We’ve had plenty of new alternative finance platforms emerge over the last few years here in the UK, and plenty of them have issued dreadful looking mini bonds. We’ve also had more than a few innovative/alternative businesses (Burford for instance) issue retail bonds on the London market but to date, we’ve not had an altfi retail bond. It comes as no great surprise that the first altfi platform to list such a bond is Lendinvest. It’s a well respected, innovative platform that has always experimented with everything from funds (the old Montello range) through to institutional funding from pension funds. Interestingly it was also the first platform – to my knowledge at least – that stopped taking in new retail money for its online platform (from May this year).
That looks a smart move because it’s now planning to return to the retail market but this time via bond – Funding Circle, by contrast, chose to use an investment trust to raise money from the stock market, with a target annual yield of around 6.5%.
So, what’s the offer for this new Peel Hunt sponsored ORB listing? The top line for this new bond issue is as follows:
- Fixed rate of 5.25% per annum
- For five years
- Semi annual interest paid of £2.625 per £100 in principal amount
- The underlying business is involved predominantly in bridging and development loans, mostly in London/South East (over 80%) with an average loan boasting a LTV of 63%
In terms of timings the offer period opened on 19 July 2017 and is expected to close at 12 noon(London time) on 4 August 2017 although of course, it could (and probably will) close earlier than this. So what security against assets do investors get for their money? I’ll quote from Lendinvest directly.
“There are two levels of security: at note-holder level, at loan level.
Security for investors: the Issuer will grant a floating charge over all of its assets in favour of the retail bond investors. This means that if the Issuer failed to make repayments to Investors, the Security Trustee (which is an entity appointed to hold the security on behalf of bondholders) could take control over the underlying assets in order to seek repayment for investors.
In addition to the security, LendInvest Limited (as the parent of the Issuer) will provide a guarantee, which means that it will repay investors any amounts they are due (provided it is solvent and able to do so), if the Issuer fails to do so.
Security in relation to the loans: all loans are secured against the borrower’s property. This means that, if the borrower was to default or fail to keep up their repayments, LendInvest has the right to take possession of the property and sell it on to recover investors’ capital. As at 31 March 2017, the Group had granted £811.34 million worth of loans (excluding extensions) since inception without suffering a capital loss (i.e. the amount recovered in receivership, through sale of the underlying property, has always been equal to, or greater than the principal amount lent).”
Cutting through the necessary legalese it seems that the relevant business against which the bonds are issued is called Lendinvest Secured Income although the bonds are guaranteed against a floating charge against the whole group assets. There are also covenants in place stipulating that the loan to value ratio can’t be above 75%, with the average currently running at 63%. There’s also an income covenant for the issuing entity to have interest cover of 1.2.
Compared to some more recent issues in the retail bond space a yield of 5.25% doesn’t look too bad. But Lendinvest is a relatively new business, is not quoted on the London stockmarket (yet) and is involved in a business sector that one can reasonably be described as ‘not without risk’.
Its core ‘asset class’ is buy to let property, largely in the South of England (and mostly in greater London). As I explained this week in Moneyweek ( http://moneyweek.com/author/davidcstevenson/) I have my doubts about any potential for capital appreciation within the buy to let sector although I think the income flow looks a bit more secure. Also, Lendinvest has a sensible average LTV ratio at 63% which should give private investors some comfort although I would observe that if house prices fell more than 15% across the board, the bond might be in danger of breaching its covenant. I don’t think that is likely but it is always possible.
A deep recession could also increase underlying Buy to Let delinquencies which might impact income cover (though not necessarily LTV ratios). Again, I think this is unlikely though not impossible.
In the past I would have compared this rate against the rate on offer from direct investment in the online platform but you can’t invest directly in Lendinvest, so that’s a moot point. Compared with the rates on offer from rival P2P platforms such as Zopa and Ratesetter, the yield of 5.25% is not bad and you unlike its nearest rivals the investor also get secured assets to work against. That’s important when comparing the Lendinvest yield of 5.25% against the Funding Circle SME Loan income fund yield of around 6.5%. The latter is not secured and is mostly invested in risky SME loans.
Overall, I’d say that given the risks of investing in property assets I would have preferred a rate closer to 5.75% or 6% but beggars can’t be choosers! I would suggest that this is probably one of the much safer options for anyone looking to access P2P loans generally. The structure is institutional grade and the returns are decent. You also don’t need to worry about platform liquidity issues and you can trade in and out of the bond in real time. I doubt this retail bond will trade at much of a premium and might even move into a discount if interest rates rise and Buy to Let delinquencies also increase but for the long term income investor this is a decent option.