DIY Investor Magazine
/
March 2017
21
‘LIKE COLD-WAR SPIES SEEKING TO LURE HIM WITH
THEIR TANTALISING COUPONS’
Furthermore, the assets will be income producing to
service the coupons. Whilst this sounds plausible, it
rarely is; for example:
•
Day 1; New Co issues an 8% bond and raises £5m,
in theory the security trustee hold £5m in cash as
security, in practise the issue costs are deducted
from the proceeds at outset. If we assume this
totals £150,000 then the trustee is left holding only
£4,850,000 (97% of the proceeds).
•
Six months after issue the first coupon of 4% (half of
8%) is due. If the issuer hasn’t been able to invest
in income generating assets then they will likely
use the cash security, diminishing this by a further
£200,000 to £4,650,000, or 93%.
•
Meaning that in the event of a default there may not
be sufficient to repay bondholders
•
The next point is the invitation document used by
mini-bond issuers; these tend to be shorter than a
PD compliant prospectus, 50 to 60 pages against
150 pages upwards. The invitation document is
really a marketing booklet, with little in the way of
issuer or industry specific risks disclosed, effectively
a general lack of transparency and disclosure. In
comparison, the PD compliant document offers
a high degree of both, and financial covenants
designed to protect investors by restricting how
much an issuer can borrow, for example:
•
An interest rate cover covenant of 1.5: 1 and a
negative pledge whereby they cannot offer security
to another lender (i.e. a bank) and put them ahead
of bondholders, or
•
Financial indebtedness of the issuer does not
exceed [50%] of the sum of the Group’s total assets,
or
•
For so long as any Note or Coupon remains
outstanding, the Issuer shall ensure that, as at each
Reference date, (i) the Leverage ratio is less than
3.0: 1.0, and (ii) the ratio of EBITDA to Finance
Charges of the period of 12 months ending on such
reference date is not less than 4.0: 1. 0.
Mr Bond now realises that there might be a third-way,
essentially a mini-bond but one where the invitation
document is based around the PD providing investors
with:
•
Transparency and disclosure required
•
With either actual security or 2-years plus
accounting history
•
Proper financial covenants
Mr Bond understands that there is an issue being
created that could address this, and stands ready to
review it in future issues.
In conclusion, whilst mini-bonds will never be the true
equal of an LSE listed issue, the third-way could make
them ‘the bond that came in from the cold’!
