Earn up to 10% with retail bonds

Even though the Bank of England (BoE) has hiked interest rates to levels not seen for over a decade, most savings accounts still do not offer an inflation-beating rate of interest. 

However, investors and savers might be able to earn a better return by looking at bonds. 

A few years back the London Stock Exchange launched a dedicated platform for bonds aimed at retail investors. 

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Called the Order Book for Retail Bonds (ORB) it was supposed to mimic the success of similar venues in Europe by lowering the hurdle for retail investors who want to play in the bond market. 

Traditionally, bonds are traded in lots of £100,000, making it all but impossible for the average investor to buy a portfolio of their choosing. However, on the ORB market, the majority of issues can be traded in lots as low as £100.  

Double-digit returns  

The ORB hasn’t really taken the market by storm. After the initial flurry of trading, new issues dried up, although a few firms continue to use the platform. International Personal Finance issued a retail bond late last year, maturing on the 12th of December 2027 and paying 12% per annum.  

This bond is still trading at around par (100p or the issue price) and the yield of 12% looks fairly attractive for a publicly listed company that is forecast to produce £108m in free cash flow this year.

Another specialist financial services firm that has made serial use of the retail order book is fintech buy-to-let and property development lending platform LendInvest. It has issued three bonds via the platform and has just closed the books on a fourth: paying 11.5% through to 3rd October 2026. 

The entity behind the bond is a subsidiary called Lendinvest Secured Income II which owns a pool of bridging loans, mainly to buy to let landlords. The bond is secured on this pool of loans with the holding company, Lendinvest providing a partial 20% guarantee from its own balance sheet. 

While the initial offer for this bond is now closed (it closed at 4 pm on 27 September 2023), it may be worth looking at on the secondary market as it has no call feature, meaning even if interest rates decline, the issuer cannot demand to repay the bond. 

That last point – the absence of a call - is worth contemplating. It is not unreasonable to presume that at some point in the next few years, interest rates will fall. In which case locking in a high yield from a respected – though ungraded – borrower isn’t a bad idea. 

Short duration  

I’d argue very short-duration retail bonds are even more attractive. These are retail bonds issued a few years ago and approaching maturity within the next two years. 

They are almost certainly going to be repaid at par and in many cases you can still buy the bonds at below par, picking up a small capital uplift as well as any interest payments in the meantime. 

A notable security is Regional REIT’s 4.5% bond due 6th August 2023. The company, which owns and leases regional offices, recently reported a solid set of figures for the first half of its financial year, with rent collection at 99% and a loan-to-value ratio of 52%. It doesn’t seem very likely that this bond won’t be repaid but the yield to maturity (capital growth and income) is close to 10% in total according to experts at Allia C&C.