A retail bond for income investors with a 6.5% yield

The London Retail Bond Market was launched a few years ago to help private investors buy corporate bonds. It seemed like 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. It has never really taken off, however, and in recent years new issues have trickled down to a trickle, mostly from smaller charities.

However, some commercial issuers have snapped up the retail bond market, including 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 higher yield of 6.5%. Even in an era of sharp interest rate increasesthis may be attractive to some investors.

The new bond will mature on August 8, 2027. It has a face value of £100, like most retail bonds, and will pay an interest rate of 6.5% per annum (£6.50 per bond), with interest paid twice a year on February 8 and August 8. The minimum investment at launch is £1,000, but will be traded in smaller denominations after launch at London Stock Exchange Retail Bond Order Book. The offering period for the launch is expected to end at 4:00 p.m. on August 3, 2022. LendInvest is also offering holders of its outstanding bonds the opportunity to redeem them for this new issue.

Property Backed Loans

The first step with a link like this is to understand security. LendInvest is a listed company established 14 years ago. Provides bridge, development, and buy-to-let loans. Its unique selling point is that it uses its own platform to quickly complete loans for borrowers and securitises them for institutional investors. The latest full-year results showed assets under management grew 36% to £2.1bn from a year earlier, and adjusted earnings before interest, tax, depreciation and amortization (Ebitda) rose 90% to £20bn. .3 million pounds sterling.

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 balance sheet consisting of a basket of property-backed loans with an average loan-to-value of around 65% to 70%. There is a 20% partial guarantee from LendInvest, which means that if the real estate market crashes, loans go into default, and don’t produce enough cash to pay off the bonds, LendInvest will make up the shortfall in interest or principal up to a maximum of 20%.

For investors satisfied with underlying credit risk, the next question is whether you want to invest in corporate bonds now. In market terms, the timing looks dire. Inflation hovers around 10%, so a return below that is eroding capital. Rates are rising, which will have a domino effect on corporate bond values. In terms of direct competition, five-year UK government bonds now yield 1.67%, so you’ll get a 5% improvement from a riskier lender. The S&P UK Investment Grade Corporate Bond Index offers a return of 3.9%, so you’ll get an extra 2.5%.

However, many investors see retail bonds as products to hold to maturity and let the income flow in, so the effect of the markets on bond values ​​doesn’t matter as much. The two key points are whether you’re happy with the credit risk and whether the return on offer over the full five years is enough to reward you for taking that risk. That depends on whether you think inflation will stay high for all five years and whether rates will rise 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 bonus gives you a 3% boost for taking on extra risk. For some income-oriented investors, that will seem much more attractive.

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