Wasps’ 6.5% 2022 retail bond ‘….Should I stay or should I go now?’

To complete the line from the Clash anthem – ‘If I go, there will be trouble. And if I stay it will be double….’; many investors in the Wasps 6.5% 2022 retail bond (‘the bond’) must be wondering just that, sell or hold? – says Retail Bond Expert’s Mr Bond.

Notwithstanding the significant conference and events business described by then Chief Exec David Armstrong when Wasps purchased the Ricoh Arena (more) many will consider it first and foremost a rugby club.

Perhaps the fundamental flaw within the bond was best summarised by my last piece on the issue; ‘The woes of the club both on and off the pitch..’ It is difficult enough for investors to read the prospectus of an issue, and to understand their business model and how robust it maybe, in addition to deciding whether the coupon offered matches the risk.

‘If I go, there will be trouble. And if I stay it will be double…’

Mr Bond then asks, ‘how can an investor be expected to understand the vagaries of a sports team performance over seven seasons, a lifetime in professional sport’?  As such, is an institution of this type suited to retail investors? It’s easy to understand die-hard fans wanting to invest and support their team / club, after all sport is an emotional subject, whereas investments are not supposed to be!

Recent headlines confirm the issues that investors cannot possible have been able to consider when making the investment, e.g.

• rumours of a player revolt because of the lack of a promised training facility
• England stars Elliot Daly and Joe Launchbury rumoured to be set to leave over ‘broken promises’ on training facilities and contracts’; an exodus of its marquee players.

All of this, perhaps, raising two questions:

1. Are direct investments into bonds suitable for retail investors at all?
2. If so, what constitutes a ‘suitable’ issue / issuer?

We believe that the answer to first question is yes. Despite what the fund management industry might tell us, if the ownership of bonds is restricted to ‘professional investors’ only then there is a good argument for doing the same with equites, after-all debt ranks senior to equities in the event of a default.

‘Ultimately, investors must take responsibility for their own actions, Caveat Emptor’

As to what constitutes a suitable issuer, perhaps we should, perhaps unfashionably (Brexiters beware!), look to the European Union for guidance; the Prospectus Directive requires issuers of bonds to be a PLC, or overseas equivalent, and to issue either:

1. A Corporate Bond, backed by two-years audited accounts, or
2. Asset-Backed Security (‘ABS’)

The prime difference being that buyers of corporate bonds have access to the issuer’s balance sheet in the event of default, however they may be junior to other creditors, whereas investors in an ABS have access only to the assets held by the Issuer.

The other issue for buyers seems to be size and liquidity, the two are often mentioned together as it is always assumed that the larger the issue the more liquid it is. Mr Bond thinks that this is perhaps missing the point.

Firstly, what is meant by liquidity? For retail investors this is more likely being able to sell if the issuer appears to be having problems. In any market bid prices fall when there are more sellers than buyers, in a falling market a bid is a bid, take it as the next is likely to be worse! In addition, in times of stress liquidity dries up, look at 2007-2008 when even supposedly liquid markets locked.

Secondly, is liquidity a function of the size of the issue, or is the number of investors? Logically, the more investors an issue has the more liquid it should be.

What else drives suitability? Perhaps how safe is the investment? Is sovereign debt safer than corporate debt? Once investors move out of mature market sovereign debt (US, Germany, et al) to emerging countries (Venezuela, Zimbabwe, et al) the risk of default increases.

Then you have black swan events, Ireland and Greece required an EU bail-out, but they weren’t viewed as emerging market issuers!

Corporate debt is logically considered to be more risky than mature market sovereign debt; but are corporates such as Apple, riskier than, for example, Italy? Are non-investment grade issuers riskier than buying debt issued by emerging countries?

With hindsight we all know the correct answers and investment decisions, but none of us are gifted with seeing into the future (apologies to any readers who have this gift).

‘in a falling market a bid is a bid, take it as the next is likely to be worse!’

Ultimately, investors must take responsibility for their own actions, Caveat Emptor, and in return issuers must provide clear and accurate information in a format an investor can understand.

Maybe, the length of prospectuses needs to be considered, 100 pages plus? Perhaps, a separate summary that points investors to the risks and relevant sections in the prospectus is required. A good example of this is the Information Booklet used by ORB issuers, it isn’t a marketing tool its an abbreviated summary of the prospectus that every investor should be expected to read before deciding to invest.

Please remember this; if everything relevant is detailed in there don’t come crying if the issue has problems, this isn’t a shop where, if you keep the bag and receipt, you can get a refund!

So what’s the answer to the question in the heading?

From a high of 111 in November 2016, the bond recently dipped to a low of 85.5 on Star Wars Day – May the fourth – on reports of reporting irregularities and speculation on Wasps’ ability to service its debt (Sting in the tale?…….)

So, at the risk of being accused of fudging the issue, I’m going to leave it hanging as a very personal choice; if you invested as a diehard fan and don’t believe that Wasps’ will be the first default in the history of ORB, then you may be comfortable to hang on in there taking what is a relatively generous coupon compared with more recent issues.

However, if you believe that the rather hairy stories that have appeared in the Coventry Telegraph, or on the back pages of many of the nationals, means that the club faces an existential threat, you may think that the ninety two-and-a-quarter bid price that the bond clawed its way back to on its most recent day of trading represents an exit price that allows you to exit with dignity, having banked some decent coupons along the way.