Mini-bond investors face total loss as Wellesley Finance seeks CVA

Alarm bells sounded back in February when Retail Bond Expert reported that auditors had called into question the financial health of Wellesley Finance – ‘More Concern for Mini-bond Investors as Auditors Question Wellesley Finance’ 

At the time David Hough of Blick Rothenberg, which reviewed the company’s accounts, said: ‘The financial statements could be a concern for anyone owed money by the business.’

Now thousands of investors in bonds issued by the firm run by Graham Wellesley, the 8th Earl Cowley stand to lose all of their money unless they agree to a rescue deal.

Wellesley Finance, encouraged ordinary savers to put millions of pounds into property development projects, many of which stalled during the pandemic; the company will today inform its 11,882 investors, owed about £118m that all bond payments will freeze.

The business has hired Duff & Phelps, the restructuring specialist, to draw up a company voluntary arrangement (CVA) to avoid what it said would be a ‘disorderly wind-down and likely insolvency which would result in an inferior outcome for all investors’.

Mr Wellesley said: ‘Today we are announcing some very disappointing news for all our investors. On behalf of management, I want to express how sorry we are that we have had to take these measures as it impacts all our loyal investors.’

Wellesley said he was sorry to have to take these measures, blaming the pandemic and regulatory environment for putting the company under increasing and unforeseen pressure, despite the fact that questions were clearly being asked before the virus struck.

‘Firstly, Covid-19 has changed the economic outlook by bringing delays and stress to the property development market,’ he said. 

‘bonds secured against property could expect to receive up to 78p in the £1 but holders of the £30m invested in unsecured bonds would get nothing’

‘Secondly, recently proposed changes to the regulatory environment have meant that Wellesley would no longer be able to raise funds via its listed bond investment programme which meant that the business model is no longer viable in the new climate.

‘Without the ability to raise further funds, there is a funding gap between the completion of loans with borrowers returning funds and the continued drawdown on more recent loans by developers to finish building development projects.’

A CVA is a form of insolvency whereby creditors are asked to agree to receive an agreed proportion of what they are owed; in this instance some will get significantly more than others because of how their investments are structured and what levels of security they were given.

If the firm were to go into administration, those holding bonds secured against property could expect to receive up to 78p in the £1 but holders of the £30m invested in unsecured bonds would get nothing.

There is little to cheer in the CVA for holders of the unsecured notes – they would receive just 1p in the £1 compared with 84p for secured investors; investors will be offered a cash lump sum, likely to be paid over 18 months.

They can achieve a slighter better outcome if they accept an equity stake in Wellesley instead of the cash option; unsecured bondholders may claw back up to 25p per £1 in this way and secured bondholders may get up to 90p, although quite how attractive it would be to become shareholders in the company is a matter of some conjecture.

In addition to Covid-19 Mr Wellesley’s assertion that one of the factors in the company’s demise is the regulatory change introduced by the Financial Conduct Authority earlier in the year that ban it, and other bond firms, from raising funds from retail investors.

He said that the restriction has had a ‘profound effect on the business’ which makes its business model ‘obsolete’; to which many thousands of ordinary savers and investors may justifiably reply ‘bloody good job’.

A measure of the strength of feeling can be found on social media this morning:

T –  ‘Tell you what Graham, shall we just be honest and call it an appallingly badly constructed virtual ponzi scheme that resulted in some Directors pocketing vast sums of investors money (via salaries and dividends of course, nothing illegal!)’

ABC – ‘If it looks fishy, smells fishy, flaps like a fish and tastes like a fish, then it probably is a fish.’

Mohandas – ‘Fraud squad should investigate this’

Miss S B Maxwell-Smith -‘Sounds to me that the “business model” recently stopped was a Ponzi scheme! Run out of money now because they relied on borrowing more to make current payments