After a long dry spell of many months with virtually no new retail bond issuance (bar the odd tiny charity bond tap issue), at long last, we have a big new issue, from an outfit called BlueZest. And this is certainly an ambitious new issue, with the offer period now open with a close on December 12th. This alternative, new mortgage lender is looking to raise up to £250m for 5-year secured bonds yielding 5.25%.

You can see more details on its website at this address – Authorised offerors include the great and good of the retail world (excluding Hargreaves Lansdown): AJ Bell Securities Limited,  Alliance Trust Savings Limited, Equiniti Financial Services Limited, Redmayne-Bentley LLP and Syndicate Room.

I’m a big fan of retail bonds and I’m delighted that we have new issuer with real ambition and scale but sadly I won’t be investing in this bond. On paper, this new issue initially looks really quite interesting. The word secured in its branding for the bond gives us the first clue to the offer. Bluezest is hitting the market with a range of mortgage products which will (note that word, will) include buy to let mortgages and business loans secured on properties (via second liens). All of these mortgages are being backed into a special vehicle which will act as security for the bond. Crucially it looks like Bluezest is focusing on clients with LTVs mostly below 70%, which implies that there is at least 30% of equity left in the properties. Next up Bluezest has insured the portfolio via an instrument called a mortgage indemnity guarantee policy (an MIG Policy) with AmTrust Europe Limited “which insures BlueZest Mortgages against a decline in the value of such Mortgaged Property by 35% or 40% (depending on the type of Mortgage Loan).” And bear in mind that as most mortgages will have an LTV of 70% or less, these insurance policies might never be needed anyway.

The management team also looks impressive with many of the key principals coming from a risk background at the big credit rating agencies. This means that they’ve developed their own in-house dynamic credit scoring model, which should be helpful in what is, after all, an insanely competitive market. My guess is that Bluezest will be focusing on clients who eother prime of maybe just below prime but who they reckon will represent a decent credit risk based on their own big data and credit analysis software.

So, why won’t I be buying? Put simply 5.25% is nowhere near enough for the risk on offer. Bluezest is actually a startup and was only launched in 2017, after reversing out of another vehicle that was wound down because of a dispute with a shareholder. So, to be clear, there is no existing book of mortgages to draw on. In the world of minibonds backing a ‘de novo’, clean sheet business is not new. In the world of listed, UKLA authorised bond issues, this is close to unprecedented. The nearest equivalent to this issue comes from Lendinvest, a p2p lender which a few months ago launched its own £50m retail bond. This offer was heavily oversubscribed – and now trades at a premium. You can see the current price here via the LSEs website:

To be crystal clear, Lendinvest has been in business for many years and had an existing book of business ready to go.  Like Bluezest it operates in alternative mortgage lending markets but it was borrowing money for six years at the same rate, of 5.25% per annum. Given its proven track record and the availability of copious amounts of transparent data about Lendinvest’s track record, why take the extra risk of backing a new business such as Bluezest?

On a more general level, I’m also slightly worried that any new mortgage lender in the current market might be tempted to cut corners as the fight over rates intensifies. The existence of mortgage insurance might tempt a new issuer to wander up the risk curve to chase new business. This could happen just as the buy to let market starts to weaken following a series of punitive tax hikes from a government determined to slow down rent rises.

I wish Bluezest well, and we need all the competition we can get in the mortgage market, but I’m really not sure investors are being rewarded for taking on what is essentially existential enterprise risk i.e the business needs to prove it can roll out the mortgage programme.

If the yield had been closer to 7% I’d be a little happier, but it isn’t – it’s just 5.25% for five years. If Bluezest can find investors willing to take on this risk, good on them but I ‘d suggest that investors looking for an alternative might perhaps look at the Lendinvest bond or the small but well-run pool of closed end real estate debt funds including ICG Longbow and Starwood which yield around 6% per annum. Another alternative is UK Mortgage fund, managed by 24 which yields 6.6%. One note on this last fund. This is a more complex creature than BlueZest, involved in the mezzanine funding of mortgages, but it’s struggled to deploy cash into relatively new, independent mortgage vendors and has continually had to push back the date for being fully invested. Be warned.