Honeycomb protects capital and provides high levels of income

David Stevenson, 12/04/2021

Pollen Street Capital’s closed-ended fund Honeycomb might appear a risky proposition to some given the impact Covid has had on small businesses. This is because the trust provides loans to non-bank lenders (NBLs) who in turn use the cash to make loans to small to medium size enterprises (SMEs) as well as individuals. However, speaking to the lead adviser on the trust Matthew Potter, it becomes apparent that it’s not as risky as first appears.

This is due to the capital structure, essentially the trust is the senior bond holder using the NBLs portfolio of loans as asset backed security. However, Mr Potter said that the performance of the trust’s loans during the outbreak of Covid was ‘incredibly strong’ which was due to the strength of the NBLs’ portfolios.

“Cash collection on their portfolios and limited levels of arrears and defaults means that the financing that we provide to those non-bank lenders, performed very well,” Mr Potter told fundeye.

However, the forced sellers in the form of Neil Woodford and Mark Barnett did put the trust into discount territory where it remains today, around 5 percent less that NAV. It had reached a high of 16 percent less that December 2019’s NAV. For this reason, although Mr Potter would like to grow the trust by issuing equity, it can’t while trading at a discount. The board of the trust instead engaged in some share buy-backs to narrow the discount, although there has also been interest from investors.

The trust delivers around an 8.5 percent dividend yield, which in today’s climate is high. Mr Potter said there had been some debate among the board whether to bring the yield down slightly and deliver some NAV growth as well but its been decided that investors in the trust are more concerned with income.

“We think that ultimately the holders of the trust we think it suits are people who are looking for high levels of cash income with capital preservation and that's really what the trust is about,” said Mr Potter.

While the trust has some pretty big players on its shareholder register, including AXA, Aberdeen Standard and Canaccord Genuity, MR Potter did concede that he would like to see some large wealth managers on there as well. Brooks Macdonald has been on the register at certain points and he hopes that as the share price recovers along with the general economy, these type of institutions will take notice.

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