Investors Sweat as Mini-bond Issuer Goes Bust
Almost one thousand UK investors have been left worrying and wondering if they will get any of the £8.15 million back they collectively invested in two mini-bonds issued by Providence Financial.
The first bond was issued in late 2014 and the second in 2015, promising quarterly coupons totaling 8.25% and 7.5% p.a. respectively.
Retail Bond Expert and sister site DIY Investor have consistently called for investors to be wary of mini-bonds and to be fully apprised of the risk they may be exposed to and the differences that exist between mini-bonds and other forms of fixed income products such as retail bonds.
Approximately 825 investors have money tied up in the bond – nearly £10,000 each.
‘too good to be true’ Providence Financial bonds prove to be just that’
The first sign that something was amiss came at the start of the summer when an interest payment was late and now Providence Bonds PLC, Providence Bonds II PLC and the Guernsey based holding company Providence Global Ltd have now all gone into administration.
With interest and income so hard to come by, many may have had their heads turned by such attractive headline rates, but coming so hot on the heels of the £7 million failure of Secured Energy Bonds, the old adage ‘those who fail to learn from history are doomed to repeat it’ has rarely been more poignant.
Deloitte are handling the liquidation and it wrote to bond holders last week explaining the status but it is unclear whether they can claw back any cash for investors.
The UK mini-bond documents were approved by Financial Conduct Authority related company Independent Portfolio Managers but they are not covered under the Financial Services Compensation Scheme meaning it will be hard for investors to get their cash back.
Independent Portfolio Managers was also responsible for signing off on Secured Energy Bonds; those left clutching its worthless paper were told by UK financial regulators that there cases could not be looked at, but to instead write to firms who plugged the bond and take cases to the Financial Ombudsman.
‘those who fail to learn from history are doomed to repeat it’
Providence Group specialised in factoring for small and medium-sized businesses across the globe, and its administration is linked to its US parent company which is being investigated for fraud.
According to an U.S. Securities and Exchange Commission filing, Providence Financial told US investors their money would be spent factoring accounts in Brazil; the company said that its UK arm was separate from the US, but it is unclear whether UK money has also been used in Brazil.
Deloitte has told investors it is looking into what assets the firm has, what recoveries, if any, can be made for investors and the manner in which it conducted its business; it has set up a website for Providence investors: www.deloitte.com/uk/providencebonds
MINI-BONDS AND RETAIL BONDS: THE BASICS
- As with any investment, mini-bonds and retail bonds can be risky investment and broadly speaking the size of the coupon indicates the chances that the issuer – the borrower – will default and be unable to pay back the loan.
- Cash is always at risk, but ensuring that you know what you are getting into is essential before you make any investment and the London Stock Exchange’s Order Book for Retail Bonds (ORB)was intended to address many of the concerns associated with investing in ‘debt securities’; there is no FSCS safety net.
- A key difference between mini-bonds and retail bonds is secondary market liquidity, or a lack thereof; retail bonds listed on ORB can be traded during market hours and such has been their popularity, many trade at above 100 or ‘par’ – the rate at which they returned at the end of the loan period.
- Mini-bonds, which may offer non-financial rewards as well as, or instead of cash coupons, have no secondary market; buy a five year mini-bond, and you’ll be sitting on it until the company, hopefully, redeems it.
- When researching a company as a potential bond investment it is vital to research all recent reports and accounts from the issuer thoroughly, and also to understand what company is actually issuing the bond – i.e. is it a special purpose vehicle established specifically for the purpose.
- Look for healthy and consistent cash flow is healthy and consistent and look at the interest cover – the ratio that shows how easily a firm will be able to meet interest repayments on its debt; divide earnings before interest and taxes and amortisation (EBITA) by what it spends on paying interest.
- Understand what the bond debt is secured against, and where you would be in the pecking order of creditors if the issuer went bust; this should be included in the prospectus of the bond.
- Decide whether you want to be exposed to the risk of buying a bond in a single company, or spread it by buying a bond fund.
- However eye-catching, a high interest rate generally reflects the high level of risk your money is exposed to; is it worth it? Bear in mind that it can be harder to judge the risk involved in investing in some bonds than in others
- If the issuer is listed, check the dividend yield on its ordinary shares to see how it compares with the return on the bond.