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Bond of the Week: 21 March 2018

Lendinvest 5.375% 2023

    
Lendinvest 5.375% 2023

Lendinvest, one of the plethora of alternative financial companies, has launched a retail bond. It is their second issue (launched off a £500 million programme). For a reason I can no longer remember I did not write about their previous bond. The last £50 million issue, Lendinvest 5.25% August 2022, was a success and traded up to just over 102%. Upon the announcement of the new issue the price has retreated to 99.75-101. The new issue terms are:

 

Information required

Status

Issuer

LendInvest Secured Income plc

Guarantor

LendInvest Limited

Launch Date/Final Terms date/
Information Booklet date:

Thursday 15th March 2018
 

Offer Period start/end time:

 

the period from 15th Mar until 12 noon (London time) on 29th March 2018 (subject to early closure)

Issue Date:

6th April 2018

Specified Denominations:

£100

Minimum Initial Subscription:

£2,000

Form of Notes:

Registered

Coupon %:
 

5.375% per annum payable in two equal semi-annual instalments in arrear

Issue Price:

100%

Interest Payment Dates:

6th April and 6th October in each year

First Interest Payment Date:

6th October 2018

Maturity date:

6th October 2023

Make-whole Call Option / UK Govt Treasury Stock details (plus Margin):

2.25% UK Govt Treasury Stock due 7 September 2023 (plus 1.00% Redemption Margin)

ISIN / Common Code:

XS1791022186/ 179102218

Delivery/Settlement method:
 

Free of payment (Euroclear, Clearstream, Luxembourg and CREST)

Names and Addresses of Lead Manage


 

Peel Hunt LLP
Moor House
120 London Wall
London EC2Y 5ET

 

What’s Lendinvest’s edge to distinguish them from all the other new financial companies? It is bridging finance. They are starting to do some buy-to-let and a small amount of development finance but their principal activity to date has been the provision of bridging finance.

Bridging finance is offered for up to a year, (typically the loans last six months as they are repayable without penalty at any time).  Loans are provided to purchase already existing buildings and not green field or brownfield sites for development. A factory bought for conversion into homes would not qualify.

The structure.

Lendinvest Secured Income PLC (the issuer) will use the proceeds of the bond to finance bridging and buy-to-let loans. The holding company has other subsidiaries (or buckets as they put it) which also lend – each has their own distinguishing characteristics. There are no cross guarantees or risk of contamination.

The bond will be the only debt of the issuer, so in effect bond holders are secured (1x) on the assets of Lendinvest Secured Income. The bond has a floating charge over the assets of the company.

In addition there is a parental guarantee (Lendinvest Ltd). The net assets of the parent as of September 2017 were £9.32million.

I have previously invested in other alternative financial companies and in those cases the bonds have been over-secured (in the region of 1.2x). However, in this case, as I see it, bond holders are swapping over-collateralisation for a parental guarantee. The loans, being of a short term nature, are also of a reasonable quality.

The loans.

Although the issuer has the ability to hold up to 10% in buy-to-let loans, in practice all to nearly all the loans advanced will be bridging finance. Buy-to-let borrowers will be paying less for their mortgages than the coupon on the bond so the provision to deviate from bridging loans is to allow the soaking up of any unutilised spare cash – i.e. a low interest rate is better than no interest rate.

The bridging loans historically have an LTV of 62%. The terms of the bond allow up to a weighted average of 75% LTV on the portfolio and up to 82% on a single case. The loans advanced are normally for a period of six months (occasionally up to a year). Loan size varies from £100,000 to £7.5 million. Current interest rates are from 8-12%. At the height of the financial crisis the going rate for bridging loans hit 18% - the current level is back to the pre-financial crisis period so management think this should represent a floor in rates.

Why do property buyers take out bridging loans?
Lendinvest does not fund owner occupiers but investors. What they offer is speed. It currently takes about three months (according to Lendinvest’s management) to get a mortgage whereas they aim to make an offer in two weeks. Given investors are likely to want to move fast (and some 30% have made their purchase at auction where there is a fixed period to complete) using expensive bridging finance is an incidental cost of business and given the short periods involved the interest rate is not material to their business.

Covenants

1. Total value of the assets which in aggregate make up the security will be at least equal to 97.5% of the nominal amount of the bond after 12 months and 100% after 15 months.

2. Interest receivable to exceed interest payable to bondholders by a ratio of 1.2:1. (On the existing bond the ratio is currently around 1.9:1).
Loan eligibility requirements include a maximum £3 million if secured against a single property or 10% of all notes if secured against multiple properties. There is also a single borrower limit of £5 million or 10% of all Notes outstanding.


Some figures from the consolidated financial statement of the parent.

                        6 months 9/17       Year to 3/17     Year to 3/16            Year to 3/15

Total assets       £175mil                  £112mil           £116 mil                £52 mil         

Revenue            £15mil                   £22.1 mil         £18.7mil                £7.2mil

Profit/ loss        £929,000                (£1.06mil)       £2mil                     £2.8mil         

Total equity     £9.32mil                 £8.34mil          £9.4mil                  £1.1mil

I understand the loss for year end March 2017 relates to buying out a shareholder and that they broadly expect the profit for the second half of this year to match the first half (so around £2million for the year) and thereafter they expect profit to grow.
Total lending since 2008 has been £1.1billion.
The risks and mitigating factors.

1. There is the obvious risk of a severe deterioration in the property market. As the properties are bought for a business purpose this may make them a slightly more risky prospect than first mortgages on owner occupied houses. Many of the loans will be secured on slightly tatty properties that will need money spent on them for refurbishment.
If they average the current LTV rate of 62% there is good protection against a fall in house values. Equally significantly, providing a downturn in the property market is not sudden and precipitous, the short term nature of bridging finance should provide a constant updating of loan to property values. The LTV’s will adjust as old loans redeem and new loans are priced to current market levels.

2. The bond is for a five and a half year period but the bridging loans last a maximum of 12 months. There is the risk Lendinvest will not be able to reinvest at a rate to cover the coupon on the bond.

Given bridging loans are now at pre-crisis levels it is arguable they should go no lower (and with rates possibly to increase they may even firm). With a ratio of 1.9:1 (latest figures) in interest cover there is a good interest rate cushion/ margin of safety.

3. There is no overcollateralization so in theory there is the risk of a single default causing a problem.

The parental guarantee provides a protective umbrella – they would not allow a default, except in extremis, to cause a problem or they would jeopardise the entire company. With a net interest margin of 4-5% the issuer will build up cash to pay for any single issuer defaults (although surplus cash can be paid to the holding company).

4. Lendinvest is a modest sized company. Bond investors need them to keep qualified staff in order to continue advancing new bridging loans because they only have a life of around six months. If bond funds are not re-invested the 5.375% bond coupon will not be paid. Therefore in the event of a downturn in business or a decision the overall business is no longer viable, a passive run off (unless very near to maturity of the bond) will not do.
 

Conclusion

This is not an exciting bond. Indeed I have been in danger of nodding off as I write it up. However, it offers a pretty good yield in present circumstances. See the table below for secondary market retail bonds with a similar maturity. Only the Provident Financial yields more and they have “issues”. There are risks to Lendinvest’s model – perhaps banks could speed up their mortgage decision making process undermining Lendinvest’s USP? But as I sit here ever more weighed down with compliance matters the world seems to be moving in the opposite direction. Should interest rates on bridging finance fall or banks speed up the time it takes them to offer a mortgage, this would certainly undermine the equity value of the business. However, the de-facto collateralisation of the bonds should give good downside protection and even in an orderly and well managed run off of the business there is a good chance bond holders would get all their money back.

This bond is a sensible but soporific investment opportunity.

ODRB

Issuer

Ticker

Outstanding

Cpn

Maturity

Years to Maturity

Ask Price

Yld to Mty (Ask)

Paragon Banking Group PLC

PAGLN

125,000,000

6.125

30/01/2022

3.86

108.50

3.74

Lendinvest Secured Income PLC

LENDIN

50,000,000

5.25

10/08/2022

4.38

101.50

4.86

Burford Capital PLC

BURLN

90,000,000

6.5

19/08/2022

4.41

111.45

3.66

Ladbrokes Group Finance PLC

LADLN

100,000,000

5.125

16/09/2022

4.48

108.45

3.09

A2D Funding PLC

ADOHOU

150,000,000

4.75

18/10/2022

4.57

110.60

2.29

Intermediate Capital Group PLC

ICPLN

160,000,000

5

24/03/2023

5.00

108.65

3.12

Provident Financial PLC

PFGLN

60,000,000

5.125

09/10/2023

5.55

97.70

5.61

Places for People Finance PLC

NBHA

65,000,000

4.25

15/12/2023

5.73

103.65

3.54

Alpha Plus Holdings PLC

ALPHPH

130,000,000

5

31/03/2024

6.02

107.30

3.64

               
         

Averages

106.42

3.73

 

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