Get bigger profits from mini bonds

People are moving to improved mini-bonds

Many investors are sitting on bond portfolios or in funds where the average yield on good-quality credit is below 3% a year. These low yields might imply that they’ve made capital gains (bonds rise in price as yields fall), but sooner or later those bonds have to mature and the cash needs to be reinvested – at horribly low yields. Thus over the past few years we’ve seen an explosion of retail-friendly bonds – many labelled “mini-bonds” because of their diminutive size in terms of capital raised. Most of these mini-bonds have been, not to put too fine a point on it, absolute junk (ie, money loaned to risky, early-stage businesses).

But in the past year we’ve seen a steady rise in the quality of these bonds, partly because reputable alternative asset managers have moved in with asset-backed propositions (ie, companies that own physical assets, providing a certain amount of security for lenders). Downing, for instance, has its own “crowd bond” business that provides debt capital to businesses, usually within an Innovative Finance Individual Savings Account wrapper. Currently Downing has two projects that allow instant access (ie, no maturity), paying a 3% yield on an energy-backed business. This is a bit on the low side, but Downing also advertises an imminent bond that involves lending to a pub business for 18 months at 5.5%.

Another asset manager, Foresight, is offering a tranche of bonds that are being used to finance the smart meter rollout. These vary in maturity from one to three years, with rates ranging from 4.07% (one year) to 4.83% (three years). Again, you get an asset-backed business with relatively predictable cash flows, although do note that there are existing institutional bond investors who have a more senior claim on the business assets.

Property lender LendInvest raised £50m when it issued the alternative finance sector’s first retail bond, paying 5.25% a year over five years. The bond issue was oversubscribed, and the bonds now trade at £102 (implying a net yield to maturity of just over 5% a year). There’s much to like about this bond. It’s asset-backed – LendInvest provides capital to buy-to-let landlords or property developers, with a loan-to-value ratio of typically well below 70%. It’s also very liquid by comparison with most other bonds – its bonds are traded on the London Stock Exchange’s retail bonds platform and the bid-offer spread should be below 1%-2%.

Another provider trying to raise the bar is UK Bond Network, which has been going for a few years now and has built up a reputation for listing quality bonds from good companies. It focuses on more established, fast-growing businesses with strong balance sheets. The yields are also closer to a level I’d be happy with, given the obvious risks of backing small businesses – many of its auctions feature yields of between 7% and 10%.
The platform has also started offering bonds from smaller, listed businesses.

If you’re tempted to explore the sector, first focus on asset-backed businesses with good balance sheets and real assets. Second, favour more mature businesses, ones that have been around for more than five years – perhaps take a look at WiseAlpha’s senior secured loan notes programme for larger businesses. Third, make sure you understand where you are in the chain of security – are there other bond holders more senior than you? Fourth, look for liquidity – see if there’s a secondary market that lets you sell out if needs be. Finally, make sure you’re being rewarded enough for taking risk – 5% is the absolute minimum, with 6%-10% a better return for a risky investment.

In the news…

• Peer-to-peer lender RateSetter has reignited the debate about transparency after it admitted placing loans via rival platforms without telling its customers, reports The Times. It placed around £10m in property development loans on Wellesley, and an unspecified sum via Archover, which lends to small businesses. Both Wellesley and Archover offer investors a higher return than RateSetter. A spokesman for RateSetter said it would not lend via either platform again. RateSetter withdrew from industry body the P2P Finance Association last month after admitting it had “breached the principles of the Association”, but stressed that “no customer has experienced any loss from our actions”.

• Investors opened 2,000 Innovative Finance Isas (IF Isas) in the first 12 months of their operation, according to figures from HMRC, reported on P2P Finance News. The average size of an IF Isa portfolio was £8,500. The lion’s share of the business went to P2P platform Abundance, which specialises in renewable energy projects, and was one of the first platforms to offer an IF Isa. Customers opened 1,436 IF Isas on the platform, investing £10.5m in total – 62% of all the money put into such Isas. Co-founder Bruce Davis admits that with more platforms now offering the IF Isa, Abundance’s current “total dominance” of the market will “obviously be short lived”.

Bitcoin for the sex industry

Lust is raising money via an initial coin offering (ICO) to create a “decentralised sex marketplace”. It will use Ethereum-based blockchain smart contracts to connect sex workers and clients securely and anonymously anywhere in the world, stressing that its system is “definitely the best solution to access the adult market from anywhere, at any time, anonymously”. It hopes to recruit 200,000 European sex workers to its platform by the end of 2018, and will make money by charging a 4% commission on transactions. Estimating that the average monthly income for a European sex worker is around €5,000, it predicts revenue of €12m a month. It is keen to point out that its system is “not illegal anywhere in the world”.


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