17th Apr

You want it Back When?


Worth a Try? Wasps Set to Launch £30 million Listed Bond.

With signs that the retail bond market is shaking off its torpor of the last eighteen months, Wasps Rugby Club is believed to be considering its funding options, one of which includes the launch of a listed retail bond.

The London Stock Exchange launched its Order Book for Retail Bonds (ORB) in 2010 in response to demand for corporate bonds from retail investors without the need to purchase a corporate bond fund.

Unlike institutional issues, retail bonds are typically available with a minimum investment of £2,000 and secondary market liquidity is provided by ORB.   

With returns that have eclipsed those achieved by the majority of equity funds, retail bonds have proven extremely popular with investors with demand outstripping supply; the majority of bonds trade above par in the secondary market which has the effect of suppressing the coupon for those that miss out at kick off.

Despite this demand only five retail bonds were launched in the twelve months to March 2015 and by way of filling the void a series of mini (sometimes ‘loyalty’) bonds have brought some interesting propositions to market. Investors are often able to take a bonus in the form of the product of the company it supports – up to and including chocolate.

Mini bonds can offer attractive returns, but this is often only achievable because the issuer avoids some of the costs associated with the launch of a full blown retail bond – including listing on an exchange, so these products are held to redemption, often five or six years on.

Adrian Lowcock, Head of Investing at Axa Wealth, believes that the rise in mini bonds is a symptom of investors’ search for income in the enduring low interest environment. 'I think they often tried to appeal to savers looking for something more than cash, which was paying below-inflation rates,' he explains. 'These bonds often looked like secure alternatives, [although] they are actually higher-risk alternatives.'

The popularity of mini bonds may be explained in no small part by the fact that whilst investors are looking for income, some higher-risk businesses are seeking alternative sources of finance because banks are reluctant to lend; a cautious investor may see the potential for danger in such a combination of circumstances.

However, for those looking to invest in companies in which they already have an emotional investment have been offered some quirky opportunities - The Jockey Club's ‘Racecourse Bond’ paid 7.75% over five years, split between 4.75% cash and 3 per cent in loyalty scheme points.

Hotel Chocolat’s bond allowed investors to choose between an annual return of 7.25% of in-store credit or 7.33% cash equivalent in the form of a monthly box of chocolates; the ‘Mr and Mrs Smith Bond’ gave the choice between 7.5% a year for four years or 9.5% in points with the boutique hotel chain's loyalty scheme; the Chilango Bond even paid out partly in burritos!

'[The appeal of mini bonds] is a high fixed income, a capital return at the end of the bond's life, discounts and loyalty offerings for bondholders, and options to convert the bonds into payouts in goods and services,' says Lowcock. 'You get to invest in a company you really like and are a customer of.'

However strong your penchant for a bean burrito there is, of course, no such thing as a free lunch.

Mini bonds tend to be issued by relatively small or new companies – why else would they shell out 7%? – which means that there is an increased risk of capital loss, although a canny income investor will spread their risk around .

Whilst both retail and mini bonds can be held in a SIPP, the latter cannot be protected from tax in an ISA wrapper.

As with any investment it is important to get to grips with the nuts and bolts of your chosen business and this is where the issuers of mini bonds can be found wanting, particularly in comparison to the level of financial disclosure required in the institutional arena.

This seems particularly poignant in view of the recent default of Secured Energy Bonds which stopped paying interest, leaving those that stumped up £7.5 million wondering if they would ever see their money again.

At the time of its launch in June 2013, Mr Bond wondered if the 7.5% coupon being dangled was too good to be true (Caveat Emptor – Mr Bond Urges Caution When Purchasing 'Retail Bonds').   

It was, and that also highlights other potential issues that may make investors more than a little wary of mini bond.

In common with retail bonds there is no recourse to the Financial Services Compensation Scheme should an issuer default, but all too often it is unclear what, if anything, the loan is secured against and how it sits in the debt structure of the company. A bar of chocolate may be little comfort when those holding senior debt are gorging themselves on the spoils ahead of you.

Furthermore, unlike institutional bonds the issuer of mini bonds can elect to buy back its bonds at par if it finds a cheaper source of finance or no longer wishes to pay a coupon; some commentators consider that mini bonds offer a level of risk that even a ten percent coupon would not mitigate and that is some way above anything on offer today.

Mini bonds are relatively high-risk investments but may be attractive to those with a diversified exposure to risk that know a business or the business owners well.

Those seeking an alternative to cash in a low interest environment may find that they have bought an investment with a higher level of risk than they are comfortable with and one that potentially comes with a sting in its tail.

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