The bond that could pay you 12% a year

I’m on a mission to bring you the best income strategies that I can find.

Today I’ll show you how you could get a 12% annual return on your money. What’s more, you can lock in that rate until the end of 2018.

Sound good?

OK. I know what you’re thinking. There’s no way that’s possible – no one can guarantee that.

That’s true – no investment is guaranteed to safeguard your money and make it grow. But trust me on this – I think this is as good a way to earn a solid income on your savings as you’ll find.

The overlooked asset class you should be using

The equity market is all over the place. At the same time, income on cash has hit rock bottom. But there’s one area of the market that should be of great interest to investors. And yet most private investors completely miss it.

I’m talking about bonds.

Unlike equities – where, largely speaking, holders are totally unprotected – with bonds you can get a lot more security. You can buy them just as easily as shares and many of them can be held in an ISA, too.

So today I want to show you what I think is a cracking deal in the bond market. If you’ve got a portion of cash you want to earn you an income, I think this could prove a great choice.

The bond I want to look at is the Enterprise Inns 6.5% December 2018 (ISIN: XS0163019143). It’ll currently cost you 75p to buy. That means instead of getting just 6.5% on your money, it’ll be nearer 8.7%.

But it gets better yet.

At the end of 2018 you’re promised £1 back for every 75p you shell out on a bond today. That gives you a capital profit of 25p for every 75p you put up. If you add that return to the running yield on the bond, you’ll find that your annualised return is 12.1%. That’s known as the gross redemption yield (GRY).

That sounds great. But you’re probably wondering just how safe that is.

This £600m bond is backed by £1bn of assets

Enterprise Inns (ETI) is the largest pub landlord in Britain. A quick glance at its stock valuation and you’ll see they’re not highly regarded by the market. On a forecast p/e of less than two, investors are clearly sceptical.

That’s fair enough. The pub game hasn’t been easy over recent years. Worse, ETI has used many of its pubs as security as they’ve loaded up on debt. It’s just like a homeowner with a massive mortgage.

But that doesn’t bother me. I’m not interested in buying shares in the business – after all, they’re not even paying a dividend. I’m interested in their bonds.

And the generous terms extended to the bondholders are precisely why the equities are looking dodgy.

With a bond, as well as getting your interest payments, you get your money back at maturity. That means the issuer (ETI in this case) will need to find that money from somewhere. If they can’t, then bondholders start to get nervous.

I think that in this case, the market has gotten a little too nervous. The point with this particular bond is that it’s secured against a ring-fenced portfolio of pubs. If ETI can’t pay back the bond, then they’ll hand the keys (and rents) over to bondholders.

This from ETI’s latest report and accounts:

“[We] expect to refinance the GBP600 million 2018 bond on maturity, bearing in mind that it will always be secured on a portfolio of pubs with an up-to-date valuation of GBP1 billion and interest cover of two times.”

So based on a recent valuation, the pubs that the bond is secured against are worth £1bn. Given that the bond issue is for £600m, there’s currently decent and tangible security for bondholders here. What’s more, these pubs are currently generating revenue that covers the bond’s interest twice-over!   

What you need to know about the risks

Now what more do you want? The equivalent of 12% a year for nearly seven years. And you’ll have a mortgage over a portfolio of pubs owned by Britain’s largest pub landlord. I love it.

MoneyWeek videos

Video tutorial: retail bondsWatch this before buying retail bonds

Tim Bennett on what you should know before you buy retail bonds.

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Sounds good, but of course there are always risks. As bondholders we want a fixed income. We don’t want to become pub landlords! And anyway, if ETI can’t afford to pay bondholders back and things get messy, there’ll doubtless be costs involved with realising the value of these assets.

And remember, the valuation on the pub estate could go down. If pub revenues fall, then the valuation on the pub will likely follow. But then again, on ETI’s figures they’d have to fall 40% before we start to get nervous.

The yield (and security) we’re getting tells us that some investors are worried. We shouldn’t ignore that. That’s why I’d only advise putting a proportion of your capital into a bond like this.

Though I think this bond is cheap, remember it can always get cheaper. Like stocks, these bonds trade in the open market. If you want to cash out before 2018, you may get back less than you put in. On the flip side, if I’m right and investors warm to the bond, you could cash out early for a profit.

Don’t ignore the bond market

So I wouldn’t go ‘all-in’. My point is that you shouldn’t ignore bonds. They can be a great way to make your money work, especially when interest rates are near zero and stock markets are shaky.

What I’d do is build a diversified portfolio of bonds covering different maturities and different sectors of the market. That way, you spread your risk. This ETI bond looks to me like a good one to start with.

If you’re looking for a secure income stream to beat inflation then there aren’t exactly that many options on the table. High yield shares are one. Bonds are a great alternative.

Just a couple of tips on buying bonds. Not all stockbrokers allow you to trade retail bonds. If yours doesn’t, check out our broker comparison page to find one that will.

Oh, and as with most of these retail bonds, you can only buy this one in multiples of 1,000 with a minimum investment of £1,000. You can get more information on the bond by visiting the stock exchange’s website.

Action to take: BUY Enterprise Inns 6.5% December 2018 bond

Enterprise Inns bonds

ISIN: XS0163019143
Currency: UK sterling
Current price: 75p
Minimum investment: £1,000
Further details: London Stock Exchange
Five-year performance: 2007 -2.12% | 2008 -29.08% | 2009 +10.08% | 2010 +6.35% | 2011 +18.35%

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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21 Responses

  1. 04/11/2011, Esprit wrote

    Guys, you really need to check the Brazilian bond market where it’s quite common to get double the return you’re suggesting here.

  2. 04/11/2011, Col wrote

    This is a new area for me. I see from the Stock Exchange website that interest is paid every 6 month, the next payment being due on 6/12. So, in effect, one could get an almost instant 3.25% (based on face value, so in reality much better) by buying them in the near future. My question is: is there the equivalent of an ex-dividend date? And where do you find it, as could not see one on the LSE website. Thanks.

  3. 05/11/2011, Joao Falcao wrote

    Dear Bengt,
    Thank you for your informing and clearfying newsletter the Right Side.I’ve read your last article about retail bonds.It is very interesting.Could you please refer any paid independent financial advisory newsletter for the NG as well as un online brooker that will allow to trade all these bonds and complete the information in your magnificent article concerning retail bonds.
    Due to the terrible mess in the euroland investing in GBP will be a alternative for the years ahead.
    Regards,
    Joao Falcao MD Lisbon Portugal

  4. 05/11/2011, Joao Falcao wrote

    Dear Bengt,
    Thank you for your informing and clearfying newsletter the Right Side.I’ve read your last article about retail bonds.It is very interesting.Could you please refer any paid independent financial advisory newsletter for the NG as well as un online brooker that will allow to trade all these bonds and complete the information in your magnificent article concerning retail bonds.
    Due to the terrible mess in the euroland investing in GBP will be a alternative for the years ahead.
    Regards,
    Joao Falcao MD Lisbon Portugal

  5. 05/11/2011, INTERCEPTOR wrote

    Hi, Bengt,
    Thanks for the bond info, over the years my equity investing has not been exactly successful and I intend to switch into bonds near retirement time. For a future article you could write about the pro’s and con’s of bond investing, and how beginners get started. Assessment of risk seems to play a big part in weighing up to buy or not. Any web sites etc would also help.
    Best regards.

  6. 05/11/2011, Robbo wrote

    Excellent stuff but like Interceptor it would be good to bone up on this form of investment – any tips on web sites or articles. I am a Money Week reader and manage my investments on line with Hargreaves Lansdown.
    Thanks
    Robbo

  7. 06/11/2011, Esprit wrote

    Col. Whilst it’s true that the bond is always earning interest; it follows that the timing of its purchase should be taken into consideration. e.g. In this example the upcoming coupon payment date is 06/12/2011 therefore interest has been accruing since the last coupon date which would have been 06/06/2011 and continuing at the rate of 6.5%. A purchase during this month, say today 06/11/2011, requires that you pay the prevailing purchase price plus the five months interest accrued since 06/06/2011. Then on the 06/12/2011 you would receive the full interest accrued over the past six mounts.
    Assuming the minimum investment of 1000 at the quoted rate of £0.75, the cost would be: 1000×0.75 = £750 + five months accrued interest =£27.08 plus charges [??] so no “instant 3.25%”

  8. 07/11/2011, Matt wrote

    Hi Bengt

    On the LSE site you gave, the Coupon Ex Date is given as 31st Dec 2099. Is this a typo? If not, please can you explain what it means.

    Thanks Matt

  9. 07/11/2011, altuary wrote

    Hi, I am looking to buy these bonds via ISA. Can someone recommend a good deal for this? I am not sure if every broker can offer such bonds hence the question.

    Thanks

  10. 08/11/2011, James Keble wrote

    My fear of GBP bonds is that inflation will destroy their value. With all the quantitive easing already issued, the liabilities to the IMF and EIB, surely we will no get below 5% inflation before 2018, which exactly wipes out your capital gain. Pubs are closing at a terrifying rate, who is to say that there will be enough remaining to back up this bond ? On the other hand what income producing alternative has the small investor got – other than high yield shares? Nothing seems safe in a world facing depression. If you go for anything it may be wise to invest in the BRIC countries rather than here . Wish I knew!

  11. 08/11/2011, P Nelson wrote

    You can buy his bond through Hargreaves Landsdown but there is about a 7 -8% spread. I looked at this bond but I don’t feel comfortable investing in Enterprise Inns.

  12. 08/11/2011, Sam wrote

    With higher risk bonds surely it’s better to spread your risk widely. I invested in the Royal London Sterling Extra Yield bond via HL last November. Its value has increased by 7.88% and quarterly payments have totalled 8.55% of the amount invested. That’s with no further tax to pay in my ISA. The yield presently quoted is 7%. The bond also has exposure to Enterprise Inn bonds.

  13. 08/11/2011, KEVIN wrote

    My broker informed me that I would need £75000 as a minimum investment into the Enterprise Inns Bond, a great deal more than I had expected. Is the broker correct. I did not invest!

  14. 08/11/2011, Grumpy Old Man wrote

    Hmmm,anyone investing in anything to do with Enterprise Inns needs to think very carefully before handing over their ‘hardearned’.To all intents and purposes the business model is broken and imho, the company has no long term future.
    Yes,I know you are not buying the shares,but I for one will be having nothing to do with this bond.
    Caveat Emptor!Be very wary of pub valuations!

  15. 22/12/2011, ropa wrote

    Bengt – Ssshhh – You are giving away a nice secret!

    Kevin – Your broker is wrong – unless he/she has a self imposed limit. I have £10k nominal purchased for around £7,200 as I remember it. I have bought Enterprise as apart of my bond portfolio – it is risky but as pointed out it is collateralised too and not on all of the company’s estate. In the same vein I have just invested in the new NatGrid and ICP bonds. I already have Tesco, LLOY, RBS, Citi, ProvFin and the Co-op. I’m not quite bold enough though to buy SocGen.

    altuary – if it is not too late try sippdeal.

    matt – I think the date is a mistake.

    Season’s greetings to all.

    R

  16. 27/12/2011, Carl Jones wrote

    Beware Enterprise Inns!
    I have in the near past had a close working relationship with Enterprise and can tell you all is not well. In brief….a few £billion owed to the bank, sales falling like a lead balloon, pubs closing at 40 a week, parliamentary enquiry into thier tennant /pubco relationship, area Managers leaving at an alarming rate due to stress and the estate on which your bonds are guaranteed is over valued by around 50%. Your getting 9.4% yield for a reason, Stick with something less risky.

  17. 29/12/2011, Carl Jones wrote

    Chief Executive of Enerprise Inns Ted Tuppen has just lost £10,000 of his own money in 1 month investing in Enterprise. Standard and Poors has just downgraded thier long term corporate credit rating after concerns about group debt saw shares tumble 35% over the festive period alone. You would be better going into Ladbrookes and placing your money on a 50/1 shot cause your more likely to get your money back!

  18. 03/01/2012, GeoffB wrote

    Some interesting comment in this article too: http://www.telegraph.co.uk/finance/personalfinance/investing/4600899/Fixed-interest-of-6.4pc-for-the-next-10-years.-Whats-the-catch.html.

    Bengt – I take your point about the bonds being secured on mortgages but what happens if the company breaks the covenants?

  19. 10/06/2012, Steve wrote

    Charts software (sharescope) shows two versions of the ‘Enterprise Inns 6.5% December 2018′, one with gross redemption yield of 11.7% and the other 8.72%. The former does not show an ISIN, and the latter is stated as having ISIN: XS0163019143. The prices are also slightly different. Any ideas why there are two versions?

  20. 11/06/2012, Robertc wrote

    When buying you pay price plus gross accumulated interest. Then you receive gross interest. Then you have to pay tax on interest – an immediate loss of at least 20% of interest ??? Please explain if this is not true!

  21. 26/06/2012, Virendra wrote

    Bengt
    Excellent read but like Steve i am confused.I have read the offering circular on Barclays Stockbrokers website.XS0163019143 refers to a
    £250 million bond and not £600million as Bengt mentions.
    The good thing is that that the valuation of the security must be 1.66 times greater than the value at par of the bond.The circular also mentions annual valuations,coupon cover of two times income and trustees to monitor etcThe question is would you buy a portfolio of pubs vauked at 416 million for 250 million?I think even in the worst case scenario the bonds will be redeemed at par.

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