DIY Investor Magazine
/
March 2017
20
……THE BOND THAT CAME IN FROM THE COLD
RETAIL BOND EXPERT’S MR BOND ON THE ONGOING QUEST FOR INCOME
It is now the 8th anniversary of the Base Rate cut to 0.50% in March 2009 and there has been no respite for savers
- the only change was to reduce it still further, to 0.25% in August 2016.
The table below shows that the pain may not be going away quickly either…
Forecast
Actual
Q1 2017
Q2 2017
Q3 2017
Q4 2017 2020
UK Base Rate
0.25% 0.25% 0.25% 0.25% 0.50% 1.25%
Source:
Because of this hunt for yield goes on, especially as
inflation is now approaching government targets, and
showing no sign of slowing down.
This has left Mr Bond in a quandary, torn between good
and evil.
The ‘good’ being the LSE listed bonds he championed
in an article published here on the 22nd September
2016
– it’s all about
the listing says Mr Bond’; and the ‘bad’ being unlisted
‘mini-bonds’
On the 9th September 2016 DIY Investor wrote about
the Mini-bond failure of the Providence Financial issue
This isn’t the only mini-bond to fail, there have been
others – e.g. the Secured Energy Bonds, Jan 2016.
It is to the22nd September article that Mr Bond is
returning; there were two statements, the first ‘…, if it
isn’t listed it likely best avoided; period’, and the second,
‘‘the ‘gold standard’ in Europe for bond investors is the
prospectus directive’. For the sake of clarity all bonds
listed on the LSE fall under the Prospectus Directive
(“PD”).
Whilst Mr Bond is happy to defend championing LSE
listed issues, he acknowledges the lack of supply,
with only five new issues since the beginning of 2016,
whereas the bad old mini-bond market is churning them
out like cold-war spies seeking to lure him with their
tantalising coupons.
All this set Mr Bond thinking; is there a third-way? One
where he can have the seductive wiles of the mini-bond
but with some of the benefits of the PD?
Before reading on there is some caveat emptor,
whatever you do the mini-bond will be unlisted, meaning
that there is no on-going no liquidity and the investment
must be held to maturity.
We spoke to a firm that arranges listed bonds and
discussed other comparisons, liquidity aside, between
listed and mini-bonds. The issuers of mini-bonds tend
to be ‘smaller’ businesses borrowing smaller amounts of
money; because of this, coupons should be higher, we
would expect 7% possibly 8%.
One of the biggest problems is that the issuers tend
be new businesses with little or no accounting history.
Whereas, under the PD the issuer, or guarantor,
is required to have two years audited accounts of
‘substance’.
Some mini-bond issuers have tried to overcome this by
offering security, however in many instances the assets
representing the security are to be purchased with the
bond proceeds.
‘THERE IS NO ON-GOING NO LIQUIDITY AND THE
INVESTMENT MUST BE HELD TO MATURITY’
