Lending to businesses is a key pillar of alternative finance. The main innovation of the likes of FundingCircle and MarketInvoice is to provide a marketplace whereby individual investors can buy bits of loans to small and medium-sized businesses. It's great for income-hungry investors, with potential annual yields of well over 5%. But it's also riskier than many other asset classes: if you lend to a smaller business, there's always the risk it might go bust. You can, of course, diversify between dozens, if not hundreds, of businesses on a platform like FundingCircle. But you can't diversify away the risk of lending to small firms as an asset class.
So you might prefer to invest in larger businesses. Sadly, big businesses don't generally want smaller investors investing in their loans and bonds directly. The few that do tend to encourage investors to use retail bond structures, usually accessed via the London stockmarket. But this market doesn't have quite the range of choice I'd like. Many big institutional debt specialists increasingly prefer an alternative structure "loan notes".
These incredibly useful investment products are sponsored and issued by big banks and offer what's called "senior, secured" access to a corporate issuer's balance sheet. They're often issued by well-known brands, so there's plenty of data available about the underlying business. And they offer one key benefit floating rate payouts, usually built around a margin above Libor (a key interest rate benchmark). That means those yields could rise (or fall) if rates move, and/or inflation starts to shoot up.
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The notes can yield anything from 3% to 7% (depending on the issuer), with maturities of anything from a few years up to ten years. Most retail corporate bonds, by contrast, are not floating rate: many boast yields of less than 5%, and several are "subordinated" other lenders have a more senior claim on the business's assets.So how do you access senior secured loan notes? There are loan note investment trusts on the London stockmarket.
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One from Alcentra European Floating Rate Income Fund (LSE: AEFS) invests in European notes, and yields 5.3%. Another from JPMorgan Senior Secured Loan Fund (LSE: JPSL) invests in US senior notes and yields 5.6%. Both are excellent for income investors looking for a decent yield from an asset class with surprisingly low volatility. Defaults are a factor, of course they spiked in 2009 and 2011 but a good fund manager should be able to avoid the most obvious basket cases.
But some investors like the DIY approach one reason why the likes of FundingCircle have been so successful. They like to pick their borrowers, understand the unique risks of each,then build their own portfolio of loans. Loan note funds can't cater to thiscrowd but WiseAlpha, a new platform founded by Rezaah Ahmad, a former senior secured loans trader, can.
Like FundingCircle, WiseAlpha offers a marketplace where you can trade loans to businesses. But the businesses are well-known names Virgin Media, United Biscuits, the RAC, Worldpay and Eddie Stobart. Some are publicly listed, others owned by private equity. The WiseAlpha platform launched last week and currently only has these five issuers, but by the end of the year that should be up to 15 or 20.
The maturities of the notes go from 2017 through to 2021, with yields ranging from 4% to 6%. Most notes run a "bullet repayment" structure you are repaid at the end of the loan note term. All the notes on this platform are senior, unsecured, floating-rate notes. Like FundingCircle, there is a secondary marketplace where you can sell the notes on. This is built around a "matched bargain" structure you have to wait for another buyer to come along before you can sell (you can't sell these notes via your stockbroker like a retail bond).
Investments start from as little as £100 (although I suspect the main users initially will be high-net-worth investors and family offices). The platform makes its money by charging a 1% platform fee on funds invested. You have to take an online test to prove that you know what you are doing, and that you haven't invested more than 10% of your total assets in this platform as with many of the crowdfunding platforms.
There are some important things tobear in mind. Firstly, you need to usethe platform to make the trades.You can't just ring up your broker or adviser and ask them to pop the notes into your existing pension or individual savings account (Isa). Also, you don't own the same notes as the big institutional investors.
WiseAlpha Ltd, administered by Apex Fund Services (a big fiduciary administration specialist), buys the underlying notes and then in effect reissues them as WiseAlpha notes, fully backed by the underlying corporate notes. The Apex connection should offer investors the surety that, even if the platform goes bust, you'll still own your underlying notes.
Also, the matched bargain secondary market isn't as liquid as a stockbroker account, although hopefully that will improve over time. In any case, I imagine many investors will prefer to hold the notes to maturity. Also be aware that, although volatility in the underlying notes is relatively low, a well-known name is no guarantee that a company won't go bust.
In all, this new platform is a cracking idea and its products could sit alongside both P2P loans and more conventional retail corporate bonds. It shouldn't be your only source of income (far from it), but if you are after a robust, sustainable yield from businesses you can trust (and research), WiseAlpha could be a good home for, say, 10% to 20% of your income portfolio.
