Bonds and mini bonds, can they help?

First, what is the difference? 

Corporate (Listed) Bonds

Corporate bonds are used by many large companies to raise large sums of finance. Corporate bonds can be sold on the open market to investment institutions or private investors. The main features of a corporate bond are the nominal rate (the price at which the bonds are first sold on the market), the interest rate paid to the bond holder (this is usually a fixed rate of interest) and the redemption rate (the date at which the nominal value of the bond it to be repaid to the owner).

Advantages

  • Flexible way of raising debt capital
  • They can be secured or unsecured
  • You can decide what priority they take over other debts
  • They can offer a way of stabilising your company’s finances by having substantial debts on a fixed-rate interest (this offers some protection against variable interest rates or economic changes)
  • Not diluting the value of existing shareholdings – unlike issuing additional shares
  • Enabling more cash to be retained in the business – because the redemption date for bonds can be several years after the issue date

Disadvantages

  • Regular interest payments to bondholders – though interest may be fixed, the interest will usually have to be paid even if you make a loss
  • The potential for your business’ share value to be reduced if your profits decline – this is because bond interest payments take precedence over dividends
  • Bondholder restrictions – because investors are locking up their money for a potentially long period of time, they can impose certain covenants or undertakings on your business operations and financial performance to limit their risk
  • Ongoing contact with investors can be somewhat limited so changes to terms and conditions or waivers can be more difficult to obtain compared to dealing with bank lenders, who tend to maintain a closer relationship
  • Having to comply with various listing rules in order to increase the tradability of the bonds listed on an exchange – particularly, an obligation to make information on the company publicly available at the issue stage and regularly during the life of the bond
  • Falls under the ‘financial promotion’ regime and therefore any investment documentation will require Section 21 sign off

Mini-Bonds (Unlisted)

Mini-bonds are a relatively new debt instrument used by companies to raise finance. Although they are a new debt instrument they already have a colourful history. British cosmetic company King of Shaves was the first to tap into its customer base and issued the first mini-bond in the UK in 2009. Whilst not the most successful, other companies soon followed suit.
One of the most successful of these was that of Hotel Chocolat, who re-defined the mini-bond by offering investors chocolate in return for their investment in lieu of cash. The £50m raised by the John Lewis Partnership in 2011 was arguably a significant milestone for the product as this gave other companies the view of mini-bonds being a viable way to raise finance.

Advantages

  •  As mini-bonds are unlisted and non-transferable the regulations governing them are less stringent that for corporate bonds
  • Can offer something is lieu of cash (i.e. chocolate) therefore possibly reducing the cost of financing for the company
  • Product can be tailored to suit the audience
  • Flexible way of raising debt capital
  • Not diluting the value of existing shareholdings – unlike issuing additional shares
  • Enabling more cash to be retained in the business – because the redemption date for bonds can be several years after the issue date

Disadvantages

  • As companies issuing mini-bonds are usually borrowing directly from its customer base, a default on any repayments may have huge reputational impact
  • Regular interest payments to bondholders
  • Falls under the ‘financial promotion’ regime and therefore any investment documentation will require Section 21 sign off
  • Less flexible choice for investors as they cannot be traded or transferred and must be held until they mature

Related News Stories

As mentioned above, some of the most documented mini-bond issues have been by Hotel Chocolat and John Lewis. We have provided the links below to articles relating to these mini-bond issues.

http://www.telegraph.co.uk/finance/businessclub/7887060/Hotel-Chocolat-closes-chocolate-bond-with-3.7m-fundraising.html

https://www.independent.co.uk/news/business/news/john-lewis-raises-16350m-in-bonds-2246373.html

How Blue Water Capital and Compliance can help?
Should you wish to issue a bond, as an authorised firm Blue Water Capital and Compliance can issue and approve financial promotions for the purposes of Section 21 of the FSMA 2000. From verifying your existing financial promotion (offer) to preparing the complete financial promotion, we can assist you to distribute your bonds to potential investors.