A retail bond for income investors with a 6.5% yield

London’s retail bond market was launched a few years ago to help private investors buy corporate bonds. It seemed a good idea at the time – private investors in the US and Italy regularly buy individual fixed-income securities, such as tax-efficient municipal bonds. Yet it has never really taken off and in recent years new issuance has slowed to a trickle, mostly from smaller charities.

However, a few commercial issuers have stuck with the retail bond market, among them alternative lender LendInvest. It issued two five-year bonds: one in 2017, paying 5.25%, and another in 2018, paying 5.375%. Both were oversubscribed. The company has now announced a third five-year bond, this time with a substantially increased yield of 6.5%. Even in an era of sharply rising interest rates, this may appeal to some investors.

The new bond will mature on 8 August 2027. It has a face value of £100 – in common with most retail bonds – and will pay an interest rate of 6.5% per annum (£6.50 per bond), with interest paid twice yearly on 8 February and 8 August. The minimum investment at launch is £1,000, but will trade in smaller denominations after launch on the London Stock Exchange’s order book for retail bonds. The offer period for the launch is expected to close at 4pm on 3 August 2022. LendInvest is also offering holders of its outstanding bonds the opportunity to exchange them for this new issue.

Property-backed loans

The first step with a bond like this is to understand the security. LendInvest is an Aim-listed company set up 14 years ago. It makes bridging, development and buy-to-let loans. Its unique selling point is that it uses its own platform to complete loans quickly for borrowers and securitises them for institutional investors. Latest annual results showed assets under management grew 36% to £2.1bn from the year before, and adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) was up 90% to £20.3m.

The bond is being issued by LendInvest Secured Income II, a special purpose vehicle that is a subsidiary of LendInvest. The subsidiary has its own ring-fenced balance sheet that consists of a basket of property-backed loans with an average loan-to-value of around 65% to 70%. There’s a partial 20% guarantee by LendInvest, which means that if the property market collapses, the loans go into default and don’t produce enough cash to repay the bonds, LendInvest will make up the shortfall in interest or principal to a maximum of 20%.

For investors content with the underlying credit risk, the next question is whether you want to invest in a corporate bond now. In market terms, the timing looks terrible. Inflation is around 10%, so a yield below that is eroding capital. Rates are going up, which will have a knock-on effect on corporate bond values. In terms of direct competition, UK government five-year bonds now yield 1.67% so you are getting 5% uplift from a riskier lender. The S&P UK Investment Grade Corporate Bond index yields 3.9%, so you’re getting an extra 2.5% on that.

However, many investors look at retail bonds as products to hold to maturity and let the income roll in, so the effect of markets on bond values don’t matter so much. The two key points are whether you are happy with the credit risk and whether the yield on offer for the full five years is enough to reward you for taking that risk. That hinges on whether you think inflation will remain elevated for the five years and whether rates will surge and then stay there for many years.

This product is not like a savings account – your capital is at risk here. But for reference, the best rate you can get on a five-year fixed-rate savings account is 3.3%. So the LendInvest bond gives you a 3% uplift for taking extra risk. For some income-orientated investors, that will look much more attractive.