Analysis & Comment > Bond of the Week
Back to 2018
Bond of the Week: 21 March 2018
Bond of the Week : 21 March 2018
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:
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.
In addition there is a parental guarantee (Lendinvest Ltd). The net assets of the parent as of September 2017 were £9.32million.
Why do property buyers take out bridging loans?
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).
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
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.
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.
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.
To unsubscribe from this article, click here.
www.fixedincomeinvestor.co.uk is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.
Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own, the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.
None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such. For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated. The investments described by or in the services are not suitable for all investors. Investors who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.
These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.