The scramble for yield globally has thrown up lots and lots of adventurous income ideas over the last few years, not least in the alternative finance space. But last week brought news of a curious new bond fund from venture cap specialist Foresight. They’ve just released the first tranche (A) of something called the Foresight Smart Bonds Fund, offering investors the choice to invest over 1, 2 or 3 year fixed terms for between 4.07% and 4.83% rates of interest per annum. According to the
According to the managers, the fund is the first of its kind and is, “ offering an innovative and simple funding solution for the UK roll out of smart meters. The funds raised will generate returns by lending to companies that own, operate and rent installed Smart Meters to UK energy suppliers”. Apparently Foresight Smart Bonds Fund Tranche A, the first tranche to be deployed, will remain open to investors until [15.09.2017], and is targeting a maximum fundraise of £10 million. The table below spells out the different interest rates on offer – note that these are bullet loans and interest is paid annually or on maturity depending on the choices of the investor.
According to the managers, the fund is the first of its kind and is, “ offering an innovative and simple funding solution for the UK roll out of smart meters. The funds raised will generate returns by lending to companies that own, operate and rent installed Smart Meters to UK energy suppliers”. Apparently, Foresight Smart Bonds Fund Tranche A, the first tranche to be deployed, will remain open to investors until [15.09.2017], and is targeting a maximum fundraise of £10 million. The table below spells out the different interest rates on offer – note that these are bullet loans and interest is paid annually or on maturity depending on the choices of the investor.
|Foresight Smart Bonds Fund :
Fixed Term Loans
Paid on Maturity
Foresight obviously knows a thing or two about smart meters as its various capital structures have been funding them for years – it says that to date its invested £74 million of debt and equity into more than 160,000 smart meters across the UK. It’s even launched Foresight Metering, a second-generation Meter Asset Provider (“MAP”) in early 2016.
Curious to how these bonds are structured I had a dig around inside the IM. First off, what about security of the asset? According to Foresight “security will be taken in the form of a legal charge over the portfolio of Smart Meters, which your loan is used to finance. Security will be either senior or junior ranking and confirmed on a tranche by tranche basis”.
And what of the track record so far for lending in this space? “Foresight has arranged 49 separate tranches of loans to Smart Meter asset providers to date, used to finance 42,500 industrial and commercial smart meters, and all capital and interest has been fully repaid to investors with no defaults”. Foresight also says that the income stream is highly predictable. “ The rental due on each Smart Meter is agreed and contracted with the energy supplier at the point of installation. Diversified Revenues come from a large (typically more than 10,000 meters) portfolio of both electricity and gas Smart Meter assets, distributed nationally and rented to a diversified mix of UK energy suppliers. Long Term Smart Meters have an economic life of approximately 20 years. Technology Risk Mitigated Most MRAs stipulate that meter failure risk resides with the energy supplier and not the MAP”.
And what of the counter parties? – a diversified set of UK energy suppliers. “The largest “Big 6” blue-chip energy supplier counterparties account for approximately 80% of electricity and gas supply* and include British Gas, SSE, E.ON, EDF, Scottish Power and nPower.”
So far, it all sounds perfectly sensible. But why would the smart meter businesses bother with a retail offer? Why not just borrow the money via big institutions who I assume would be happy to lend day in, day out. The complex looking chart below, taken from the IM, goes some way to explaining these bonds. Assuming say a £5m funding requirement based on future cashflows, £0.5m (10%) is funded by equity. This leaves £4.5m (90%0 to fund via debt. £3m is funded by institutional debt which I assume is more senior to the retail debt and thus likely to cost less in terms of interest. This leaves £1.5m to fund via retail issued bonds which seem to be averaging around 4.5% pa net cost. Logically I would assume therefore that the investors in the bond fund are first in line to take a hit after the equity investors get wiped out. In effect their vulnerability is from 90% down to 60% loan to value, equivalent to say the lower grade BBB elements of a securitised loan.
Overall, this doesn’t seem a hugely risky investment in my humble opinion although I’d personally be even happier if that return was closer to 5.5% to 6%. But this does seem like a decent quasi infrastructure investment and its also worth pointing out that although the bonds are NOT covered by the FSCS deposit protection scheme they ARE covered by the FSCS investment protection scheme (for qualifying investors only) which means they should get back some compensation if the fund manager goes bust.