it meets both of the following conditions
and is not designated as at FVTPL:
(a) it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets;
and
(b) its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Movements in the carrying amount are taken through the Other Comprehensive Income (“OCI”), except for the recognition of expected
credit losses, interest revenue and foreign exchange gains and losses on the investments at amortised cost which is recognised in the
Consolidated Statement of Comprehensive Income. When the financial asset is derecognised, the cumulative gain or loss previously
recognised in OCI is reclassified from equity to the Consolidated Statement of Comprehensive Income and recognised in ‘Income’.
Interest income from these financial assets in included in ‘Income’ using the EIRM. No assets have been classified at FVOCI as at 31
December 2020 or 31 December 2021.
Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be
made on initial recognition to measure them at FVOCI with no subsequent reclassification to profit or loss. This election is made on
an investment by investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. All equity
positions are measured at FVTPL. Financial assets measured at FVTPL are recognised in the balance sheet at their fair value. Fair value
gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading
income in the period in which they occur. The fair values of assets and liabilities traded in active markets are based on current bid and
offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. In addition, on
initial recognition the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at
amortised cost or at FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
Business model assessment
The Group assesses the objective of the business model in which a financial asset is held at a portfolio level in order to generate cash
flows because this best reflects the way the business is managed, and information is provided to the Investment Manager. That is,
whether the Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash
flows and cash flows arising from the sale of assets. If neither of these are applicable, then the financial assets are classified as part of
the other business model and measured at FVTPL.
The information that is considered includes:
The stated policies and objectives for the portfolio and the operation of those policies in practice, including whether the strategy
focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching duration of the financial
assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 82
Past experience on how the cash flows for these assets were collected;
How the performance of the portfolio is evaluated and reported to the Investment Manager;
The risks that affect the performance of the business model (and the financial assets held within that business model) and how
those risks are managed; and
The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity.
However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Investment
Manager’s stated objective for managing the financial assets is achieved and how cashflows are realised.
Assessment whether contractual cash flows are solely payments of principal and interest
For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined
as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular
period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a reasonable profit
margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the contractual terms of the instrument
are considered. This includes assessing whether the financial asset contains a contractual term that could change the timing or
amount of contractual cash flows such that it would not meet this condition. In making the assessment the following features are
considered:
Contingent events that would change the amount and timing of cash flows;
Leverage features;
Prepayment and extension terms;
Terms that limit the Group’s claim to cash flows from specified assets, e.g. non-recourse asset arrangements; and
Features that modify consideration for the time value of money, e.g. periodic reset of interest rates.
Classification and measurement - Financial liabilities
In both the current period and prior year, financial liabilities are classified and subsequently measured at amortised cost, except for:
Financial liabilities at fair value through profit or loss: this classification is applied to derivatives, financial liabilities held for
trading (e.g. short positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains
or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive
income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that
liability, which is determined as the amount that is not attributable to change in market conditions that give rise to market risk)
and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation
would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk
of the liability are also presented in the Consolidated Statement of Comprehensive Income;
Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability
is recognised for the consideration received for the transfer. In subsequent periods, the Company recognises any expense
incurred on the financial liability; and
Financial guarantee contracts and loan commitments
Deemed loans
The deemed loans are a non-derivative financial liability with fixed or determinable repayments that are not quoted in an active market.
Deemed loans in relation to the Company arise from loans originated by the Company and subsequently sold to in a special purpose
entity to reduce the cost of borrowing, in this case Sting Funding Limited and Bud Funding Limited. Although the loans are no longer
legally owned by the Company, the Company maintains the economic risks and rewards of the underlying assets and therefore does
not meet the criteria to derecognise. Derecognition cannot be achieved by merely transferring the legal title of a financial asset to
another party. The substance of the arrangement must be assessed in order to determine whether an entity has transferred the
economic exposure associated with the rights inherent in the asset.
Loans and related transaction costs are measured at initial recognition at fair value and are subsequently measured at amortised cost
using the EIRM. International accounting standards (“IAS”) makes it clear that assets should only appear on one statement of financial
position. IFRS require a reporting entity, as part of the derecognition assessment, to consider whether the transfer includes a transfer
to a consolidated subsidiary. Derecognition cannot be achieved by merely transferring the legal title to a financial asset to another
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party. The substance of the arrangement must be assessed in order to determine whether an entity has transferred the economic
exposure associated with the rights inherent in the asset (i.e., its risks and rewards) and, in some cases, control of those rights.
In the case of the Company, it has not met the requirements of derecognition in relation to the deemed loans given the economic
exposure associated with the rights inherent in the assets (i.e., its risks and rewards), have been retained. As such the Company fails to
meet the requirements for derecognition and continues to recognise the financial assets and as such has a deemed loans liability to
the to the relevant special purpose entity. At a consolidated Group level, the deemed liability is eliminated.
Equity instruments
Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not
contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments
include basic ordinary shares.
The Group subsequently measures all equity investments at FVTPL. Gains and losses on equity investments at FVTPL are included in
the ‘Income’ line in the Statement of Comprehensive Income.
Expected Credit loss allowance for financial assets measured at amortised cost
The impairment charge in the income statement includes the change in expected credit losses which are recognised for loans and
advances to customers, other financial assets held at amortised cost and certain loan commitments.
IFRS 9 applies a single impairment model to all financial instruments subject to impairment testing. Impairment losses are recognised
on initial recognition, and at each subsequent reporting period, even if the loss has not yet been incurred. In addition to past events
and current conditions, reasonable and supportable forecasts affecting collectability are also considered when determining the
amount of impairment in accordance with IFRS 9. Under IFRS 9 expected credit loss model expected credit losses are recognised at
each reporting period, even if no actual loss events have taken place. In addition to past events and current conditions, reasonable
and supportable forward-looking information that is available without undue cost or effort is considered in determining impairment,
with the model applied to all financial instruments subject to impairment testing.
At initial recognition, allowance is made for expected credit losses resulting from default events that are possible within the next 12
months (12-month expected credit losses). In the event of a significant increase in credit risk, allowance (or provision) is made for
expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected
credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets
which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets which have defaulted
or are otherwise considered to be credit impaired are allocated to Stage 3. Stage 2 and Stage 3 are based on lifetime expected credit
losses.
The measurement of ECLs is primarily based on the product of the instrument’s probability of default (“PD”), loss given default (“LGD”),
and exposure at default (“EAD”), taking into account the value of any collateral held or other mitigants of loss and including the impact
of discounting using the effective interest rate.
The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months (“12M PD”),
or over the remaining lifetime (“Lifetime PD”) of the obligation.
EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (“12M EAD”) or over
the remaining lifetime (“Lifetime EAD”). For example, for a revolving commitment, the Group includes the current drawn
balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should
it occur. The EAD is discounted back to the reporting date using the effective interest rate (“EIR”) determined at initial
recognition.
LGD represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type
and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of
exposure at the time of default (EAD). LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage
of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to
be made if the default occurs over the remaining expected lifetime of the loan.
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The estimated credit loss (“ECL”) is determined by estimating the PD, LGD, and EAD for each individual exposure or collective segment.
These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or
defaulted in an earlier month). This effectively calculates an ECL, which is then discounted back to the reporting date and summed.
The discount rate used in the ECL calculation is the original EIR or an approximation thereof. The Lifetime PD is developed by applying
a maturity profile to the current 12M PD. The maturity profile looks at how defaults develop on a portfolio from the point of initial
recognition throughout the lifetime of the loans. The maturity profile is based on historical observed data and is assumed to be the
same across all assets within a portfolio and credit grade band where supported by historical analysis. The 12-month and lifetime EADs
are determined based on the expected payment profile, which varies by product type.
For amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over
a 12 month or lifetime basis. This is also adjusted for any expected overpayments made by a borrower. Early
repayment/refinance assumptions are also incorporated into the calculation.
For revolving products, the exposure at default is predicted by taking current drawn balance and adding a “credit conversion
factor” which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by
product type and current limit utilisation band, based on analysis of the Company’s recent default data.
The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by
product type.
For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to
market/book values due to forced sales, time to repossession and recovery costs observed.
For unsecured products, LGDs are typically set at product level due to the limited differentiation in recoveries achieved across
different borrowers. These LGDs are influenced by collection strategies, including contracted debt sales and price.
The main difference between Stage 1 and Stage 2 is the respective PD horizon. Stage 1 estimates use a maximum of a 12-month PD,
while Stage 2 estimates use a lifetime PD. The main difference between Stage 2 and Stage 3 is Stage 3 is effectively the point at which
there has been a default event. For financial assets in stage 3, entities continue to recognise lifetime ECL but now recognise interest
income on a net basis. This means that interest income is calculated based on the gross carrying amount of the financial asset less
ECL. Stage 3 estimates continue to leverage existing processes for estimating losses on impaired loans, however, these processes are
updated to reflect the requirements of IFRS 9, including the requirement to consider multiple forward-looking scenarios using
independent third-party economic information.
Movements between Stage 1 and Stage 2 are based on whether an instrument’s credit risk as at the reporting date has increased
significantly relative to the date it was initially recognised. Where the credit risk subsequently improves such that it no longer represents
a significant increase in credit risk since origination, the asset is transferred back to Stage 1.
In assessing whether a borrower has had a significant increase in credit risk the following indicators are considered:
Consumer
Short-term forbearance
Extension of terms granted
Structured/SME/Property
Significant increase in credit spread, where this information is available
Significant adverse changes in business, financial and/or economic conditions in which the borrower operates
Actual or expected forbearance or restructuring
Actual or expected significant adverse change in operating results of the borrower
Significant change in collateral value (secured facilities only) which is expected to increase the risk of default
Early signs of cashflow/liquidity problems such as delay in servicing of trade creditors
However, as a backstop, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly
when repayments are more than 30 days past due. Movements between Stage 2 and Stage 3 are based on whether financial assets
are credit impaired as at the reporting date. IFRS 9 contains a rebuttable presumption that default occurs no later than when a
payment is 90 days past due. The Group uses this 90-day backstop for all its assets except for UK second mortgages, the Group has
assumed a backstop of 180 days past due as mortgage exposures more than 90 days past due, but less than 180 days, typically show
high cure rates and this aligns to the Group’s risk management practices. Assets can move in both directions through the stages of the
impairment model.
In assessing whether a borrower is credit impaired the following qualitative indicators are considered:
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 85
Consumer
Long-term forbearance
Borrower deceased
Borrower insolvent
Structured/SME/Property
Borrower in breach of financial covenants
Concessions have been made by the lender relating to the borrower’s financial difficulty
Significant adverse changes in business, financial or economic conditions on which the borrower operates
Long term forbearance or restructuring.
The following quantitative indicators are also considered
The remaining lifetime PD at the reporting date has increased, compared to the residual lifetime PD expected at the reporting
date when the exposure was first recognised; and
Based on data developed internally and obtained from external sources.
The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default
used for internal credit risk management purposes. The default definition has been applied consistently to model the PD, EAD and
LGD throughout the Group’s expected credit loss calculations.
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes
in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the risk of default) on a financial instrument has increased significantly
since initial recognition, reasonable and supportable information that is relevant and available without undue cost or effort, including
both quantitative and qualitative information and analysis based on historical experience, credit assessment and forward-looking
information.
The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk considers
information about past events and current conditions as well as reasonable and supportable forward-looking information. A ‘Base
case’ view of the future direction of relevant economic variables and a representative range of other possible forecasts scenarios have
been developed. The process has involved developing two additional economic scenarios and considering the relative probabilities
of each outcome.
The base case represents a most likely outcome and is aligned with information used for other purposes, such as strategic planning
and budgeting. The number of scenarios and their attributes are reassessed at each reporting date. At 31 December 2021 as well as 31
December 2020, all the portfolios of the Group use one positive, more optimistic and one downside, more pessimistic outcomes. The
scenario weightings are determined by a combination of statistical analysis and expert credit judgement, taking account of the range
of possible outcomes each chosen scenario is representative of.
The estimation and application of forward-looking information requires significant judgement. PD, LGD and EAD inputs used to
estimate Stage 1 and Stage 2 credit loss allowances, are modelled and adjusted based on the macroeconomic variables (or changes
in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. The Group has utilised
macroeconomic scenarios prepared and provided by Oxford Economics (“Oxford”). Oxford combines two decades of forecast errors
with the quantitative assessment of the current risks facing the global and domestic economy to produce robust forward-looking
distributions for the economy. Oxford construct 3 alternative scenarios at specific percentile points in the distribution. In any
distribution, the probability of a given discrete scenario is close to zero. Therefore, scenario probabilities represent the probability of
that scenario or similar scenarios occurring. In effect, a given scenario represents the average of a broader bucket of similar severity
scenarios and the probability reflects the width of that bucket. Given that it is known where the IFRS 9 scenarios sit in the distribution
(the percentiles), their probability (the width of the bucket of similar scenarios) depends on how many scenarios are chosen. Scenario
probabilities must add up to 100 percent so the more scenarios chosen, the smaller the section of the distribution, or bucket, each
scenario represents and therefore the smaller the probability. This allows the probabilities to be calculated according to whichever
subset of scenarios chosen to use in the ECL calculation. The scenarios are generated at the year-end and are only updated during the
year if economic conditions change significantly. The Base case is given a 40 percent weighting and the downside and upside a 30
percent weighting each. These weightings were introduced in the 2018 financial year and maintained in the current financial year.
As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and
therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its
best estimate of the possible outcomes and has analysed the non-linearities and asymmetries within the Group’s different portfolios
to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 86
Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory,
legislative or political changes, have also been considered, but no adjustment has been made to the ECL for such factors. This is
reviewed and monitored for appropriateness on an annual basis.
In March 2020, the World Health Organisation recognised Covid-19 as a pandemic. Covid-19 has caused major disruption to businesses
and economic activity with corresponding volatility in global stock markets. There are no comparable recent events which may provide
guidance as to the effect of the spread of the Covid-19 and a potential pandemic, and as a result, the ultimate impact of the Covid-19
outbreak or a similar health epidemic is highly uncertain and subject to change. Given the Group’s strategy, its performance is linked
to the health of the economy. We expect the Group could experience further impairments and consequently reduced profits,
particularly if economic expectations deteriorate. The government has also launched a number of initiatives aimed at providing
finance to SMEs and support to consumers. Two of our largest borrowers are in the process of lending under the Recovery Loan
Scheme government guarantee scheme which will also refinance part of their exposure with the benefit of the government guarantee.
The recent market improvements and progress made on national vaccination programmes are encouraging, however uncertainty
remains.
Collateral and other credit enhancements
The Group employs a range of policies to mitigate credit risk. The most common of these is accepting collateral for funds advanced.
The Group has internal policies of the acceptability of specific classes of collateral or credit risk mitigation.
The Group prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is reviewed
periodically. The principal collateral types for loans and advances are:
Mortgages over residential properties;
Security over our borrowers receivables;
Margin agreement for derivatives, for which the Group has also entered into master netting agreements;
Charges over business assets such as premises, inventory and accounts receivable; and
Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally
unsecured.
Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Debt securities,
treasury and other eligible bills are generally unsecured, with the exception of asset-backed securities and similar instruments, which
are secured by portfolios of financial instruments. Derivatives are also collateralised.
The Group closely monitors collateral held for financial assets considered to be credit-impaired, as it becomes more likely that the
Group will take possession of collateral to mitigate potential credit losses.
Modification of financial assets
The Group sometimes modifies the terms or loans provided to customers due to commercial renegotiations, or for distressed loans,
with a view to maximising recovery.
Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring
policies and practice are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely
continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans.
The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original
terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original assets. The
Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly
improved after restructuring, so that the assets are moved from Stage 3 or Stage 2.
Modification of loans
The Company sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens,
the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering,
among others, the following factors:
If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the
borrower is expected to be able to pay;
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 87
Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the
risk profile of the loan;
Significant extension of the loan term when the borrower is not in financial difficulty;
Significant change in the interest rate;
Change in the currency the loan is denominated in; and
Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan.
If the terms are substantially different, the Group derecognises the original financial asset and recognises a ‘New’ asset at fair value
and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial
recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk
has occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial
recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed
payments. Differences in the carrying amounts are also recognised in the Consolidated Statement of Comprehensive Income as a gain
or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in derecognition,
and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a
modification gain or loss in the Consolidated Statement of Comprehensive Income. The new gross carrying amount is recalculated by
discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets).
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have
expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or
(ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Company has not retained
control.
The Company enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a
contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These
transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Group:
Has no obligation to make payments unless it collects equivalent amounts from the assets;
Is prohibited from selling or pledging the assets; and
Has an obligation to remit any cash it collects from the assets without material delay.
Derecognition
Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged,
cancelled or expires). Different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for
as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially
different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and
discounted using the original effective interest rate, is at least 10 percent different from the discounted present value of the remaining
cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is
denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are
also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any
costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted
for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining
term of the modified liability.
Segmental Reporting
The Board and Investment Manager consider investment activity in Credit Assets and selected Equity Assets as the single operating
segment of the Group, being the sole purpose for its existence. No other activities are performed.
Whilst visibility over deal type and sector is afforded at an operational level, all are considered ‘routes to market ’ for acquiring interests
in credit assets, and thus act merely as indicators of financial performance. There are no segment managers directly accountable for
the individual routes to market and the routes to market are not determinants of resource allocations, rather each investment
opportunity is considered on its own merits.
The Directors are of the opinion that the Company is engaged in a single segment of business and operations of the Group are mainly
in the United Kingdom
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 88
2. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of financial statements accordance with both International Accounting Standards in conformity with UK-adopted
International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under
those standards requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies
and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and
expenses during the reporting period. UK company law and IFRS require the Directors, in preparing the Group’s financial statements,
to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable. The Group’s
estimates and assumptions are based on historical experience and expectations of future events and are reviewed on an ongoing
basis. Although these estimates are based on the Directors’ best knowledge of the amount, actual results may differ ultimately from
those estimates.
The estimates of most significance to the financial statements, are in relation to expected credit losses and equity investments at fair
value through profit or loss. These are detailed below.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods affected.
The critical judgements relate to the application of consolidation accounting principles, and within the Company, the treatment of
asset derecognition and deemed loans. These have been explained on pages 77 to 83 as well as in the accounting policies section of
the Notes.
Estimates
Expected Credit loss allowance for financial assets measured at amortised cost
The calculation of the Group’s ECL allowances and provisions against loan commitments and guarantees under IFRS 9 is complex and
involves the use of significant judgement and estimation. Loan Impairment Provisions represent an estimate of the losses incurred in
the loan portfolios at the balance sheet date. Individual impairment losses are determined as the difference between the carrying
value and the present value of estimated future cash flows, discounted at the loans’ original effective interest rate. To calculate this
involves the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement
objective of IFRS 9. Depending on a range of factors such as changes in the economic environment in the UK driven by Covid-19
pandemic, there could be a material adjustment to the carrying amounts of assets and liabilities in the next financial year. The most
significant factors are set out below.
Definition of default - The Probability of Default (“PD”) of an exposure, both over a 12-month period and over its lifetime, is a key input
to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant
financial difficulty which is likely to affect the ability to repay amounts due.
The definition of default adopted by the Company is described in expected credit loss allowance for financial assets measured at
amortised cost above.
As noted on page 84, the Group has rebutted the presumption in IFRS 9 that default occurs no later than when a payment is 90 days
past due on some of its portfolio.
The lifetime of an exposure - To derive the PDs necessary to calculate the ECL allowance it is necessary to estimate the expected life
of each financial instrument. A range of approaches has been adopted across different product groupings including the full contractual
life and taking into account behavioural factors such as early repayments and refinancing. The Group has defined the lifetime for each
product by analysing the time taken for all losses to be observed and for a material proportion of the assets to fully resolve through
either closure or write-off.
Significant increase in credit risk (“SICR”) - Performing assets are classified as either Stage 1 or Stage 2. An ECL allowance equivalent to
12 months expected credit losses is established against assets in Stage 1; assets classified as Stage 2 carry an ECL allowance equivalent
to lifetime expected credit losses. Assets are transferred from Stage 1 to Stage 2 when there has been an SICR since initial recognition.
The Company uses a quantitative test together with qualitative indicators and a backstop of 30 days past due for determining whether
there has been a SICR. The setting of precise trigger points combined with risk indicators requires judgement. The use of different
trigger points may have a material impact upon the size of the ECL allowance.
Forward looking information - IFRS 9 requires the incorporation of forward-looking macroeconomic information that is reasonable
and supportable, but it provides limited guidance on how this should be performed. The measurement of expected credit losses is
required to reflect an unbiased probability-weighted range of possible future outcomes.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 89
In order to do this the Group uses a model to project a number of key variables to generate future economic scenarios. These are
ranked according to severity of loss and three economic scenarios have been selected to represent an unbiased and full loss
distribution. They represent a ‘most likely outcome’ (the Base case scenario) and two, less likely, ‘outer’ scenarios, referred to as the
‘Upside’ and ‘Downside’ scenarios. These scenarios are used to produce a weighted average PD for each product grouping which is
used to calculate the related ECL allowance. This weighting scheme is deemed appropriate for the computation of unbiased ECL. Key
scenario assumptions are set using external economist forecasts, helping to ensure the IFRS 9 scenarios are unbiased and maximise
the use of independent information. Using externally available forecast distributions helps ensure independence in scenario
construction. While key economic variables are set with reference to external distributional forecasts, the overall narrative of the
scenarios is aligned to the macroeconomic risks faced by the Group at the 31 December 2021.
The choice of alternative scenarios and probability weighting is a combination of quantitative analysis and judgemental assessments,
designed to ensure that the full range of possible outcomes and material non-linearity are captured. Paths for the two outer scenarios
are benchmarked to the Base scenario and reflect the economic risk assessment. Scenario probabilities reflect management
judgement and are informed by data analysis of past recessions, transitions in and out of recession, and the current economic outlook.
The key assumptions made, and the accompanying paths, represent our ‘best estimate’ of a scenario at a specified probability.
Suitable narratives are developed for the central scenario and the paths of the two outer scenarios. It may be insufficient to use three
scenarios in certain economic environments. Additional analysis may be requested at management’s discretion, including the
production of extra scenarios. We anticipate there will only be limited instances when the standard approach will not apply. The Base
case, Upside and Downside scenarios are usually generated annually and those described herein reflect the conditions in place at the
balance sheet date and are only updated during the year if economic conditions change significantly.
The Group’s UK mild upside scenario can be thought of as an alternative, more optimistic, base case in which households run down
savings accumulated during the pandemic at a faster pace than assumed in the baseline, permanent scars to the supply side are
avoided, and the economy reverts to its pre-crisis trajectory within a couple of years. This mild-upside case scenario sees UK
unemployment drop by 0.8 per cent in 2022. Consequently, for the mild upside scenario the Bank of England base rate is forecast to
rise to around 0.9 per cent by the end of 2022. The one-year forecast changes in these key economic drivers are shown in the table
below.
The base case forecasts unemployment reducing to 3.8% by the end of 2025; returning to match unemployment seen in March 2020.
The downside scenario however forecasts a much slower recovery, with unemployment at 6.1% by December 2025 and HPI still 19.3%
lower than at the end of 2021.
See Note 10 for the sensitivity analysis.
2021
Base
Upside
Down-side
UK unemployment rate yearly change (0.17%)
(0.84%)
1.64%
UK HPI yearly change (0.45)
4.25%
(9.43%)
UK Base Rate 0.37%
0.75%
(0.13%)
2020
Base
Upside
Down-side
UK unemployment rate yearly change (0.11%)
(1.60%)
2.01%
UK HPI yearly change (5.50%)
(1.32%)
(14.32%)
UK Base Rate 0.1%
0.4%
(0.3%)
Loss given default (“LGD”) - LGD represents the expectation of the extent of loss on a defaulted exposure. LGD varies by type of
counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss
per unit of exposure at the time of default. LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage
of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made
if the default occurs over the remaining expected lifetime of the loan.
The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by
product type:
For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to
market/book values due to forced sales, time to repossession and recovery costs observed.
For unsecured products, LGDs are typically set at product level due to the limited differentiation in recoveries achieved across
different borrowers. These LGDs are influenced by collection strategies, including contracted debt sales and price.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 90
Exposure at default (“EAD”) - EAD is based on the amounts expected to be owed at the time of default, over the next 12 months (“12M
EAD”) or over the remaining lifetime (“Lifetime EAD”). IFRS 9 requires an assumed draw down profile for committed amounts.
Equity Investments
The valuation of unquoted investments and investments for which there is an inactive market is a key area of estimation and may
cause material adjustment to the carrying value of those assets and liabilities. The unquoted equity assets are valued on a periodic
basis using techniques including a market multiple approach, costs approach and/or income approach. The valuation process is
collaborative, involving the finance and investment functions of the Investment Manager with the final valuations being reviewed by
the Investment Manager’s Valuation Committee. The techniques used include earnings multiples, discounted cash flow analysis, the
value of recent transactions and the net asset value of the investment. The valuations often reflect a synthesis of a number of different
approaches in determining the final fair value estimate. The individual approach for each investment will vary depending on relevant
factors that a market participant would take into account in pricing the asset. These might include the specific industry dynamics, the
Investee’s stage of development, profitability, growth prospects or risk as well as the rights associated with the particular security.
Increases or decreases in any of the inputs in isolation may result in higher or lower fair value measurements. Changes in fair value of
all investments held at fair value are recognised in the Consolidated Statement of Comprehensive Income as a capital item. On
disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income. Transaction costs
are included within gains or losses on investments held at fair value, although any related interest income, dividend income and
finance costs are disclosed separately in the financial statements. Sensitivity analysis has been performed on the equity investment
valuations in Note 11.
Judgement
Consolidation
Determining whether the Group has control of an entity is generally straightforward when based on ownership of the majority of the
voting capital. However, in certain instances, this determination will involve significant judgement, particularly in the case of structured
entities where voting rights are often not the determining factor in decisions over the relevant activities. This judgement may involve
assessing the purpose and design of the entity. It will also often be necessary to consider whether the Group, or another involved party
with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others.
The Company does not consider itself to be an investment entity for the purposes of IFRS 10, as it does not hold substantially all of its
investments at fair value. Consequently, it consolidates its subsidiaries rather than treating its subsidiaries as investments at fair value
through profit or loss.
The Company controls Bud Funding Limited (“Bud”), a limited company incorporated under the law of England and Wales, though it
does not own the majority of the voting capital the Company is considered to control Bud through its exposure to the variable returns
of the vehicle through hold of a junior note issued by it and the controls it exerts over Bud. Bud was incorporated on 2 November 2020
and the junior note was funded on 2 December 2020, at which point control was obtained. The Company exercises control over Bud
through its involvement in the initial creation of Bud and in the absence of another entity now having control over Bud and so the
Group consolidates Bud.
3. BUSINESS COMBINATION
On 20 June 2019 the Group incorporated Sting Funding Limited (“Sting”), a limited Company incorporated under the law of England
and Wales. Sting became active on 28 August 2019 when it drew down on a debt facility backed by commercial and second charge
residential mortgages. The Group is considered to control Sting through holding 100 percent of the issued shares.
The Company also controls Bud Funding Limited (“Bud”), a limited company incorporated under the law of England and Wales. The
Company is considered to control Bud through its exposure to the variable returns of the vehicle through holding of a junior note
issued by it and the control it exerts over Bud. Bud was incorporated on 2 November 2020 and the junior note was funded on 2
December 2020, at which point the control began.
As a result, the financial statements for the year ended 31 December 2021 and 31 December 2020 are prepared on a consolidated basis.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 91
4. INTEREST INCOME ON CREDIT ASSETS AT AMORTISED COST
Group
31 December 2021
£’000
31 December 2020
£’000
Investment income
Interest income
51,900
50,948
Commitment fee income
2,403
2,154
Arrangement fee income
2,232
1,844
Net (loss) / gain on foreign exchange*
(53)
21
Total investment income
56,482
54,967
Other income
Deposit interest
2
3
Total income
56,484
54,970
*Net (loss)/Gain on foreign exchange also includes fair value movements on derivatives taken out to economically hedge fair value exposures
5. MANAGEMENT AND PERFORMANCE FEE
Management Fee
The management fee is calculated and payable monthly in arrears at a rate equal to 1/12 of 1.0 percent per month of Gross Asset Value
(the ‘‘Management Fee’’). Gross Asset Value is the equivalent of Total Assets on the Consolidated Statement of Financial Position. The
aggregate fee payable on this basis must not exceed 1.0 percent of the gross assets of the Company and its group in any year. The
Management Fee is allocated between the revenue and capital accounts based on the prospective split of the Gross Asset Value
between revenue and capital.
In respect of any issue of Ordinary Shares or C Shares, until the date on which 80 percent of the net proceeds of such issue have been
invested or committed to be invested in Credit Assets or Equity Assets, the Net Asset Value attributable to such Ordinary Shares or C
Shares shall, for the purposes of the Management Fee, exclude any portion of the issue proceeds in cash, or invested in cash deposits
or cash equivalent investments. Where there are C Shares in issue, the Management Fee will be calculated separately on the gross
assets attributable to the Ordinary Shares and the C Shares.
Management fees charged for the year ended 31 December 2021 totalled £6.4 million (2020: £5.9 million) of which £1.0 million was
payable at the year-end (2020: £1.0 million).
Performance Fee
The Investment Manager is also entitled to a performance fee, which is calculated in respect of each twelve-month period starting on
1 January and ending on 31 December in each calendar year (”Calculation Period”), and the final Calculation Period shall end on the
day on which the management agreement is terminated or, if earlier, the business day immediately preceding the day on which the
Company goes into liquidation.
The performance fee will only be payable if the Adjusted Net Asset Value at the end of a Calculation Period exceeds a hurdle threshold,
equal to the Adjusted Net Asset Value immediately following admission to trading on the London Stock Exchange, compounded at a
rate equal to 5 percent per annum (the “Hurdle”).
If, on the last day of a Calculation Period (each a “Calculation Date”), the Adjusted Net Asset Value exceeds the Hurdle, the Investment
Manager shall be entitled to a performance fee equal to the lower of:
a) the amount by which the Adjusted Net Asset Value exceeds the Hurdle, in each case as at the Calculation Date; and
b) 10 percent of the amount by which total growth in Adjusted Net Asset Value since first admission (being the aggregate of the growth
in Adjusted Net Asset Value in the relevant Calculation Period and in each previous Calculation Period), after adding back any
performance fees paid to the Investment Manager, exceeds the aggregate of all performance fees payable to the Investment
Manager in respect of all previous Calculation Periods.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 92
‘Adjusted Net Asset Value’ means the Net Asset Value after: (i) excluding any increases or decreases in Net Asset Value attributable to
the issue or repurchase of any Ordinary Shares; (ii) adding back the aggregate amount of any dividends paid or distributions made in
respect of any Ordinary Shares; (iii) excluding the aggregate amount of any dividends or distributions accrued but unpaid in respect of
any Ordinary Shares; and (iv) excluding the amount of any Performance Fees accrued but unpaid, in each case without double
counting.
Performance fees for the year ended 31 December 2021 totalled £3.4 million (2020: £2.3 million) of which £3.4 million was payable at
the year-end (2020: £2.3 million).
6. FUND EXPENSES
Group
31 December 2021
£’000
31 December 2020
£’000
Directors’ fees 203
200
Administrator’s fees 179
148
Auditors’ remuneration 319
287
Amortisation -
41
Potential merger costs -
585
LSE market listing costs 18
280
Other expenses 1,441
1,064
Total fund expenses 2,160
2,605
All expenses where applicable are inclusive of VAT (except those paid to the auditors which are net). Directors’ fees above include
£203,000 (2020: £178,000) paid to Directors’ and £23,256 (2020: £21,538) of employment taxes. Further details on Directors’ fees can be
found in the Directors’ remuneration report on pages 53 to 56.
The auditors’ remuneration net of VAT for the audit of the Group was £319,000 for the year ended 31 December 2021 (2020: £287,000).
Remuneration includes the audit of subsidiaries during the year was £29,000 (2020: £37,500). Non-audit fees amounted to £0 in 2021
(2020: £nil).
7. TAX EXPENSE
It is the intention of the Directors to conduct the affairs of the Company so as to satisfy the conditions for approval as an investment
trust. As an investment trust the Company is exempt from corporation tax on capital gains. The Company's revenue income from loans
is subject to tax, but offset by any interest distribution paid, which has the effect of reducing that corporation tax to nil. This means the
interest distribution may be taxable in the hands of the Company's shareholders.
Any change in the Company's tax status or in taxation legislation generally could affect the value of investments held by the Company,
affect the Company's ability to provide returns to shareholders, lead the Company to lose its exemption from UK Corporation tax on
chargeable gains or alter the post-tax returns to shareholders. It is not possible to guarantee that the Company will remain a non-close
company, which is a requirement to maintain status as an investment trust, as the ordinary shares are freely transferable. The Company,
in the event that it becomes aware that it is a close company, or otherwise fails to meet the criteria for maintaining investment trust
status, will as soon as reasonably practicable, notify shareholders of this fact.
The Company may be subject to taxation under the tax rules of the jurisdictions in which it invests, including by way of withholding of
tax from interest and other income receipts. Although the Company will endeavour to minimise any such taxes this may affect the level
of returns to shareholders.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 93
The following table presents the tax chargeable for the period ended 31 December 2021.
Group
Revenue
£’000
Capital
£’000
Total
£’000
Corporation tax -
-
-
Total current tax charge
-
-
-
Deferred tax movement -
-
-
Total tax charge in income statement
-
-
-
The following table presents the tax chargeable for the year ended 31 December 2020.
Group
Revenue
£’000
Capital
£’000
Total
£’000
Corporation tax -
-
-
Total current tax charge -
-
-
Deferred tax movement -
-
-
Total tax charge in income statement -
-
-
Factors affecting taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax of 19.00 percent (2020: 19.00 percent). A
reconciliation of the 2021 taxation charge based on the standard rate of UK corporation tax to the actual taxation charge is shown
below.
Group
Revenue
£’000
Capital
£’000
Total
£’000
Profit before taxation 29,809
509
30,318
Profit before taxation multiplied
by the standard rate of UK corporation tax of 19.00%
5,664
97
5,761
Effects of:
Capital items exempt from tax -
(127)
(127)
Excess management expenses not utilised / (utilised) (304)
30
(274)
Interest distributions paid in respect of
the year
(5,360)
-
(5,360)
Total tax charge in income statement -
-
-
A reconciliation of the 2020 taxation charge based on the standard rate of UK corporation tax to the actual taxation charge is shown
below.
Group
Revenue
£’000
Capital
£’000
Total
£’000
Profit/(loss) before taxation 20,420
281
20,701
Profit/(loss) before taxation multiplied
by the standard rate of UK corporation tax of 19.00%
3,880
53
3,933
Effects of:
Excess management expenses not utilised 855
(53)
802
Interest distributions paid in respect of
the year
(4,735)
-
(4,735)
Total tax charge in income statement -
-
-
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 94
8. EARNINGS PER SHARE
Group
31 December
2021
31 December
2020
Revenue 90.2p
55.7p
Capital (4.2)p
0.8p
Earnings per ordinary share
86.0p
56.5p
The calculation for the year ended 31 December 2021 is based on revenue returns of £31.8 million, capital returns of £(1.5) million and
total returns of £30.3 million and a weighted average number of ordinary shares of 35,259,741.
The calculation for the year ended 31 December 2020 is based on revenue returns of £20.4 million, capital returns of £0.3 million and
total returns of £20.7 million and a weighted average number of ordinary shares of 36,657,807.
9. ORDINARY DIVIDENDS
31 December 2021
£’000
31 December 2020
£’000
20.00p Interim dividend for the period to 31 December 2019
(paid 27 March 2020)
-
7,450
20.00p Interim dividend for the period to 31 March 2020
(paid on 23 June 2020)
-
7,303
20.00p Interim dividend for the period to 30 June 2020
(paid on 22 September 2020)
-
7,201
20.00p Interim dividend for the period to 30 September 2020
(paid 27 December 2020)
-
7,051
20.00p Interim dividend for the period to 31 December 2020
(paid 26 March 2021)
7,052
-
20.00p Interim dividend for the period to 31 March 2021
(paid on 25 June 2021)
7,052
-
20.00p Interim dividend for the period to 30 June 2021
(paid on 30 September 2021)
7,052
-
20.00p Interim dividend for the period to 30 September 2021
(paid 24 December 2021)
7,052
-
Total dividend paid in period 28,208
29,005
20.00p Interim dividend for the period to 31 December 2020
(paid 26 March 2021)
-
7,051
20.00p Interim dividend for the period to 31 December 2021
(to be paid 25 March 2022)
7,052
-
Total dividend paid/to be paid in relation to period 28,208
28,606
The 31 December 2021 interim dividend of 20.00 pence was approved on 23 February 2022 and will be paid on the 25 March 2022
before the approval of the financial statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 95
10. INVESTMENTS AT AMORTISED COST
(a) Credit Assets at amortised cost
The disclosure below presents the gross carrying value of financial instruments to which the impairment requirements in IFRS 9 are
applied and the associated allowance for ECL. Please see Note 1 for more detail on the allowance for ECL.
The following table analyses loans by industry sector and represent the concentration of exposures on which credit risk is managed
for both the Group and Company as at 31 December 2021:
31 December 2021 31 December 2020
Group and
Company
Gross Carrying
Amount
£’000
Allowance
for ECL
£’000
Net Carrying
Amount
£’000
Gross Carrying
Amount
£’000
Allowance
for ECL
£’000
Net Carrying
Amount
£’000
Credit Assets at amortised cost
Consumer 95,665
(3,190)
92,475
211,636
(20,000)
191,636
Property 383,473
(7,596)
375,877
343,219
(10,269)
332,950
SME 97,642
-
97,642
23,359
(208)
23,151
Total Assets
576,780
(10,786)
565,994
578,214
(30,477)
547,737
The following table analyses loans by staging for both the Group and Company as at 31 December 2021:
31 December 2021 31 December 2020
Group and
Company
Gross Carrying
Amount
£’000
Allowance
for ECL
£’000
Net Carrying
Amount
£’000
Gross Carrying
Amount
£’000
Allowance
for ECL
£’000
Net Carrying
Amount
£’000
Credit Assets at amortised cost
Stage 1 544,233
(952)
543,281
509,550
(1,464)
508,086
Stage 2 6,363
(946)
5,417
11,691
(1,927)
9,764
Stage 3 26,184
(8,888)
17,296
56,973
(27,086)
29,887
Total Assets
576,780
(10,786)
565,994
578,214
(30,477)
547,737
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 96
Group and Company
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
At 1 January 2021 1,464 1,927 27,086 30,477
Movement from stage 1 to stage 2 (8) 450 - 442
Movement from stage 1 to stage 3 (2) - 766 764
Movement from stage 2 to stage 1 - (218) - (218)
Movement from stage 2 to stage 3 - (321) 432 111
Movement from stage 3 to stage 1 2 - (388) (386)
Movement from stage 3 to stage 2 - 58 (237) (179)
Decreases due to repayments (53) (139) (1,651) (1,843)
Increases due to origination 67 - - 67
Remeasurements due to modelling 460 33 (94) 399
Loans sold (978) (843) (16,714) (18,535)
Loans written off - (1) (312) (313)
Allowance for ECL at 31 December 2021 952 946 8,888 10,786
Group and Company
Stage 1
£’000
Stage 2
£’000
Stage 3
£’000
Total
£’000
At 1 January 2020 3,217
2,606
24,331
30,154
Movement from stage 1 to stage 2 (102)
3,170
-
3,068
Movement from stage 1 to stage 3 (270)
-
7,379
7,109
Movement from stage 2 to stage 1 11
(515)
-
(504)
Movement from stage 2 to stage 3 - (1,180)
3,206
2,026
Movement from stage 3 to stage 1 4
-
(343)
(339)
Movement from stage 3 to stage 2 - 75
(213)
(138)
Decreases due to repayments (794)
(2,607)
(4,870)
(8,271)
Increases due to origination 381
-
-
381
Remeasurements due to modelling 490
796
963
2,249
Loans sold (1,473)
(418)
(3,367)
(5,258)
Allowance for ECL at 31 December 2020 1,464
1,927
27,086
30,477
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 97
(b) Expected Credit Loss allowance for IFRS 9
Under the expected credit loss model introduced by IFRS 9 Impairment Provisions are driven by changes in credit risk of instruments,
with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly
since initial recognition.
The following table analyses Group and Company loans by stage and sector for the year ended 31 December 2021:
Group
Consumer
£’000
Property
£’000
SME
£’000
Total
£’000
At 1 January 2021 20,000 10,269 208 30,477
Charge for the period – Stage 1 5 (41) 326 290
Charge for the period – Stage 2 3 (486) - (483)
Charge for the period – Stage 3 1,545 (2,196) - (651)
Charge for the period – total 1,553 (2,723) 326 (844)
Loans sold (18,363) 50 (534) (18,847)
Allowance for ECL at 31 December 2021 3,190 7,596 - 10,786
The following table analyses Group and Company loans by stage and sector for the year ended 31 December 2020:
Group
Consumer
£’000
Property
£’000
SME
£’000
Total
£’000
At 1 January 2020 19,844 10,051 259 30,154
Charge for the period – Stage 1 (344) 149
(91)
(286)
Charge for the period – Stage 2 61 (320)
(17)
(276)
Charge for the period – Stage 3 5,697
389
57
6,143
Charge for the period – total 5,414 218 (51) 5,581
Loans sold (5,258) - - (5,258)
Allowance for ECL at 31 December 2020 20,000
10,269
208
30,477
Measurement uncertainty and sensitivity analysis of ECL
The recognition and measurement of ECL is highly complex and involves the use of significant judgement and estimation. This includes
the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of
IFRS 9.
For most portfolios, the Group has adopted the use of three economic scenarios, representative of Oxford Economics view of forecast
economic conditions, sufficient to calculate unbiased ECL. They represent a ‘most likely outcome’ (the Base scenario) and two, less
likely, ‘outer’ scenarios, referred to as the ‘Upside’ and ‘Downside’ scenarios.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 98
The ECL recognised in the financial statements reflect the effect on expected credit losses of a range of possible outcomes, calculated
on a probability-weighted basis, based on the economic scenarios described in Note 2 to the financial statements, including
management overlays where required. The probability-weighted amount is typically a higher number than would result from using
only the Base (most likely) economic scenario. ECLs typically have a non-linear relationship to the many factors which influence credit
losses, such that more favourable macroeconomic factors do not reduce defaults as much as less favourable macroeconomic factors
increase defaults. The ECL calculated for each of the scenarios represent a range of possible outcomes that have been evaluated to
estimate ECL. As a result, the ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and
lower limits of possible actual ECL outcomes. There is a high degree of estimation uncertainty in numbers representing tail risk
scenarios when assigned a 100 percent. A wider range of possible ECL outcomes reflects uncertainty about the distribution of
economic conditions and does not necessarily mean that credit risk on the associated loans is higher than for loans where the
distribution of possible future economic conditions is narrower.
For stage 3 impaired loans, LGD estimates consider independent recovery valuations provided by external consultants where available,
or internal forecasts corresponding to anticipated economic conditions.
The table below shows a sensitivity analysis for ECL based on changing the weighting of the scenarios to allocate a 100 percent weight
to the downside scenario. The scenarios are applicable to 31 December 2021. The analysis shows that the ECL would have been £2.9
million higher under this sensitivity.
2021
Weighted Year end ECL
£’000
100% Downside Scenario
£’000
Consumer
3,190
5,096
Property
7,596
8,616
SME
-
-
Total
10,786
13,712
At 31 December 2020 if the weightings used represented a 100 percent downside scenario the ECL would have been £4.0 million higher
as split below:
2020
Weighted Year end ECL
£’000
100% Downside Scenario
£’000
Consumer
20,000
20,205
Property
10,269
14,099
SME
208
208
Total
30,477
34,512
The sensitivity of the ECL has been further analysed by assessing the impact of £10.0 million of credit assets at amortised cost moving
from Stage 1 to Stage 2. The analysis shows that the ECL would have been £1.5 million higher under this sensitivity.
The amortised cost of the structurally secured portfolio is £297 million, and the largest exposure is on page 12. We have stress tested
each structured position as at 31 December 2021 to analyse the sensitivity to impairment of the underlying assets. The portfolio was
able to withstand the stress test without incurring a loss, this has been done by running each structured model on a 100% downside
scenario to show that excess cashflow remains, such that in the event of default LGD is nil.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 99
11. ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Total assets at Fair Value Through Profit or Loss
Group and Company
2021
£’000
Opening fair value 20,864
Purchases at cost 31,347
Reclassification from loans at amortised cost 5,476
Disposal at cost (9,726)
Net change in unrealised gains 809
Realised (losses)/gains -
Closing fair value as at 31 December 2021 48,770
Comprising:
Equity assets at fair value 15,659
Credit assets at fair value 33,111
Closing fair value as at 31 December 2021 48,770
Group and Company
2020
£’000
Opening fair value 8,390
Purchases at cost 16,220
Reclassification from loans at amortised cost 2,509
Disposal at cost (6,655)
Net change in unrealised gains 1,155
Realised (losses)/gains (755)
Closing fair value as at 31 December 2020 20,864
Comprising:
Equity assets at fair value 14,959
Credit assets at fair value 5,905
Closing fair value as at 31 December 2020 20,864
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 100
Equity assets at Fair value through profit or loss
(a) Movements in the year
The table below sets out the movement in equities assets at fair value through profit or loss for the Group for the year ended 31
December 2021.
Group and Company
2021
£’000
Valued using transaction price
13,600
Valued using an earnings multiple
1,359
Opening fair value 14,959
Purchases at cost 2,037
Disposal at cost -
Net change in unrealised gains (1,337)
Realised (losses)/gains -
Closing fair value as at 31 December 2021 15,659
Comprising:
Valued using an earnings multiple 1,359
Valued using a TNAV
6
multiple 14,300
Closing fair value as at 31 December 2021 15,659
The table below sets out the movement in equity assets at fair value through profit or loss for the Group for the year ended 31 December
2020.
Group
2020
£’000
Valued using transaction price
550
Valued using an earnings multiple
7,840
Opening fair value 8,390
Purchases at cost 13,599
Disposal at cost (6,655)
Net change in unrealised gains 380
Realised losses (755)
Closing fair value as at 31 December 2020 14,959
Comprising:
Valued using sales value 1,380
Valued using an earnings multiple 13,579
Closing fair value as at 31 December 2020 14,959
6
TNAV is defined as “Tangible Net Asset Value”
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 101
The table below sets out the movement in equity assets at fair value through profit or loss for the Company for the year ended 31
December 2020.
Company
2020
£’000
Valued using Net Asset Value 4,493
Valued using transaction price 550
Valued using an earnings multiple 7,840
Opening fair value 12,883
Purchases at cost 13,599
Disposal at cost (6,655)
Net change in unrealised losses (4,113)
Realised losses (755)
Closing fair value as at 31 December 2020 14,959
Comprising:
Valued using an earnings multiple 1,380
Valued using a TNAV multiple 13,579
Closing fair value as at 31 December 2020 14,959
(b) Fair value of financial instruments
IFRS 13 requires the Company to classify its financial instruments held at fair value using a hierarchy that reflects the significance of
the inputs used in the valuation methodologies. These are as follows:
Level 1 – quoted prices in active markets for identical investments;
Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments,
credit risk, etc.); and
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of
investments).
An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may
use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the
fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement requires judgement and is specific to the investment.
The following sets out the classifications in valuing the Group’s investments:
Group
Closing fair value as at 31 Dec 2021
£’000
Closing fair value as at 31 Dec 2020
£’000
Level 1
- -
Level 2
- -
Level 3
15,659 14,959
Total
15,659 14,959
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 102
The investments in unquoted equities are valued using several different techniques, including recent transactions and recent rounds
of funding by the investee entities and the market approach. Quantitative information regarding the unobservable inputs for the
Group’s Level 3 positions as at 31 December 2021 is given below:
Closing fair value as at 31 Dec 2021
£’000
Valuation Technique
Earnings multiple changed by 1
£’000
1,359 Earnings Multiple 238
1,359
238
Earnings multiples used is 5.3x.
Closing fair value as at 31 Dec 2021
£’000
Valuation Technique
TNAV multiple changed by 0.25x
£’000
14,300 TNAV Multiple 1,543
14,300
1,543
Tangible Net Asset Value (“TNAV”) multiple used is 2.1x.
Quantitative information regarding the unobservable inputs for the Group and Company’s Level 3 positions as at 31 December 2020 is
given below:
Closing fair value as at 31 Dec 2020
£’000
Valuation Technique
Earnings multiple changed by 1
£’000
1,380 Earnings Multiple 265
1,380
265
Earnings multiples used is 4.3x.
Closing fair value as at 31 Dec 2020
£’000
Valuation Technique
TNAV multiple changed by 0.25x
£’000
13,579 TNAV Multiple 1,583
13,579
1,583
TNAV multiple used is 2.15x.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 103
Credit assets at Fair value through profit or loss
(a) Movements in the year
The table below sets out the movement in credit assets at fair value through profit or loss for the Group for the year ended 31 December
2021.
Group and Company
2021
£’000
Opening fair value 5,905
Purchases at cost 29,310
Reclassification from loans at amortised cost 5,476
Disposals (9,726)
Net change in unrealised gains 2,146
Closing fair value as at 31 December 2021 33,111
Comprising:
Valued using an earnings multiple 7,775
Valued using a TNAV multiple 25,336
Closing fair value as at 31 December 2021 33,111
Group and Company
2020
£’000
Opening fair value -
Purchases at cost 2,621
Reclassification from loans at amortised cost 2,509
Disposals -
Net change in unrealised gains 775
Closing fair value as at 31 December 2020 5,905
Comprising:
Valued using an earnings multiple 1,655
Valued using a TNAV multiple 4,250
Closing fair value as at 31 December 2020 5,905
(b) Fair value of financial instruments
IFRS 13 requires the Company to classify its financial instruments held at fair value using a hierarchy that reflects the significance of
the inputs used in the valuation methodologies. These are as follows:
Level 1 – quoted prices in active markets for identical investments;
Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments,
credit risk, etc.); and
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of
investments).
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 104
An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may
use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the
fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement requires judgement and is specific to the investment.
The following sets out the classifications in valuing the Group and Company’s investments:
Group and
Company
Closing fair value as at 31 Dec 2021
£’000
Closing fair value as at 31 Dec 2020
£’000
Level 1
- -
Level 2
- -
Level 3
33,111 5,905
Total
33,111 5,905
Quantitative information regarding the unobservable inputs for the Group and Company’s Level 3 positions as at 31 December 2021 is
given below:
Closing fair value as at 31 Dec 2021
£’000
Valuation Technique
Earnings multiple changed by 1
£’000
Earnings Multiple
7,775
1.08
1,740
Earnings multiple used is 1.33x.
Closing fair value as at 31 Dec 2021
£’000
Valuation Technique
TNAV multiple changed by 0.1x
£’000
TNAV Multiple
25,336
0.9
2,393
TNAV multiple used is 1.0x.
Assets and liabilities not carried at fair value but for which fair value is disclosed
For the Group as at 31 December 2021:
Group
As Presented
Fair Value
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Investments at amortised cost
565,994
-
-
579,482
579,482
Receivables 6,554
-
6,554
-
6,554
Cash and cash equivalents 12,948
12,948
-
-
12,948
Total assets 585,496
12,948
6,554
579,482
598,984
Liabilities
Management fee payable (1,037)
-
(1,037)
-
(1,037)
Performance fee payable (3,431)
-
(3,431)
-
(3,431)
Other payables (2,691)
-
(2,691)
-
(2,691)
Interest bearing borrowings (267,657)
-
(267,657)
-
(267,657)
Total liabilities (274,816)
-
(274,816)
-
(274,816)
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 105
For the Company as at 31 December 2021:
Company As Presented
Fair Value
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Investments at amortised cost
565,994
-
-
579,482
579,482
Receivables 6,554
-
6,554
-
6,554
Cash and cash equivalents 10,500
10,500
-
-
10,500
Total assets 583,048
10,500
6,554
579,482
596,536
Liabilities
Management fee payable (1,037)
-
(1,037)
-
(1,037)
Performance fee payable (3,431)
-
(3,431)
-
(3,431)
Other payables (2,392)
-
(2,392)
-
(2,392)
Deemed Loan (82,326)
-
(82,326)
-
(82,326)
Interest bearing borrowings (183,182)
-
(183,182)
-
(183,182)
Total liabilities (272,368)
-
(272,368)
-
(272,368)
For the Group as at 31 December 2020:
Group As Presented
Fair Value
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Investments at amortised cost
547,737
22,175
-
538,314
560,489
Receivables 6,773
-
6,773
-
6,773
Cash and cash equivalents 62,548
62,548
-
-
62,548
Total assets 617,058
84,723
6,773
538,314
629,810
Liabilities
Management fee payable (1,040)
-
(1,040)
-
(1,040)
Performance fee payable (2,300)
-
(2,300)
-
(2,300)
Other payables (3,832)
-
(3,832)
-
(3,832)
Interest bearing borrowings (273,539)
-
(273,539)
-
(273,539)
Total liabilities (280,711)
-
(280,711)
-
(280,711)
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 106
For the Company for the year ended 31 December 2020:
Company As Presented
Fair Value
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Investments at amortised cost 547,737
22,175
-
538,314
560,489
Receivables 6,773
-
6,773
-
6,773
Cash and cash equivalents 59,673
59,673
-
-
59,673
Total assets 614,183
81,848
6,773
538,314
626,935
Liabilities
Management fee payable (1,040)
-
(1,040)
-
(1,040)
Performance fee payable (2,300)
-
(2,300)
-
(2,300)
Other payables (3,429)
-
(3,429)
-
(3,429)
Deemed Loan (103,719)
-
(103,719)
-
(103,719)
Interest bearing borrowings (167,348)
-
(167,348)
-
(167,348)
Total liabilities (277,836)
-
(277,836)
-
(277,836)
Categorisation within the hierarchy has been determined based on the lowest level input that is significant to the fair value
measurement of the relevant asset or liability (see note 11). Further details of the loans at amortised cost held by the Group can be
found in note 10 to the financial statements.
12. FINANCIAL RISK MANAGEMENT
The Group’s investing activities undertaken in pursuit of its investment objective, as set out on page 4, involve certain inherent risks.
The main financial risks arising from the Group’s financial instruments are credit risk, market risk and liquidity risk. The Board reviews
and agrees policies for managing each of these risks as summarised below. Credit risk is analysed further in Note 13.
Market risk
The fair value or future cash flows of a financial instrument held by the Group may fluctuate because of changes in market prices.
Market risk can be summarised as comprising three types of risk:
Interest rate risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in
market interest rates; and
Currency risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign
exchange rates.
Price risk – the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market
prices (other than those arising from interest rate risk or currency risk);
The Group’s exposure, sensitivity to and management of each of these risks is described in further detail below. Management of market
risk is fundamental to the Group’s investment objective. The investment portfolio is continually monitored to ensure an appropriate
balance of risk and reward. The Board has also established a series of investment parameters, which are reviewed annually, designed
to limit the risk inherent in managing a portfolio of investments.
(a) Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair value of financial
instruments.
The Group invests in Credit Assets which may be subject to a fixed rate of interest, or a floating rate of interest (which may be linked to
base rates or other benchmarks). The Group’s borrowings may be subject to a floating rate of interest.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 107
The Group intends to manage the mismatch it has in respect of the income generated by its Credit Assets, on the one hand, with the
liabilities in respect of its borrowings, on the other hand, by matching any floating rate borrowings with investments in Credit Assets
that are also subject to a floating rate of interest. To the extent that the Group is unable to match its funding in this way, it may use
derivative instruments, including interest rate swaps, to reduce its exposure to fluctuations in interest rates, however some unmatched
risk may remain. The Group has not used any interest rate derivative instruments in the current or prior year.
The Group finances its operations through its share capital and reserves, including realised gains on investments as well as the Group’s
debt facilities. As at 31 December 2021 the Group had £270.0 million drawn down under these facilities (2020: £273.5 million).
Exposure of the Group's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are reset)
and fixed interest rates (giving fair value risk) as at 31 December 2021 is shown below:
Group Financial instrument
Floating Rate
£’000
Fixed or Administered Rate
£’000
Total
£’000
Credit Assets at amortised cost
269,053
296,941
565,994
Cash and cash equivalents
12,948
-
12,948
Interest bearing borrowings
(267,657)
-
(267,657)
Total exposure 14,344
296,941
311,285
Exposure of the Company's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are
reset) and fixed interest rates (giving fair value risk) as at 31 December 2021 is shown below:
Company Financial instrument
Floating Rate
£’000
Fixed or Administered Rate
£’000
Total
£’000
Credit Assets at amortised cost
269,053
296,941
565,994
Cash and cash equivalents
10,500
-
10,500
Interest bearing borrowings
(183,182)
-
(183,182)
Deemed loan
(82,326)
-
(82,326)
Total exposure 14,045
296,941
310,986
Exposure of the Company and Group's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when
rates are reset) and fixed interest rates (giving fair value risk) as at 31 December 2020 is shown below:
Group Financial instrument
Floating Rate
£’000
Fixed or Administered Rate
£’000
Total
£’000
Credit Assets at amortised cost
204,592
343,145
547,737
Cash and cash equivalents
62,548
-
62,548
Interest bearing borrowings
(273,539)
-
(273,539)
Total exposure (6,399)
343,145
336,746
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 108
Exposure of the Company's financial assets and liabilities to floating interest rates (giving cash flow interest rate risk when rates are
reset) and fixed interest rates (giving fair value risk) as at 31 December 2020 is shown below:
Company Financial instrument
Floating Rate
£’000
Fixed or Administered Rate
£’000
Total
£’000
Credit Assets at amortised cost
204,592
343,145
547,737
Cash and cash equivalents
59,673
-
59,673
Interest bearing borrowings
(167,348)
-
(167,348)
Deemed loan
(103,719)
-
(103,719)
Total exposure (6,802)
343,145
336,343
An administered rate is not like a floating rate, movements in which are directly linked to benchmarks, such as LIBOR. The administered
rate can be changed at the discretion of the lender.
A 1 percent change in interest rates impacts income on the assets with a floating rate by £2.8 million (2020: £2.7 million). A 1 percent
change in interest rates impacts debt expense on the liabilities with a floating rate by £2.7 million (2020: £2.7 million).
(b) Currency risk
Currency risk is the risk that the value of net assets will fluctuate due to changes in foreign exchange rates. Relevant risk variables are
generally movements in the exchange rates of non-functional currencies in which the Group holds financial assets and liabilities. The
assets of the Group are invested in Credit Assets and other investments including unquoted equities which are denominated in Pounds
Sterling and other currencies. Accordingly, the value of such assets may be affected favourably or unfavourably by fluctuations in
currency rates. The Group hedges currency exposure between Pounds Sterling and other currencies.
Concentration of foreign currency exposure
The Investment Manager monitors the fluctuations in foreign currency exchange rates and may use forward foreign exchange contracts
to hedge the currency exposure of the Group’s non-GBP denominated investments. The Investment Manager re-examines the currency
exposure on a regular basis in each currency and manages the Group’s currency exposure in accordance with market expectations.
The Group did not designate any derivatives as hedges for accounting purposes as described under IFRS 9 during the year (2020: none)
and records its derivative activities on a fair value basis. The forward contracts held at 31 December 2021 were carried out with Lumon
Pay Limited and represent USD12,000k (2020: USD0) and EUR1,950k (2020: 2,780k).
The largest exposure to FX is to the USD. The below table presents the net exposure to USD and Euros as at 31 December 2021. The
table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded
on the Consolidated Statement of Financial Position.
Total Assets
(£’000)
Total Liabilities
(£’000)
Forward Contract
(£’000)
Net Exposure after Forward Contract
(£’000)
9,149
-
(8,758)
391
9,149
-
(8,758)
391
If the GBP exchange rate simultaneously increased/decreased by 10 percent against the above currencies, the impact on profit would
be an increase/decrease of £915k (2020: 3k). 10 percent is considered to be a reasonably possible movement in foreign exchange rates.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 109
The table below presents the net exposure to Euro’s at 31 December 2020. The table includes forward foreign exchange contracts at
their notional exposure value and excludes all GBP assets and liabilities recorded on the Consolidated Statement of Financial Position.
Total Assets
(£’000)
Total Liabilities
(£’000)
Forward Contract
(£’000)
Net Exposure after Forward Contract
(£’000)
1,762
-
(1,750)
12
1,762
-
(1,750)
12
(c) Price risk
Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices
(other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting similar financial instruments traded in the market. Local, regional or global events
such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a
significant impact on the Group and market prices of its investments. This risk applies to financial instruments held by the Group,
including equity assets, credit assets and derivatives. Sensitivity analysis on the equity assets is included in Note 11.
Capital Management
The Company’s primary objectives in relation to the management of capital are driven by strategic and organisational requirements
but are focused around:
ensuring its ability to continue as a going concern; and
maximising the long-term capital growth for its shareholders through an appropriate balance of equity capital and gearing.
In the management of capital and in its definition, we include equity (including revenue and capital reserves), debt (including long-
term credit facilities, commercial paper backstopped by long-term credit facilities and any hedging assets or liabilities associated with
long-term debt items), cash and temporary investments.
The Board manage the capital structure and make adjustments to it considering changes in economic conditions and the risk
characteristics of the business. The Company aims to meet these objectives by diversifying the leverage facilities through the
introduction of a new Topco facility, a new amortising term loan and an increase in an existing facility.
The Group monitors capital using a ratio of debt to equity. Debt is calculated as total interest-bearing borrowings (as shown in the
Consolidated Statement of Financial Position). The Group’s debt to equity ratio which is a key performance indicator used for internal
management at Group level was 74.5 percent at 31 December 2021 (31 December 2020: 76.6 percent).
Liquidity risk
Liquidity risk is the risk that the Group will be unable meet its obligations in respect of financial liabilities as they fall due.
The Group manages its liquid resources to ensure sufficient cash is available to meet its expected contractual commitments. It
monitors the level of short-term funding and balances the need for access to short-term funding, with the long-term funding needs of
the Group.
A substantial proportion of the Group’s net assets are in loans, whose cash collections could be utilised to meet funding requirements
if necessary. The Group has the power, under its Articles of Association, to take out both short and long-term borrowings subject to a
maximum value of one hundred percent of its share capital and reserves.
At 31 December 2021 the Company had a committed debt facility totalling £200.0 million with a maturity date of 4 September 2023.
This facility includes a term and revolving facility secured on a range of assets. The Company also has a 2-year term facility that is
structured as run-off financing in that the debt will paydown over the term of the facility and a £35m amortising term loan with a 49
year term, but where final repayment is expected in 2024 in line with the facility it is secured against. Categorisation within the hierarchy
has been determined based on the lowest level input that is significant to the fair value measurement of the relevant asset or liability
(see Note 11 for details). Further details of the loans at amortised cost held by the Group can be found in Note 10 to the financial
statements.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 110
The table below shows the amortised cost assets and liability balances by maturity dates:
Group
Total
Less than
3months
3 - 12months 1- 5years
More than 5
years
£’000 £’000 £’000 £’000
£’000
Assets
Investments at amortised cost 565,994 35,479 47,590 314,073 168,852
Liabilities
Interest bearing borrowings (267,657) 96 (49,435) (182,602) (35,717)
The table below shows the amortised cost assets and liability principal by contractual maturity dates:
Group
Total
Less than
3months
3 - 12months 1- 5years
More than 5
years
£’000 £’000 £’000 £’000
£’000
Liabilities
Interest bearing borrowings (269,980) - (49,435) (185,545) (35,000)
Effect of IBOR reform
Following the financial crisis, the reform and replacement of benchmark interest rates such as GBP LIBOR and other inter-bank offered
rates (‘IBORs’) become a priority for global regulators. The Group’s risk exposure that is directly affected by the interest rate benchmark
reform predominantly comprises its portfolio of GBP credit assets that are measured at amortised cost, which as at the 31 Dec 2021
had an outstanding principal of GBP573.7m and liabilities of GBP270m.
For the GBP LIBOR reforms, the UK Financial Conduct Authority (‘FCA’) has decided to no longer compel panel banks to participate in
the GBP LIBOR submission process after the end of 2021. The Group will now be using the SONIA reference rates to measure the
variable elements of its credit assets and obligations. The key differences between GBP LIBOR and SONIA. GBP LIBOR is a ‘term rate’,
which means that it is published for a borrowing period (such as three months or six months) and is ‘forward looking’, because it is
published at the beginning of the borrowing period. SONIA is currently a ‘backward-looking’ rate, based on overnight rates from actual
transactions, and it is published at the end of the overnight borrowing period. Furthermore, LIBOR includes a credit spread over the
risk-free rate, which SONIA currently does not. To transition existing contracts and agreements that reference GBP LIBOR to SONIA,
adjustments for term differences and credit differences might need to be applied to SONIA, to enable the two benchmark rates to be
economically equivalent on transition.
As at 31 December 2021, changes required to systems, processes and models have been identified. The Group has identified that the
areas of most significant risk arising from the replacement of GBP LIBOR are: updating systems and processes which capture GBP
LIBOR referenced contracts, amendments to those contracts, or existing fallback/transition clauses not operating as anticipated.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 111
The Group currently has a number of contracts which reference GBP or USD LIBOR and extend beyond 2021. The principal balance of
these contracts are disclosed within the tables below by GBP and USD.
Non-derivative assets and
liabilities exposed to GBP
LIBOR
Carrying Value/Nominal Amount at 31 December
2021
Assets
Liabilities
£’000
£’000
Credit assets at amortised
cost
51,268
30,129
Total exposure
51,268
30,129
Non-derivative assets and
liabilities exposed to USD
LIBOR
Carrying Value/Nominal Amount at 31 December
2021
Assets
Liabilities
£’000
£’000
Credit assets at amortised
cost
285
-
Total exposure 285
-
The GBP positions that are yet to transition to SONIA will transition within Q1 of 2022.
13. CREDIT RISK
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an
obligation.
The Group's credit risks arise principally through exposures to loans originated or acquired by the Group and cash deposited with
banks, both of which are subject to risk of borrower default.
The Investment Manager establishes and adheres to stringent underwriting criteria. The Group invests in a granular portfolio of assets,
diversified at the underlying borrower level, with each loan being subject to a maximum single loan exposure limit. This helps mitigate
credit concentrations in relation to an individual customer, a borrower group or a collection of related borrowers.
The credit quality of loans is assessed through evaluation of various factors, including credit scores, payment data, collateral available
from the borrower and other information.
The Group further mitigates its exposure to credit risk through structuring facilities whereby the facilities are secured on a granular
pool of performing loans and structured so that the Origination Platform and or borrower provides the first loss, and the Group finances
the senior risk.
Further risk is mitigated in the property sector as the Group takes collateral in the form of property to mitigate the credit risk arising
from residential mortgage lending and commercial real estate.
The outbreak of Covid-19 continues to cause major disruption across the globe. The potential impacts of the government’s assistance
to consumers and businesses coming to an end are yet unknown, but they may increase the potential expected credit loss impact.
Depending on the evolution of the Covid-19 situation, this could result in further economic downturn and potentially a material
increase in credit risk. This is being continually monitored.
Set out below is the analysis of the gross closing balances of the Group and Company’s credit assets split by the type of loan and the
credit risk band as at 31 December 2021, each loan is assigned to a credit risk band at inception:
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 112
Credit Risk Band
Unsecured
£’000
Secured
£’000
Total
£’000
A & B 1,411
575,369
576,780
C -
-
-
D & E -
-
-
Total 1,411
575,369
576,780
Set out below is the analysis of the closing balances of the Group and Company’s credit assets split by the type of loan and the credit
risk band as at 31 December 2020:
Credit Risk Band
Unsecured
£’000
Secured
£’000
Total
£’000
A & B 29,845
524,989
554,834
C 9,419
-
9,419
D & E 13,961
-
13,961
Total 53,225
524,989
578,214
Each credit risk band is defined below:
Credit Risk Band Definition
A Highest quality with minimal indicators of credit risk
B
High quality, with minor adverse indicators
C
Medium-grade, moderate credit risk, may have some adverse credit risk indicators
D/E
Elevated credit risk, adverse indicators (e.g. lower borrowing ability, credit history, existing debt)
The Group ensures that it only deposits cash balances with institutions with appropriate financial standing or those deemed to be
systemically important.
14. FIXED ASSETS
The tables below set out the movement in Fixed Assets for the Group and Company.
Year ended 31 December 2021
IT Development and Software
£’000
Total
£’000
Opening net book amount
-
-
Additions -
-
Amortisation charge
-
-
Closing net book amount -
-
As at 31 December 2021
Cost
-
-
Accumulated amortisation
-
-
Net book amount -
-
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 113
Year ended 31 December 2020
IT Development and Software
£’000
Total
£’000
Opening net book amount 41
41
Additions -
-
Amortisation charge (41)
(41)
Closing net book amount -
-
As at 31 December 2020
Cost 830
830
Accumulated amortisation (830)
(830)
Net book amount -
-
15. RECEIVABLES
The table below set out a breakdown of the Group receivables.
Group and Company
31 December 2021
£’000
31 December 2020
£’000
Prepayments and other debtors 5,583
4,820
Amounts due from platforms 924
1,820
Other receivables 47
133
Total receivables 6,554
6,773
The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these
receivables approximate their fair value.
Amounts due from platforms relate to cash that has been collected by the platform partners but not yet remitted to the Group, whereby
the credit asset at amortised cost has been treated as if this cash had been received.
16. OTHER PAYABLES
The table below set out a breakdown of the Group payables.
Group
31 December 2021
£’000
31 December 2020
£’000
Accruals and other payables 2,691
3,832
Total other payables 2,691
3,832
The table below set out a breakdown of the Company payables.
Company
31 December 2021
£’000
31 December 2020
£’000
Accruals and other payables 2,392
3,429
Total other payables 2,392
3,429
Withholding Taxation
The Company's revenue income from loans is subject to tax, but offset by the interest distribution paid, which has the effect of reducing
that corporation tax to nil. This means the interest distribution may be taxable in the hands of the Company's shareholders. There is
no withholding tax payable by the Company at 31 December 2021 (31 December 2020: £nil) due to the changes made in 2017 Finance
Act whereby all interest distributions will be paid gross of tax, therefore withholding tax is retained by the Company and paid directly
to HMRC.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 114
17. INTEREST BEARING BORROWINGS
The table below sets out a breakdown of the Group’s interest-bearing borrowings.
Group
31 December 2021
£’000
31 December 2020
£’000
Current Liabilities
Credit facility 49,435
20,916
Interest and commitment fees payable 195
183
Prepaid interest and commitment fees (291)
(234)
Total current liabilities 49,339
20,865
Non-Current Liabilities
Credit facility 220,545
256,438
Interest and commitment fees payable -
-
Prepaid interest and commitment fees (2,227)
(3,764)
Total non-current liabilities 218,318
252,674
Total interest-bearing borrowings 267,657
273,539
The table below sets out a breakdown of the Company’s interest-bearing borrowings.
Company
31 December 2021
£’000
31 December 2020
£’000
Current Liabilities
Credit facility 15,000
-
Interest and commitment fees payable 72
73
Prepaid interest and commitment fees -
-
Total current liabilities 15,072
73
Non-Current Liabilities
Credit facility 170,000
170,000
Interest and commitment fees payable -
-
Prepaid interest and commitment fees (1,890)
(2,725)
Total non-current liabilities 168,110
167,275
Total interest-bearing borrowings 183,182
167,348
At 31 December 2021 the Company’s main debt facility was a £250 million provided by Goldman Sachs, being a £170 million term loan
and £80 million revolving credit facility. At 31 December 2021 the term loan was fully drawn with £nil drawn on the revolving element.
Interest is charged at LIBOR plus a margin with the facility maturing in September 2023. From 2022 onwards the facility will be charged
using SONIA; the Company does not expect to be negatively impacted by the change to SONIA. The debt facility is secured against the
Company’s loan portfolios and other assets, in addition to the net exposures the Company holds where the Company is the junior
lender to an SPV.
In August 2019, the Group entered a two-year debt facility to finance three residential mortgage portfolios, two commercial mortgage
pools and a small unsecured consumer pool. These portfolios were previously leveraged through the Company level debt facility but
getting assets specific leverage on these provides a lower cost of funding at a higher advance rate. The total debt raised on day one of
this facility was £81.0 million. Interest was charged at LIBOR plus a margin. From 2022 onwards, the facility is now be charged at SONIA
plus a margin. The facility was a 2-year term with a 1-year extension option and is structured as a run-off financing in that the debt will
paydown over the term of the facility. During 2020 the 1-year extension was exercised, and an additional mortgage portfolio was
transferred into the pool. The facility therefore now expires in August 2022. The carrying value of the portfolio of loans, which this facility
is secured against, at 31 December 2021 was £76.5 million (2020: £93.6 million).
In December 2020, the Group entered into a £35 million debt facility secured against a structured SME facility, the carrying value of this
structured SME facility at 31 December 2021 was £39.5 million. The debt facility charges LIBOR plus a margin and is an amortising term
loan with the full £35 million drawn on day one. From 2022 onwards, the facility will be charged using synthetic LIBOR plus a margin.
The facility has a 49 year term but final repayment is expected in 2024.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 115
During 2021 the below related debt costs had been incurred by the Group.
Group
2021
£’000
2020
£’000
Interest and commitment fees payable 11,022
8,729
Other finance charges 1,837
5,594
Total finance costs 12,859
14,323
During 2021 the below related debt costs had been incurred by the Company.
Company
2021
£’000
2020
£’000
Interest and commitment fees payable 8,577
6,832
Other finance charges 1,103
5,210
Total finance costs 9,680
12,042
As part of IAS 7, “Statement of cash flows”, an entity is required to disclose changes in liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes.
During 2021 the below changes occurred for the Group:
Group
Total
£’000
At 1 January 2021
273,539
Drawdown of interest bearing borrowings 27,000
Repayments of interest-bearing borrowing (34,375)
Finance costs 12,859
Interest paid on financing activities (11,366)
At 31 December 2021 267,657
During 2021 the below changes occurred for the Company:
Company
Total
£’000
At 1 January 2021
167,348
Drawdown of interest bearing borrowings 27,000
Repayments of interest-bearing borrowing (12,000)
Finance costs 9,678
Interest paid on financing activities (8,844)
At 31 December 2021 183,182
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 116
During 2020 the below changes occurred for the Group:
Group
Total
£’000
At 1 January 2020
206,792
Drawdown of interest bearing borrowings 359,648
Repayments of interest-bearing borrowing (289,013)
Finance costs 14,323
Interest paid on financing activities (18,211)
At 31 December 2020 273,539
During 2020 the below changes occurred for the Company:
Company
Total
£’000
At 1 January 2020
130,741
Drawdown of interest bearing borrowings 312,500
Repayments of interest-bearing borrowing (272,752)
Finance costs 12,042
Interest paid on financing activities (15,183)
At 31 December 2020 167,348
The table below analyses the Group’s financial liabilities into relevant maturity groupings as well as expected future interest and
commitment fee costs based on the remaining period at the Consolidated Statement of Financial Position date to the final scheduled
maturity date.
2021
Group Financial instrument
< 1 year
£’000
1 – 5 years
£’000
More than 5 years
£’000
Total
£’000
Credit facility 49,435
185,545
35,000
269,980
Interest and commitment fees
payable
(96)
(2,944)
717
(2,323)
Total exposure 49,339
182,601
35,717
267,657
The below table analyses the Company’s financial liabilities into relevant maturity groupings as well as expected future interest and
commitment fee costs based on the remaining period at the Statement of Financial Position date to the final scheduled maturity date.
2021
Company Financial instrument
< 1 year
£’000
1 – 5 years
£’000
More than 5 years
£’000
Total
£’000
Credit facility 15,000
170,000
-
185,000
Interest and commitment fees
payable
72
(1,890)
-
(1,818)
Total exposure 15,072
168,110
-
183,182
The below table analyses the Group’s financial liabilities into relevant maturity groupings as well as expected future interest and
commitment fee costs based on the remaining period at the Consolidated Statement of Financial Position date to the final scheduled
maturity date.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 117
2020
Group Financial instrument
< 1 year
£’000
1 – 5 years
£’000
Total
£’000
Credit facility 20,865
256,490
277,355
Interest and commitment fees payable 9,691
18,189
27,880
Total exposure 30,556
274,679
305,235
The below table analyses the Company’s financial liabilities into relevant maturity groupings as well as expected future interest and
commitment fee costs based on the remaining period at the Statement of Financial Position date to the final scheduled maturity date.
2020
Company Financial instrument
< 1 year
£’000
1 – 5 years
£’000
Total
£’000
Credit facility -
170,000
170,000
Interest and commitment fees payable 7,310
16,448
23,758
Total exposure 7,310
186,448
193,758
18. DEEMED LOAN
The Company has two deemed loans as at 31 December 2021 (two as at 31 December 2020). Deemed loans can only relate to the
Company as they relate to loans originated by the Company and subsequently sold to a special purpose entity. Although the loans are
not legally owned by the Company, the Company maintains the economic benefit of the underlying assets and therefore does not
meet the criteria to derecognise as the economic exposure associated with the rights inherent in the asset are maintained. As the
requirements of derecognition have not been met the Company has a deemed loan liability to the special purpose entity. As at the 31
December 2021 the Company had the below deemed loans:
Opening as at 1 January 2021
£’000
(Redemptions)/Novations
£’000
Closing as at 31 December 2021
£’000
103,719
(21,393)
82,326
103,719
(21,393)
82,326
As at the 31 December 2020 the Company had the below deemed loan:
Opening as at 1 January 2020
£’000
(Redemptions)/Novations
£’000
Closing as at 31 December 2020
£’000
78,612
25,107
103,719
78,612
25,107
103,719
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 118
19. ORDINARY SHARE CAPITAL
The table below details the issued share capital of the Company as at the date of the Financial Statements.
31 December 2021
31 December 2020
No. Issued, allotted and fully paid ordinary shares of £0.01 each 35,259,741
35,259,741
Cost £’000 352
352
The table below shows the movement in shares during the period to 31 December 2021:
Shares in issue at the
beginning of the period
Buyback of
Ordinary Shares
Shares in issue at
the end of the period
Ordinary Shares 35,259,741
-
35,259,741
Treasury Shares 4,190,178
-
4,190,178
20. SPECIAL DISTRIBUTABLE RESERVE
At a general meeting of the Company held on 14 December 2015, special resolutions were passed approving the cancellation of the
amount standing to the credit of the Company’s share premium account as at 23 December 2015.
Following the approval of the Court and the subsequent registration of the Court order with the Registrar of Companies on 21 March
2016, the reduction became effective. Accordingly, £98.1 million, previously held in the share premium account, has been transferred
to the special distributable reserve as disclosed in the Statement of Financial Position.
21. INVESTMENTS IN SUBSIDIARIES
On 20 June 2019 the Group incorporated Sting Funding Limited (“Sting”), a limited Company incorporated under the law of England
and Wales. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Group is considered to control
Sting through holding 100 percent of the issued shares. As a result, the financial statements for the years ended 31 December 2020 and
31 December 2021 are prepared on a consolidated basis. Sting became active on 28 August 2019 when it drew down on a debt facility
backed by commercial and second charge residential mortgages.
The Company also consolidates a structured entity, Bud Funding Limited (“Bud”), a limited company incorporated under the law of
England and Wales. The company is registered at 1 Bartholomew Lane, London, United Kingdom, EC2N 2AX. The Company is
considered to control Bud through its exposure to the variable returns of the vehicle through holding of a junior note issued by it and
by way of control exerted through its involvement in the initial creation of Bud and in the absence of another entity now having control.
Bud was incorporated on 2 November 2020 and the junior note was funded on 2 December 2020, at which point the control began.
The assets of the subsidiaries are credit assets that are included as part of the impairment policies of the group and no impairment
triggers have been identified for the subsidiaries.
22. INVESTMENTS IN ASSOCIATES
As at 31 December 2021, the Company has no associates. In the prior year, the Company disposed of its investment in Allium in August
2020 with no gain or loss recognised on disposal.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 119
23. NET ASSET VALUE PER ORDINARY SHARE
31 December 2021
31 December 2020
Net asset value per ordinary share pence 1,019.1p
1,013.1p
Net assets attributable £’000 359,342
357,232
The net asset value per ordinary share as at 31 December 2021 is based on net assets at the year-end of £359.3 million and on 35,259,741
ordinary shares in issue at the year-end. The net asset value per ordinary share as at 31 December 2020 is based on net assets at the
year-end of £357.2 million and on 35,259,741 ordinary shares in issue at the year-end.
24. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
As at 31 December 2021 there were no contingent liabilities or capital commitments for the Group (2020: None). The Group had £90.0
million (2020: £95.3 million) of undrawn committed structured credit facilities as at 31 December 2021 and £113.7 million (2020: £48.2
million) of undrawn commitments in relation to secured real estate loans.
25. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE
INVESTMENT MANAGER
IAS 24 ‘Related party disclosures’ requires the disclosure of the details of material transactions between the Company and any related
parties. Accordingly, the disclosures required are set out below:
Directors – The remuneration of the Directors is set out in the Directors’ Remuneration Report on pages 53 to 56. There were no
contracts subsisting during or at the end of the year in which a Director of the Company is or was interested and which are or were
significant in relation to the Company’s business. There were no other transactions during the year with the Directors of the Company.
The Directors do not hold any ordinary shares of the Company.
At 31 December 2021, there was £nil (2020: £nil) payable to the Directors for fees and expenses.
Joanne Lake was appointed as a Director on 1 January 2021 and is a Director of Morses Club plc (“Morses”), an entity for which the
Company previously provided a facility.
Investment Manager – Pollen Street Capital Limited (the ‘Investment Manager’), a UK-based company authorised and regulated by the
FCA, has been appointed the Company’s investment manager and AIFM for the purposes of the AIFMD. Details of the services provided
by the Investment Manager and the fees paid are given on Note 5 to the financial statements.
During the year the Group paid £9.72 million (2020: £8.24 million) of fees and at 31 December 2021, there was £4.47 million (2020: £3.34
million) payable to the Investment Manager.
The Group considers all transactions with the Manager or companies that are controlled by the Manager as related party transactions.
Oplo Group Limited (“Oplo", formerly 1st Stop Group) is an English based consumer lender and was owned by funds managed by an
affiliate of the Investment Manager. During the year the Group provided a structured facility to Oplo that is secured on a granular pool
of consumer loans. As at 31 December 2021 the structured facility was £29.7 million drawn (31 December 2020: £35.0 million). The
Group also had a forward flow facility in place with Oplo in which the Group provided £26.7 million in 2021 (31 December 2020: £22.3
million) with the total pool of loans having an outstanding balance of £47.6 million as at 31 December 2021 (31 December 2020: £30.0
million). The company also invested £2m in Tandem Bank Limited.
Shawbrook Group PLC (“Shawbrook”) is a specialist SME and consumer lending and savings bank. Shawbrook is 50 percent owned
by funds that are managed by the Investment Manager. During the Year the Company sold its Shawbrook bond holdings. The bonds
were acquired in the secondary market in 2020 from an unrelated third party at an arm’s length price. The exposure at 31 December
2021 was £0m (31 December 2020: £11.4m). During the year, the Company carried out FX transactions with Lumon Risk Management
LTD (“Lumon”, formerly Infinity International Limited) in relation to Euro and USD derivative transactions. Lumon is owned by a fund
that is managed by an affiliate of the Investment Manager. The exposure as at 31 December 2021 is disclosed in Note 12.
During the year, the Company sold holdings in related parties Freedom, Deko and Bumblebee portfolios which consisted of £9 million
of assets. The Company also sold a portfolio of Avant loans for £18 million.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 120
26. ULTIMATE CONTROLLING PARTY
It is the opinion of the Directors that there is no ultimate controlling party.
27. SUBSEQUENT EVENTS
On 23 February 2022, a dividend of 20.0 pence per ordinary share was approved for the final quarter of 2021.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 121
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 122
Directors, Portfolio Manager and Advisers
Directors Administrator
Robert Sharpe Apex Fund Services (UK) Ltd
Jim Coyle 6th Floor, Bastion House
Richard Rowney 140 London Wall
Joanne Lake London EC2Y 5DN
all at the registered office below
England
Registered Office Depositary
6th Floor Indos Financial Limited
65 Gresham Street The Scalpel, 18
th
Floor, 52 Lime Street
London EC2V 7NQ London EC3M 7AF
England England
Investment Manager and AIFM Registrar
Pollen Street Capital Limited Computershare Investor Services PLC
11 – 12 Hanover Square The Pavilions, Bridgewater Road
London W1S 1JJ Bristol BS99 6ZZ
England England
Financial Advisers and Brokers Company Secretary
Liberum Capital Limited Link Company Matters Limited
Level 12, Ropemaker Place 6th Floor
25 Ropemaker Place 65 Gresham Street
London EC2Y 9LY London EC2V 7NQ
England England
Cenkos Securities plc Independent Auditors
6.7.8 Tokenhouse Yard PricewaterhouseCoopers LLP
London EC2R 7AS 7 More London Riverside
England London SE1 2RT
England
Custodian
Sparkasse Bank Malta PLC
101 Townsquare
Sliema SLM3112
Malta
Website
http://www.honeycombplc.com/
Share Identifiers
ISIN: GB00BYZV3G25
Sedol: BYZV3G2
Ticker: HONY
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 123
Website
The Company’s website can be found at
www.honeycombplc.com. The site provides visitors with
Company information and literature downloads.
The Company’s profile is also available on third-party sites
such as www.trustnet.com and www.morningstar.co.uk.
Annual and half-yearly reports
Copies of the annual and half–yearly reports may be obtained
from the Company Secretary by calling 020 7954 9552 or by
visiting www.honeycombplc.com.
Share prices and Net Asset Value information
The Company’s ordinary shares of 1p each are quoted on the
London Stock Exchange:
SEDOL number: BYZV3G2
ISIN number: GB00BYZV3G25
EPIC code: HONY
The codes above may be required to access trading
information relating to the Company on the internet.
Electronic communications with the Company
The Group’s Consolidated Annual Report & audited financial
statements, half-yearly reports and other formal
communications are available on the Company’s website. To
reduce costs the Company’s half-yearly financial statements
are not posted to shareholders but are instead made available
on the Company’s website.
Whistleblowing
As the Company has no employees, the Company does not
have a whistleblowing policy. The Audit Committee reviews the
whistleblowing procedures of the Investment Manager and
Administrator to ensure that the concerns of their staff may be
raised in a confidential manner.
Warning to shareholders – share fraud scams
Fraudsters use persuasive and high-pressure tactics to lure
investors into scams. They may offer to sell shares that turn out
to be worthless or non-existent, or to buy shares at an inflated
price in return for an upfront payment. While high profits are
promised, if you buy or sell shares in this way, you will probably
lose your money.
How to avoid share fraud
Keep in mind that firms authorised by the FCA are
unlikely to contact you out of the blue with an offer to
buy or sell shares
Do not get into a conversation, note the name of the
person and firm contacting you and then end the call
Check the Financial Services Register from
www.fca.org.uk to see if the person and firm contacting
you is authorised by the FCA
Beware of fraudsters claiming to be from an authorised
firm, copying its website or giving you false contact
details
Use the firm’s contact details listed on the Register if
you want to call it back
Call the FCA on 0800 111 6768 if the firm does not have
contact details on the Register or you are told they are
out of date
Search the list of unauthorised firms to avoid at
www.fca.org.uk/scams
Consider that if you buy or sell shares from an
unauthorised firm you will not have access to the
Financial Ombudsman Service or Financial Services
Compensation Scheme.
Think about getting independent financial and
professional advice before you hand over any money
Remember: if it sounds too good to be true, it probably
is!
5,000 people contact the Financial Conduct Authority about
share fraud each year, with victims losing an average of £20,000.
Report a scam
If you are approached by fraudsters, please tell the FCA using
the share fraud reporting form at fca.org.uk /scams, where you
can find out more about investment scams.
You can also call the FCA Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters, you should
contact Action Fraud on 0300 123 2040.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 124
.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 125
Credit Assets
Credit Assets are loans made to consumers and small businesses as well as other counterparties,
together with related investments.
Equity Assets
Equity Assets are selected equity investments that are aligned with the Company’s strategy and that
present opportunities to enhance the Company’s returns from its investments.
Net asset value (“NAV”)
Net asset value represents the total value of the Group’s assets less the total value of its liabilities.
For valuation purposes, it is common to express the NAV on a per share basis.
Ongoing Charges
Ongoing charges is calculated as a percentage of annualised ongoing charge over average reported
NAV. Ongoing charges are those expenses of a type which are likely to recur in the foreseeable
future.
Premium
If the share price of the Company is higher than the NAV per share, the Company’s shares are said
to be trading at a premium. The premium is shown as a percentage of the NAV.
Discount
If the share price of the Company is lower than the NAV per share, the Company’s shares are said to
be trading at a discount. The discount is shown as a percentage of the NAV.
Fair Value
The amount for which an asset could be exchanged, or a liability settled, between willing parties in
an arm’s length transaction.
Registrar
An entity that manages the Company’s shareholder register. The Company’s registrar is
Computershare Investor Services PLC.
Alternative Investment Fund
(“AIF”)
An AIF, as defined in the AIFM Directive 2011/61/EU on Alternative Investment Fund Managers.
London Inter-Bank Offered
Rate (“LIBOR”)
The interest rate participating banks offer to other banks for loans on the London market.
Sterling Overnight Interbank
Average Rate (SONIA)
The effective overnight interest rate paid by banks for unsecured transactions in the British sterling
market
Structured Loan
Credit Asset whereby the Group typically has senior secured loans to speciality finance companies,
whereby the security on our investment comprises the assets originated by the speciality finance
company and the company provides the ‘first loss’ in the form of ‘real capital’ whilst the Company
provides the senior capital. Corporate guarantees also typically taken
Whole Loan Credit Assets whereby the Group is exposed to the whole loan
Direct Portfolio Portfolios of loans owned directly by the Group, typically secured on property
AIFM
An Alternative Investment Fund Manager, as defined in the AIFM Directive. Pollen Street Capital
Limited undertakes this role on behalf of the Company.
Servicers
Comprehensive loan servicing to support the full loan lifecycle, from origination, through account
servicing to arrears management.
Hedging An investment to reduce the risk of adverse price movements in an asset.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 126
RECONCILIATION TO ALTERNATIVE PERFORMANCE MEASURES
The APMs are used to improve the comparability of information between reporting periods, either by adjusting for uncontrollable or
one-off factors which impact upon IFRS measures or, by aggregating measures, to aid the user understand the activity taking place.
APMs are not considered to be a substitute for IFRS measures but provide additional insight on the performance of the business.
Premium / (Discount) to NAV per share
31 December 2021
31 December 2020
NAV per share (Cum income) 1,019.1p
1,013.1p
Share Price at Close
945.0p
942.5p
Premium / (Discount) (7.3)%
(7.0)%
The premium / (discount) to NAV per share is calculated by taking the difference between the share price at close and the NAV per
share (Cum income) and dividing it by the NAV per share.
Annual NAV per Share Return
31 December 2021
31 December 2020
NAV per share (Cum income) at year end 1,019.1p
1,013.1p
Opening NAV per share (Cum income)
1,013.1p
1,014.9p
Dividends per share paid in the year
80.0p
80.0p
Annual Nav per Share Return 8.5%
7.7%
The annual NAV per share return is calculated by taking the total of the closing NAV per share (cum income) at year end, adding the
dividend per share paid in the year and subtracting the opening NAV per share (Cum Income), divided by the opening NAV per share
(cum income).
Inception to Date (“ITD”) NAV per Share Return
31 December 2021
31 December 2020
NAV per share (Cum income) 1,019.1p
1,013.1p
Opening NAV per share (Cum income) at inception
982.0p
982.0p
Dividends per share paid since inception
452.9p
372.9p
ITD NAV per Share Return 49.9%
41.1%
The ITD NAV per share return is calculated by taking the total of the closing NAV per share (cum income) at year end and adding the
dividend per share paid since inception and subtracting the opening NAV per share (Cum Income) at inception, divided by the NAV per
share (cum income) at inception.
Debt to Equity
31 December 2021
(£’000)
31 December 2020
(£’000)
Net Asset Value
359,342
357,232
Interest Bearing Borrowings
267,657
273,539
Debt to Equity ratio 74.5%
76.6%
Cash and cash equivalents 12,948
62,548
Net Debt to Equity Ratio 70.9%
59.1%
Debt to equity ratio is calculated as the Group’s interest-bearing debt divided by the net asset value expressed as a percentage. Net
Debt to equity ratio is calculated as the Group’s interest-bearing debt less cash and cash equivalents, divided by the net asset value
expressed as a percentage.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 127
Dividend Return
2021
2020
Dividend declared (pence per share)
80.0
80.0
IPO issue price (pence per share)
1,000.0
1,000.0
Dividend Return 8.0%
8.0%
Dividend return is calculated as the total declared dividends for the period divided by IPO issue price.
Ongoing Charges
2021
(£’000)
2020
(£’000)
Auditors’ remuneration
319
287
Administrator’s fees
179
148
Directors’ fees
227
200
Management Fee
6,349
5,942
Other costs
1,417
908
Average NAV
360,793
373,853
Ongoing Charges 2.3%
2.0%
Ongoing charges ratio: The Annualised Ongoing Charge is calculated using the Association of Investment Companies recommended
methodology. It is calculated as a percentage of annualised ongoing charge over average reported Net Asset Value. Average NAV is
calculated as the average of the previous 12 months published monthly NAV’s. Ongoing charges are those expenses of a type which
are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment
company as a collective fund, excluding the costs of acquisition/disposal of investments, financing charges and gains/losses arising
on investments. Ongoing charges are based on costs incurred in the year as being the best estimate of future costs. The AIC excludes
performance fees from the Ongoing Charges calculation.
Honeycomb Investment Trust plc – Annual Report and Audited Financial Statements 2021 128
NAV Return Bridge
2021
£’000
Monthly Average Credit Assets 586,074
Monthly Average NAV Excluding Leverage 629,929
Monthly Average NAV 360,793
Monthly Average Credit Assets is the mean of the aggregate of the credit assets at amortised cost, credit assets held at fair value through
profit or loss and derivative assets and liabilities held at fair value through profit or loss for each month end from 31 December 2020 to
31 December 2021, inclusive.
Monthly Average NAV Excluding Leverage is the mean of the net assets of the Group, excluding interest bearing borrowings, for each
month end 31 December 2020 to 31 December 2021, inclusive.
Monthly Average NAV is the mean of the net assets of the Group for month end from 31 December 2020 to 31 December 2021 inclusive.
2021
Investment Yield 9.5%
Investment yield is calculated as Interest Income on credit assets at amortised cost,
plus Income/(loss) on credit assets at fair value through profit and loss, less third
party servicing, divided by Monthly Average Credit Assets, excluding one-off charges.
Impairments and write-offs 0.1%
Impairments and write-offs is calculated as credit impairment release over Monthly
Average Credit Assets
Credit asset return 9.6%
Credit asset return is a sub-total of the above
Equity and working capital (0.8%)
The impact of equity and working capital is calculated as the Statement of
Comprehensive Income amounts above plus Income / (Loss) on equity assets at fair
value through profit and loss divided by Monthly Average NAV Excluding Leverage, less
the impact of items already disclosed above
Effect of leverage 2.9%
Effect of leverage is calculated as the above Statement of Comprehensive Income
amounts above plus finance costs divided by Monthly Average NAV, less the impact of
items already disclosed above
Investment Manager fees (2.7%)
Calculated as Management fee and Performance fee divided by Monthly Average NAV
Fund Opex (0.5%)
Calculated as Fund expenses, divided by Monthly Average NAV
NAV return 8.5%
Calculated as a sub-total of the above