A first retail bond from a P2P platform

Construction workers © iStock
Property development can be risky

We’ve had plenty of new alternative-finance platforms emerge over the past 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 businesses (such as litigation-finance firm Burford Capital) issue retail bonds on the London market. However, we’ve not had a retail bond from an alternative-finance firm – until now.

It’s no surprise that the first peer-to-peer (P2P) platform to launch such a bond is LendInvest. This is a well-respected, innovative platform that has experimented with everything from setting up funds to raising institutional money from pension funds. Earlier this year, it stopped taking in new money from ordinary retail investors through its online platform. But it’s now returning to the retail market via this bond issue, which looks to be a smart move.

Funding Circle recently set up a listed investment trust to raise money, with a target annual yield of around 6.5%. LendInvest, by contrast, is offering a lower coupon of 5.25% on its bond – and, despite that, I would expect demand to be strong enough that it will close before its scheduled date of 4 August.

LendInvest predominantly makes bridging and development loans for the property sector, mostly in London and the southeast. It has granted more than £800m of loans so far, on an average loan to value (LTV) of 63%, and says it has not yet suffered a capital loss on any loan. The business against which the bonds are issued is called LendInvest Secured Income, but the bonds are guaranteed by a floating charge over the whole group’s assets. There are also covenants stipulating that the LTV can’t rise above 75% and that the issuing entity must maintain interest cover of 1.2.

Compared to some recent issues in the retail-bond space, a yield of 5.25% doesn’t look too bad. Still, LendInvest is a relatively new business and is involved in a business sector that carries meaningful risks. Its core asset class is buy-to-let property, and 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. LendInvest’s average LTV ratio of 63% seems sensible, which should give investors some comfort, but I would note that if house prices fell more than 15%, the bond might be in danger of breaching its covenants. And a recession could also increase buy-to-let delinquencies, which might hurt income cover. I don’t think either development is likely, but they are possible.

You can’t invest directly in LendInvest, but compared with the rates on offer from rival P2P platforms, such as Zopa and RateSetter, the yield of 5.25% is not bad and unlike its nearest rivals the debt is also secured against assets. That’s important when comparing the LendInvest bond against the Funding Circle SME Loan Income fund – the latter yields more, but is not secured and is mostly invested in risky SME loans.

Overall, I’d say that given the risks, 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 potential return is decent. You don’t need to worry about platform liquidity issues and you can trade in and out of the bond in real time, since it is listed on the stock exchange. I doubt this 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 investor this is a decent option.

Issuer LendInvest Secured Income PLC
Guarantor LendInvest Limited
Nominal amount £50m
Rating Unrated
Repayment Bullet at par
Coupon 5.25%, semi-annual in arrears
Early redemption Gilts + 100 bps
Coupon dates 10 February, 10 August
First settlement date 10-Feb-18
Maturity date 10-Aug-22
ISIN number XS1649806343
Denominations £100
Listing London Stock Exchange
Governing law English law
Lead manager Peel Hunt LLP

Retail bonds versus mini-bonds

A retail bond is like a traditional corporate bond, but intended for individual investors. They are listed on the London Stock Exchange (LSE) and are traded in small blocks of just £100. In contrast, a corporate bond intended for institutions, which will not usually be listed on an exchange, may trade in minimum blocks of £50,000 or more.

Retail bonds come with risks: if the company is unable to pay you back, you will not be entitled to compensation from the Financial Services Compensation Scheme (FSCS), so you could lose your money. However, since they are traded on the LSE, you should be able to sell before the bond matures – although the price may be less than you paid.

Mini-bonds are typically issued by smaller firms which can’t afford to pay the associated fees that come with a retail bond issue. They are not listed on an exchange and generally cannot be sold, transferred or redeemed early. Therefore, they are highly illiquid assets – so once you’re invested, your money is locked away until they mature. This means that even good-quality mini-bonds should pay higher interest rates to compensate for this lack of liquidity. Many of the mini-bonds issued in recent years are of poor quality and don’t remunerate investors for the risks they are taking.