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The answer to the question, in short, is “plenty” IMO.
In this era of low interest rates, an investment offering a “guaranteed” 6% yield and return of capital after 6 years may seem appealing, superficially. Investors, however, need to dig a little deeper and examine the strength of that guarantee.
This particular investment, being issued on behalf of Select Property Group, came to my attention as it is being offered by one of my brokers, YouInvest (and several other “intermediaries”, including Saga Share Direct, Selftrade and Shareview/Equiniti).
See https://www.youinvest.co.uk/markets/ipo/Select-property-group for details. The investment being offered is what is termed a “retail bond”. This class of investment was introduced to the market in 2010, with the London Stock Exchange launching a trading facility called ORB – the Order Book for Retail Bonds.
Corporate bonds (a form of debt issued by companies) are one of the classic investment classes, offering a fixed income and return of capital at the end of an agreed period. Prior to the launch of ORB, they were difficult for individual investors to trade and often were traded in units (e.g. £100,000 lots) that were too large for the typical individual investor. Retail bonds however are generally offered in £100 lots and, as the name suggests, are targeted at individual investors, rather than solely institutions.
ORB has been successful and there are now many retail bonds on offer. There are new issues like this offered quite regularly, and such bonds can be a useful component of an income portfolio, with (generally) less risk than equity (share) investments. Provided you are prepared to hold the bonds until maturity, there is only one major risk investors need to worry about, and that is whether the guarantor of the bonds is likely to run into financial difficulties.
The terms of this bond appealed to me, offering a 6% yield and a reasonable 6 year maturity period to 2023. The fixed maturity of such bonds mitigates against the risk of interest rate rises, which may otherwise depress bond prices, as your original investment should be returned at the end of the bond’s life. So, my next step was to study the bond’s prospectus. Unfortunately, the prospectus contains a number of “red flags” which I would like to draw to the attention of anyone else contemplating this investment:
- There is no target or maximum size set for the issue. Most bond issues have a target and maximum size. Knowing the maximum issue size is important to investors, so that you know how much debt the issuer is intending to take on. Instead the prospectus says:
Furthermore, if by way of example, the Group were to raise an additional £30 million to £70 million of borrowings in the bond issue proposed in this Prospectus, immediately following the bond issue, assuming all bond proceeds were used to fund new property assets, total property assets may represent between approximately 124 per cent. and 121 per cent. of the total borrowings of the Group. (Investors should note that this is illustrative only and should not be taken as any assurance as to the potential size of the proposed bond issue or the level of borrowings to total property assets, which will, in part, be dependent on the demand received for the Bonds during the Offer Period and the circumstances at the time).
I take this to imply that the issue size will largely be governed by demand for the bonds from investors. This does not seem a very responsible approach to me, meaning that investors will not know what the total borrowings of the company (including the bonds themselves) will be following the issue..
- Nature of the guarantor. As in many cases, the issuer of the bonds is a special purpose vehicle (SPV). Interest and capital payments via the SPV (whose only assets will be the proceeds of the bonds, initially) are guaranteed by Select Property Group (Holdings) Ltd (SPG). In most cases bonds are issued by listed companies, but not in this case. SPG is a private company with a controlling shareholder, Mark Stott. As such it is not subject to the usual corporate governance requirements applicable to listed companies, and investors are largely reliant on Mr Stott for fulfilment of the obligations. I have not researched Mr Stott’s background or track record. Anyone considering investment should do so.
- Fundamental to assessing the credit risk of any issuer is the amount of gearing the issuer is employing. The prospectus includes accounts for SPG to 31st December 2015. [It is a further concern that 2016 accounts are not included]. These accounts show total assets of £117m and equity of just £10.5m. In other words, the company is already very highly geared.
Combining these factors, I would consider this a very high risk investment and that a potential return of 6% in no way compensates for those risks. When investing in retail bonds, you need to think like a bank manager: would I lend money to this firm and, if so, at what rate of interest?
Mark Bentley
Post Date: October 2, 2017
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Mark, There are a number of retail bonds coming out with this format – sparse information and a superficially attractive coupon. I fear that many of these will be very illiquid, and rely more on hope than fundamentals not to end in tears. This one is a prime example, and the lack of 2016 accounts is worrisome, but possibly due to accounts being unavailable until the last minute. These are in fact now available at Companies House, and show that the assets of the parent company have increased from £117 mio to £308 mio, while equity has increased from £10.5 mio to just £11.2 mio. They’ve moved from “very highly geared” to “eyewateringly high geared”.
Another thought – the debt of the borrower is guaranteed by the holding company. But the Accounts indicate that some of the borrowings are secured. Given that some of the borrowings in the consolidated accounts appear to be from banks, I would imagine that the banks have first charge on the assets of the company, and lenders under this proposal have second rank. Not a happy position to be in with such a thin sliver of equity in the capital structure.
Link to Companies House accounts here:
https://s3-eu-west-1.amazonaws.com/document-api-images-prod/docs/wAJ7mTgP1pJNddcJrJGGkPoe2Oaf1Kac3KCgaQvBg7I/application-pdf?AWSAccessKeyId=ASIAJUMV7RY7SJXZ76BQ&Expires=1507109186&Signature=VvpaL65bDwrzzTVIW3KGfqwbJHs%3D&x-amz-security-token=FQoDYXdzECoaDAMlClprxfuAPMe9kyK3A90n8M4I%2FbIwGKvyC5yWdseBaH1wz1eu7L01MD8sKJQF%2BBCJ4y20rNAleHnTdH%2F6kwMOPPO7cYMf9umtLKtp1Rj%2FHS3oyrIRjui8Nlv2O0RwMcr%2FuIgywcLTFHkpvtP1BtGiuFH2MMkh4UsZvB%2B%2BhASqWSdQbWkQ18JsxHGBLvFE4Mv3iu9otZCRSZezAhtE9FVt3oSRWlhJVDle8dDk58Uk2rqqHj8Ky36cgKrsapr68x%2FK7F8qT1m%2BsSkPjcBvloRxZ%2BnfH4vClYuM94vS8PX%2BdaqXjva7f6okxhXdFna495iMzZFhsqH8iCU2tJXzUykspAEh%2F8OVftH8cSQ27wOSEysJBn5HUV8AbG8BG5v%2F3r%2BVTc1SGP8B46QzudybvDZoQTY7buFb6KbUY3%2FpSQ1UWpveWy2E%2ByB0NCEhkDrxpmhmBj3kCP3bWregmzPcHS2SAtxaZ9H1MCSLb2jcjkugi4%2FG47VGo2wFT4ZW1mNbIIcDIfFNRmALZgHKpMoZeqN2s3tIbPiH61EU8vfI7YxyAAlllZ6gWke3GqwpqAYMYG84V7kn6ycDZfhLr8AgJSpFfUJEyD4ozMvSzgU%3D
Thanks LTR, You’re quite right that the bondholders rank quite low in the capital heirarchy, but at least this made explicit on pp43-44 of the prospectus. My concern is that some individual investors might be tempted to buy, without having read or fully understood the prospectus.
Another point I failed to mention in my original post: as the issuer is private, bondholders cannot expect to see RNSs informing them of the financial situation of the issuer, unlike with a public issuer. Thus it is difficult to keep track of the risk in the bonds. The first you might hear that the guarantor’s financial position is deteriorating might be when administrators are appointed.