Many Financial Thing readers have emailed me to ask what on earth Mini Bonds are and whether or not they should consider investing in them. In the spirit of full disclosure, let me start by saying I have never invested a single £, $ ¥ or any other currency into any of the peer to peer lending companies Mini Bond or regular company corporate bond offerings and I doubt I ever will.
Ok, now that is out of the way, let’s discuss Mini Bonds. So what are they anyway?
When a company wants to raise some extra money, they offer bonds. Many corporations including Apple and John Lewis have offered bonds to investors. In return for lending money, the investors are paid an annual rate of return. In 2011, retailer John Lewis offered a bond paying 6.5% per year. Many people jumped on this bond offering which left me wondering why. The John Lewis bond returns are far less than average stock market returns and on top of that, some retailers are dying a slow death. It’s possible that John Lewis could fail and the bond could be worth little or nothing. Compare that to the chances of the stock market crashing to zero, and what you are left with is a relatively high risk corporate bond investment.
I’m not suggesting that the companies offering bonds or Mini Bonds are bad companies, but I am suggesting that the returns offered by such bonds rarely match the risk levels. In fact you’d probably be better off investing in Dell Boy’s Peckham Springs.
Peer to peer companies are no different in the way they offer Mini Bonds. You lend the peer to peer company money and they pay you a return; well, hopefully. Corporate bonds and Mini Bonds have no guarantee of repayment and if the peer to peer company runs into financial troubles, then your chances of being paid back on the Mini Bond would probably be minimal.
Wellesley and Co. has announced a new-three year Property Mini Bond offering 4.7% per year. This Mini Bond differs from the standard ones Wellesley offers as it has to be purchased through The Share Centre. The Property Mini Bond is listed on the Irish Stock Exchange and can be bought and sold just like a share. The bond price will also fluctuate meaning the the value will rise and fall on any given day. There might be some confusion to the Mini Bond security since Wellesley advertises that the bond is “secure”. While the loan assets that make up the bond are secured, the bond itself is unsecured meaning that if anything happens to Wellesley, the bond could be worthless.
Here are the standard Wellesley Mini Bonds available through their website:
Currently Wellesley has suspended its popular peer to peer lending in favour of offering a range of in-house Mini Bonds. The highest rate you might hope to achieve as of October 2017 is 5.20% per year for five years. Again, you are lending money directly to Wellesley & Co. and they can do whatever they please with your money with no guarantee of repayment. In January 2017, The Telegraph newspaper reported that independent auditors warned Wellesley’s survival was dependent on its capital raising over the following 12 months. Hence the new Property Mini Bond offering.
Other companies such as LendInvest have offered Mini Bonds that have been over subscribed and their immense popularity is perplexing. I believe most investors don’t understand Mini Bonds and the risks involved. If they did, I doubt they would invest in them.
I’m often asked if Mini Bonds or corporate bonds are safe and the answer is no, they are not. Obviously buying Apple’s bond is far safer than buying Wellesley & Co’s bond but neither is a “safe” product as either company can go out of business rendering the bond worthless.
With the level of apparent peer to peer company Mini Bond risk, you would certainly be better off putting your money into peer to peer loans and rolling the dice because I see peer to peer loans as being less risky than Mini Bonds. I would rather invest in the loans than the companies that offer the loans. At least if a peer to peer loan fails, there is usually security to recover. This recovery can possibly be used to fully or partially repay lenders. Mini Bonds are usually unsecured meaning there is no security or recourse should the company offering the Mini Bond fail.
I believe you will see more and more Mini Bonds offered in favour of peer to peer loans because on paper, they make sense and appear to be popular amongst investors. Mini Bonds offered on stock exchanges can raise large amounts of money in very short periods of time and are administered by share platforms. Now the peer to peer companies can collect management fees on the Mini Bonds. The question becomes whether the companies can generate enough fees to earn a profit.
When you invest in higher risk products, capital preservation is important. A Mini Bond that is listed on a stock exchange could be worth less than what you paid for it making capital preservation difficult.
So would I ever invest in a Mini Bond? Extremely doubtful as I’ve yet to see a Mini Bond offering that came close to peeking my interest. Return rates should always somewhat match the investment risk and Mini Bonds don’t even come close.
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** This article is for information purposes only and should not be regarded as investment advice. Opinions expressed in this review are only opinions based on my own personal experiences. As with any financial investment, peer to peer lending involves risks, so never invest more than you can afford to lose. **