Bonds have always been an investment opportunity for those who are looking for a long term, high return option, with recent market forces showing bonds popularity continuing with investors cashing in their shares to place in bonds. However, it is retail bonds that seemed to have captured the imagination of those wanting a return with the difference. Here, Daniel Terry, CEO of IntaCapital Swiss, that provides bespoke solutions for complex financial situations, looks at past retail bonds investments and the opportunity and risks involved in investing in them.
From beer to chocolate, to education and sport, whatever your pleasure there has been a retail bond for you. Many investors already know the return on retail bonds with those investing in companies like high street brand, John Lewis, seeing windfalls in cash following on from their investment of the £50 million scheme that offered up to £10,000 per investor for a return of 4.5% annual dividend and a further 2% in John Lewis or Waitrose vouchers. High street retailer, Tesco followed suit and exceeded expectations with a massive £125 million against its target of £ 50-£100m.
Following on from these high street retailers, came the surprise opportunity from one of the most established institutions The University of Cambridge offering a historic bond in October 2012 that raised over £1.5 bn to help research and accommodation at the university. With a 40 year maturity and a 3.75% payback over its life, the bond that was initially set out to raise £ 350m was massively oversubscribed with everyone wanting their “little bit of history”.
Next, we saw gourmet chocolate retailer, Hotel Chocolat, announce a second issue of its retail bond in 2014, with returns paid out to investors in chocolate instead of cash. With the aim to raise a further £10m in development capital from its first issuance that raised £5m, returns were made through a Hotel Chocolat card or monthly box of chocolates rather than cash.
Not so much pure “retail” but leisure and retail, The Jockey Club launched its first ever retail bond that raised £24.7m last May for the redevelopment of Cheltenham racecourse. With a lower maturity period of five years, it paid 7.75% per year return on investment, split between 4.75% in cash and 3% in “Rewards4Racing” loyalty points that could be redeemed at 15 racecourses nationwide on a refreshments, hospitality and membership fees.
At IntaCapital Swiss we are still seeing retail bonds being a popular option for investors globally. However, we believe there are a number of points to consider before deciding if they are the right investment for you.
- Do you understand how the bond works?
As we have seen in the examples above retail bonds can differ significantly in their benefits and interest. Talking to a professional broker like IntaCaptial Swiss will help you really understand the opportunities and risk fully before committing.
- How much can you afford to lose?
As with all investments there is always a risk. As many retail bonds are not protected by the Financial Services Compensation scheme, if the company was to go bust, your initial investment would be lost. This is particularly key at times when some well known retailers who were seen to be stalwarts of our high street are struggling to keep their financial heads above water.
- How long can you afford to invest?
Retail bonds tend to be mid to long term investments that can mature in five, ten years or even longer in the future. Think about your future financial position rather than how your finances are today as once committed your money could be tied up for the foreseeable future.
- Is the bond listed?
Retail bonds come in two types – retail and mini. Retail bonds are listed on London Stock Exchange and therefore you can sell before the bond matures. Mini bonds cannot be sold on before their maturity and often offer higher risk but higher return.
- What do you know about the company you are investing in?
How much do you know about the company? Even if the company has a good name, ensure you have a good broker who undertakes due diligence about the company you are investing in. It is not only the retailer’s current state of affairs to be considered but its future state.
Retail bonds can be a good addition to an investor’s portfolio for those who have funds that they want long term returns on, rather than a quick fix cash maker. Ensure you take robust advice and use a broker you trust rather than being attracted by the brand, its marketing and the appeal of “added value” perks like vouchers or free products.