Property companies have been one of the major issuers of retail bonds. Last week, Helical Bar (LSE: HLCL) tempted private investors with a seven year, 6% bond, which is due to mature in 2020. Should you buy it? Start by asking three key questions. Why does the company need the money? Can it afford to pay me the 6% interest? Can it pay me back at the end of seven years?
Helical has £286m of borrowings and a lot of that has to be paid back within the next three years. Restructuring some of its borrowings is the main reason for issuing the bond.
As far as the interest bill is concerned, Helical has a property portfolio with a market value of £626m. Just over 70% of this is in investment properties, which produce a stream of rental income, with the rest of it in development projects. Like most of the sector it has gone through some difficult times, but things seem to be looking up at the moment. A large chunk of investment income comes from retail properties and London offices.
The portfolio is currently 97% let with an average remaining lease of just over seven years. As long as the economy – and the fortunes of high-street shops – does not deteriorate, then this source of income is likely to hold up. So can it pay the interest bill? At the moment, yes. It’s producing just over £24m of income to help settle an interest bill of £13.9m. This pretty tight situation may get tighter as Helical wants to raise fresh money costing 6% but is currently only paying just over 4%.
Another potential source of cash is the company’s development portfolio. This consists of retirement villages, land for supermarkets and a shopping centre in Poland. Helical should be able to get some decent profits from these developments over the next few years, which should ease the interest bill as well as freeing up cash to pay bondholders back in 2020.
These bonds are quite risky but that’s why interest rates of 6% are on offer compared with government bonds of the same maturity paying less than 2%. Retail investors can pop them in an Isa (as they mature in more than five years) with a minimum investment of £2,000 and denominations of £100 thereafter. But they’re not protected by the Financial Services Compensation Scheme if the firm can’t pay up.
Verdict: a risky buy