London:
The rising prominence of mini-bonds was underlined by two multimillion pound launches, as income-starved investors show increased appetite for the unregulated sector.
Peer-to-peer lending platform Wellesley is to extend its mini-bond programme by another £6 million (Dh34.59 million) as a growing number of businesses look directly to the public in raising debt. If successful, the new tranche will bring Wellesley’s total mini-bond debt to £22 million, making it one of the biggest fund-raisers via unregulated products.
The move follows the launch of a £3.5 million mini-bond by the Oval cricket ground to build a new stand, carrying a cash coupon of 5.5 per cent.
Businesses ranging from burrito bars to housebuilders have used mini-bonds to raise debt, tempting investors with coupons of 7 per cent or more. Despite the growth of the sector, there are fears that investors are not fully aware of the risks.
Wellesley has been expanding aggressively, with total loans on its platform of about 250 million pounds so far; it says it aims to be the largest peer-to-peer lender in the UK within two years.
Money raised through Wellesley’s three- and five-year mini-bonds has so far been used for loans through its online platform, which specialises in asset-backed loans to residential property developers. But in future, the money raised may be used for expansion, including acquisitions, or for working capital, it said.
The mini-bonds — which are offered by a Wellesley Finance plc, a separate entity from Wellesley & Co, the investment platform — offer gross interest rates of 6 to 7 per cent a year, paid twice yearly.
Increasingly popular with retail investors, the sector has faced criticism because of the lack of investor protection and few regulatory requirements for the issuer. Investors’ capital is at risk and unlike listed retail bonds, they cannot be transferred or traded.
Other big mini-bond offers have included John Lewis, which raised £50 million in 2011, and The Jockey Club, which raised almost £25 million two years ago. Mini-bonds have also been issued by a series of much smaller companies, sometimes with the company’s products — such as burritos or wine — on offer as free extras to investors.
They have also been used by little-known overseas companies, but one such product, Secured Energy Bonds, appears to have lost investors most of their money.
“Mini-bonds have a bad name in the market because they tend to be used by start-ups and highly speculative businesses. I think it’s important to specify that Wellesley is well-capitalised and profitable,” said Graham Wellesley, joint chief executive.
Two-year-old Wellesley is owned by its founders and directors, without venture capital funding, and unlike its rivals boasts that it invests its own money in all loans it makes. It has taken part in the rapid expansion of the peer-to-peer lending sector over the past two years.
The company does not belong to the Peer-to-Peer Finance Association, an industry group which enforces rules stricter than the Financial Conduct Authority’s requirements. But it has recently appointed David Godfrey — the chief executive of UK Export Finance and a former risk chief at several major banks — to its board, a move Wellesley said should “demonstrate the importance of risk management in the group”.
Wellesley raised £3 million through a retail bond listed on the London Stock Exchange’s Order Book for Retail Bonds this year. It says it will start issuing fully-fledged corporate bonds once it has filed three years’ worth of audited accounts, a regulatory requirement.
Wellesley says the company favours mini-bonds as they are “the easiest and most flexible route to market”.
Emanuela Vartolomei, chief executive of All Street — a research firm analysing crowdfunding and other alternative investments — said that anyone considering investing in a mini-bond should look at the security structure, how the underlying properties were valued, and the record of the investment team.
“Were we to analyse property-linked mini-bonds we would focus heavily on the risk-return profile,” she said, noting that Wellesley’s underlying loans were being used for property developments and bridge lending.
“Interest rates on bridge loans can often be quite high, up to 15 per cent or even 20 per cent, reflecting their risk, so we would be asking the issuer for more information about the underlying assets.”
— Financial Times
