LONDON CAPITAL AND FINANCE MINI-BOND REVIEW PART 1
London Capital and Finance (LC&F) Plc www.londoncapitalandfinance.co.uk describes itself as a commercial lender and corporate financier, lending to small and medium business enterprises (smes). The direct issue of the LC&F fixed term investment mini-bond is intended to raise income to finance business lending activity. Company info site Endole states the purpose of LC&F is the provision of raising funding through the issuance of private bonds. Unregulated corporate loan notes. Classified as non-mainstream pooled investments and offered only to high net worth, high net income or sophisticated investors. Visit LC&F for info on the up to 8% APR fixed rates interest 1-3 year term LC&F investment security.
The LC&F Bond Prospectus for the debt security, corporate loan note or certificate of debt is available online: Malta Financial Services Authority (MFSA) Bond Prospectus £100,000,000 Secured Bond Issuance Programme London Capital and Finance (20161018_Final_Base_Prospectus2.pdf Download from https://www.mfsa.com.mt). Issuer: London Capital and Finance Plc, Tunbridge Wells, TN39JS. Tel 08452186918. UK Companies House no. 08140312. Financial Conduct Authority (FCA) no. 722603. The Chief Executive Officer (CEO) of LC&F, the sole shareholder and owner, is Michael Andrew Thomson (Andy Thomson).
LC&F, a past NFACB member, is an FCA UK authorised and regulated firm. As of 7/6/2016 it has permissions to provide regulated products and services: accepting deposits, providing credit to consumers, giving investment advice, arranging deals in investments. The firm cannot hold client money. It is able to control client money for corporate finance business only. LC&F can lend monies directly without FCA permission if each loan amount is over £25,000. A financial company without relevant FCA permissions may also engage in such financial activity by selecting an appointed firm with such FCA approval and permissions e.g. for lending. The FCA authorised company contracted by LC&F at time of launch to ensure FCA compliance of the bond information memorandum was appointed in this way.
For company and financial information about LC&F Plc and the directors visit the following UK websites: www.companieshouse.co.uk www.duedil.co.uk www.endole.co.uk www.companycheck.co.uk www.bizdb.co.uk These websites provide accounts and returns information, officers, address, current liabilities, current assets, net assets, cash, turnover, and more for UK companies registered at Companies House.
The LC&F website and well-staffed mini-bond marketing and financial team are mostly about the direct marketing of the corporate minibond and the prospectus. Little about LC&F loan business, track record and means of bond interest payments. As with other online mini-bond offers, the website is about marketing the bond, not the business side and practical discharge of financial obligations to investors. The Feefo invited customer reviews in 2016 are from investors, no reviews from business loan borrowers. No results in Google for a commercial lending platform under the company name. Financial services in Tunbridge Wells and surroundings are unaware of LC&F.
Financial regulatory requirements are less stringent for unregulated mini-bonds than for LSE listed corporate bonds. Great for firms issuing them as it saves on paperwork and reduces the problems of dealing with banks. In the case of a UK stockmarket traded corporate bond the detailed prospectus, with FCA mandatory requirements, for the corporate bond and the bond issuer are legally and financially scrutinised before a LSE listing. In contrast, mini-bond issuers do not have to provide a detailed, legally, financially, independently scrutinised prospectus for the company itself, nor a prospectus following FCA regulations. However, any financial promotions, including public offers must be approved by a FCA authorised person, who must approve the invitation document and all related promotional material as financial promotions.
Unlike a UK exchange (LSE) listed bond, an unregulated mini bond issuer is only required to provide a prospectus or financial promotion document for the offer following FCA rules for the publication, the type and description of the financial product, and that the retail investor is appropriately certified, that is, a sophisticated, high net worth, restricted or advised investor. (For more info about mini bonds as instruments of investment see: Being part of the crowd: mini-bonds and crowdfunding for franchise growth - Lexology www.lexology.com).
Of relevance here, unlike a UK stockmarket traded corporate bond, the mini bond issuing company is only required to state, in the bond prospectus or financial promotion, the business means to fulfill financial obligations under the bond. This is an evidential disclosure issue which is considered further later.
The LC&F mini bond security is a certificate of debt or debt security, an IOU or corporate loan note issued to raise finance. It is unregulated, unprotected, non-convertible, un-tradeable and carries a significant risk so a return on investment and return of capital is not guaranteed. As an FCA unregulated financial product, the investor has no protection against losses under the Financial Services Compensation Scheme (FSCS) nor Financial Ombudsman (FO) which do not apply to such unregulated fixed term investments.
However, the LC&F website states this unprotected investment is secured. It is asset-backed, that is secured on the assets of LC&F. The risk to investors is spelled out here in the disclaimer of liability: "The Bonds are secured by a debenture over the assets of the Company. There can be no assurance that, in the event that this security is realised, the amounts realised will be sufficient to satisfy the obligations to repay principal and accrued interest under the Bonds." (For the full LC&F disclaimer of liability visit http://londoncapitalandfinance.co.uk/disclaimer).
To add to this, a credit reference search at the time of the minibond public launch revealed the company's liabilities cancel out most of the value of the property assets of LC&F. (For a more up to date summary of LC&F latest financials, as of 30/4/2016, visit https://www.endole.co.uk/company/08140312/london-capital-and-finance-plc).
In addition to the mini-bond secured with a charge on LC&F assets, the issuer claims the bond is secured by a fixed and floating charge on the assets of the borrowing businesses. Many secured business loans take this format. But the assets of the borrowing smes are not the lender's assets, rather LC&F has a fixed and floating charge over them in case of loan default and insolvency.
This illiquid scenario is not good in the case of loan default and consequential insolvency administration of LC&F and the borrowing companies, especially if challenged by existing creditors of both LC&F and/or the borrowing companies. Just because it is claimed that the mini-bond is secured by assets, whether of the lender or the borrowers, it does not mean it is secured in practice. Enforcing a registered charge on assets in case of default and insolvency can be difficult, expensive and time consuming, especially if many parties are involved. There is no guarantee of sale at initial valuation of the assets and it may be difficult to find buyers, in turn affecting bondholder compensation. Skilled risk evaluation and debt recovery would be needed to avoid such problems. (For info on the difference between a secured and unsecured bond visit www.thebalance.com/secured-bonds-vs-unsecured-bonds-417067).
Any money returnable in LC&F and sme borrower insolvency is dependent on the liquidation process. Bondholders are low in the compensation ranking order, although secured ranks higher than unsecured. Bondholders receive payments before shareholders. Neither are paid before the company settles debts with past and future higher ranking creditors: banks, mortgage holders and other senior creditors. We have seen there are little in the way of LC&F property assets, which are mortgaged, and the asset liquidation of defaulting loan borrowers is complicated, time consuming and expensive with administration, legal and other fees reducing value. It is highly likely bondholders would lose most if not all of their investments.
There may also be problems with default when enforcing the legally required independent corporate trust in favour of the bondholders to secure interest and capital return. Recent mini-bond failures reveal a corporate trust may not in practice prevent nor remedy corporate issuer default. The independent trustees deny liability, even though their duties include monitoring and protecting the trust monies in the interest of the bondholders as beneficiaries, and administration in default. Prevention is better than cure. (More later on corporate trusts and trustees in relation to this.)
Turning to the viability of the LC&F business lending model. The up to 8% APR interest (coupon) on the mini-bond is declared payable to bondholders quarterly minimum to yearly maximum, depending on the bond series loan 1-3 year period, with the capital principal repaid to bondholders end of term. The periodic interest return is declared raised from short term loan interest at 12-20% APR paid on asset secured loans (minimum £500,000) to smes. Note the lender, LC&F, will need to cover contractors, profits, wages, promotion and marketing as well as the bondholder interest out of the sme loan interest.
How viable is this business loans model in relation to meeting the financial obligations by LC&F?
The LC&F website states it has over 4,300 investors (10/06/2017) and an increasing loan book in excess of £66m. Since 2012 LC&F has lent over £108m, £42m in loans have been repaid since 2012 and the repaid funds have been re lent to other borrowers. However, Companies House Annual Accounts indicate that LC&F has very little past experience in short term sme loans. More on this later.
The business loan market is highly competitive. An online study indicates the current average small business bank loan rate is 6-13% APR from lowest to highest, much less than the business loan interest rates of 12-20% offered by LC&F. A business loan provider online comparison website indicates rates approx. 3.5-5.5% APR on secured business loans. An application with good credit standing for an unsecured one year business loan for £25,000 results in a 4.9% APR interest rate from Santander. Much less than LC&F secured business loan rates at 12-20%.
With low current loan interest rates and the large number of loan companies, the 12-20% lending rates by LC&F may not be competitive in the UK asset secured sme loan industry. But it is unlikely that lending rates below 12-20% would be sufficient to cover the LC&F company and mini bond marketing expenses, wages, contractor fees, and profit, as well as bond interest. No other business model is put forward by LC&F.
A reason a business would be charged a higher loan rate of 12-20% APR is higher default risk. Not good for LC&F bondholder interest payments, nor return of sme loan capital and bondholder principal, nor for company expenditure and profits. (It would also appear that LC&F could have difficulty raising borrowed capital from traditional lenders, banks et al, as no evidence can be provided of assets and business activities leading to a high risk scenario for the lender and relending the borrowed funds would be highly risky for the bank.)
The following five factors pull the most weight in credit underwriting or loan risk evaluation: capacity, credit history, the size of the loan, collateral and conditions. These are the factors the LC&F loan team would apply to sme loan applicants. Risk evaluation and management in relation to business lending is a very skilled job, with negative financials for the lending company investors if credit underwriting is mismanaged. Both interest and capital can be lost.
Financial regulators are concerned that such risk mismanagemen is potentially a primary cause of future large scale failure in the rapidly expanding peer-to-peer lending. Peer-to-peer lending is a new method of debt financing that allows people to borrow and lend money without a financial institution. Lord Adair Turner, former City regulator, said in 2016: "You cannot lend money to small and medium sized enterprises without someone doing good credit underwriting." Proper checks were required to ensure a company actually possessed the premises, equipment and expertise it claimed. However, the P2PFA cites the low 2-3% loan default amongst its members, but they are the established largest P2P firms. The peer-to-peer lending sector came under FCA regulation in April 2014. This has resulted in further safeguards for investors, as sites must ensure they have arrangements in place for loan agreements to continue if the platform goes bust.
There are other broader UK economic and financial factors affecting business loan interest rates. The economy is still recovering from the credit crunch and global market turmoil of the 2008 financial crisis. Brexit hit UK company confidence. Profit margins are low. Defaults can occur in an economic downturn. The present financial market conditions in the UK are in some ways similar to the pre-2008 crisis, including very low interest rates, 0% credit card lending, very low fixed rate mortgages. Consumer debt has risen to the crisis levels. The interest base rate could rise. The small business loan model in the UK and other countries is subject to financial mismanagement reminiscent of the high default risk in the subprime mortgage investments crisis. Small business lending falls through the regulatory cracks.
Following the bank crisis sme business loans have been hard to obtain, despite government interventions like the Bank of England's Funding for Lending Scheme. Conditions eased recently but most lenders still have strict requirements for borrowers. It was the crisis that led UK banks to withdraw small business loans. In turn leading to the birth of minibonds whereby companies could directly approach the public, with restrictions, privately for investment loans. As also happened in Greece, where mini bonds are popular as banks severely reduced lending.
LC&F states no borrower defaults as of June 2017. However, there is a high default risk with sme loans, especially if inadequate credit underwriting. The minimum LC&F loan of £500,000, unlike P2P, is spreading the risk thinly among borrowers. The Bank of England estimates 6.5% of smes are in receipt of bank forbearance, 13% if property companies included. Default would impact LC&F company expenditure and profits, and bond interest payment. Issuer default may trigger immediate return of all interest and capital to bondholders, if a 75% bondholder vote in favour. Another point here is outstanding loans at end of bond term may delay return of principal.
However, to help avoid this scenario, it is possible to contract a competent third party loan provider, with relevant FCA permissions, to provide and expertly administer the business loans. But then contractor fees need to be paid from the sme loan interest as the only source of available finance. They cannot be paid from bondholder capital the stated purpose of which is sme loans by LC&F to generate earnings.
Turning to loan numbers. It is difficult to find evidence for the marketing team claim that LC&F have lent approximately £15 million to approximately 120 small and medium sized business enterprises (smes) secured on £33 million asset value since launch of the mini bond. These figures from 2016 are out of date by a few months. As of June 2017, the LC&F website states in excess of £66 million invested with over £215 million worth of asset security. Up to that latter date LC&F state no borrowers have defaulted on the loans.
LC&F are so far paying out due interest to bondholders. However, where is the value of interest paid if you lose all unprotected capital before or at the end of term. All capital and interest is at risk, and will continue to be so until it has been returned. The higher, but not historically high, incentive driven mini-bond interest rates, also indicative of the level of risk, may not justify the risk of loss of the entire capital.
We said earlier that Companies House audited Annual Accounts reveal that LC&F have little experience of sme lending. LC&F claim on the website a 100% track record of paying out interest, between 2012 and 2017. However, this appears to be the first marketed issue of the minibond. Companies House LC&F audited Annual Accounts clarify the picture. Before 2014 Annual Accounts indicate no loans of any significance were made. The Companies House audited Annual Account return 2014-15, re related financial transactions, indicated only one loan customer and the director of the lender LC&F, Michael Andrew Thomson, was also the director of the loan receiving company, One Monday, now dissolved. Although bond interest payments were made 2016-17, the little activity in 2012-14 and the one loan client in 2014-15 does not really support LC&F's claim of 100% record of interest payment to investors since 2012.
From one loan to one company in financial year end 2015 (a period when no mini bond was offered by LC&F) to 120 sme loans in financial year end 2016 (a period when a mini bond was offered by LC&F). From a few thousand pounds single loan in financial year end 2015 to £15 million plus in the financial year end 2016. An update on the website in 2017 claims excess of £66 million invested with over £215 million worth of borrowers. A lot of work for employed directors and two Operations employees. LC&F can contract out the commercial lending, although Operations state LC&F is lending directly to smes. It is also possible that secured loans are being lent via peer-2-peer lending platforms, however they do not offer 12-20% interest and are more long term.
The 2015-16 Companies House audited Annual Account return shows much greater revenue and expenditure to previous years. The 2014-15 audited Annual Account mentions only one loan client, disclosed as a risk factor. There are figures in the 2015-16 audited Annual Account indicating considerable expenditure on contractual outsourcing by LC&F. (For info re audited requirements visit https://www.rapidformations.co.uk/blog/will-my-limited-company-be-audited/). The 2015-16 accounts, as well as an update 7 months up to 30/11/2016 can be downloaded (http://www.lcaf.co.uk). According to LC&F Annual Return in the financial year 2015-16 there were two directors and two employees. As of July 2017 four directors and two secretaries are listed at Companies House as officers.
Turning to the investor customer interface, the front marketing team for the minibond marketing and financial administration. According to the 0800 helpdesk, this is an outsourced financial service: Surge Financial Ltd. Companies House no. 09395654. Officers: Paul Careless, Kerry Jane Graham. However, staff acted like employees of LC&F although unaware of the LC&F lending business. This gives the impression that LC&F is bigger than it really is. The marketing team claimed approx. 50 employees in LC&F, really referring to Surge. The LC&F Companies House Annual Account return for 2015-16 indicates two salaried employees at LC&F. According to LinkedIn they are education students working in Operations. The CEO, Michael Andrew Thomson, should also be salaried.
In 2015-16 all customer contacts, regarding LC&F business and the minibond offer and administration, were through the contracted marketing company. The marketing team knew little re the commercial lending side, sometimes wrongly citing data protection laws. Want to speak to the CEO about this? Not so easy and may well be unproductive. Like politicians, company directors can say meaningful sounding meaningless statements. However, directors have duties to act in the interests of creditors as well as to maintain confidentiality of the company affairs.
The marketing team passed queries on, but only to senior account managers in their own team who knew little about LC&F's commercial loans business. This results in going round in circles, without getting answers to relevant questions by potential and existing customers searching for information disclosure.
Of course this is part and parcel of their job. As a financial marketing contractor they are there to deal directly with customers in relation to the administration of the bond offer by LC&F. They do not directly deal with issues relating to the LC&F company and associated officers and employees. However, it is frustrating to have nobody deal with issues, e.g. proof of business lending to smes, which could impact earnings of potential and existing investors. Banks and other large financial institutions are also skilled in ensuring customers can only contact retail banking and retail head office but not the head corporate office where officers are based. The FCA Handbook Principles shed more light on this, on the behavioural relations between firms and customers, existing and potential. (See APPENDIX 1.)
In 2015-16 the marketing team were unable to substantiate to potential or existing investors the sme trading interface. Unlike other sme business loan providers, there appeared to be no available company website for sme borrowers to apply for LC&F business loans. No physical location other than the registered office in Tunbridge Wells. No available names of existing sme borrowers, no names of the lending team employees. No credit underwriter name. No lending team employee contact, no phone, no email address, no loan statistics, reviews by investors but no reviews by borrowers. Business loan enquirers were asked to email the bond marketing team. No internet searches revealed evidence of the sme lending, nor how the bondholder interest was paid through sme loan interest, nor was there such evidence on the LC&F website, nor could the bond marketing team provide such when asked. However, many of these concerns also apply to other commercial lenders.
A year later on 1/12/2017 a new domain name http://www.lcaf.co.uk was acquired by LC&F. The new lcaf.co.uk website was not linked to in the londoncapitalandfinance.co.uk website. In Google the whole name lcaf.co.uk, including the suffix, is required in the search. The site has three sections: business loans (£500,000 minimum), introducers, and investing; with online application forms but still no evidential info re business loans. No loan statistics, no borrower reviews, no lending team details or contact. There is a London telephone 020 3861 9060. However, other sme loan providers will not provide such evidence either, some citing data protection laws. Incorrectly, as data protection laws only apply to living individuals not companies. Any smes out there have a LC&F secured business loan? Recent LC&F accounts can be downloaded from the lcaf.co.uk site.
This does not mean LC&F are not carrying out commercial lending activities. This does not mean that LC&F are not paying out due interest payments to bondholders. Interest payments are paid to date. But where is the evidence where this money is coming from? The only info given by LC&F is that it is a commercial lender to smes and the lending totals, and lately an online loan application form. Investors want more disclosure, especially in light of the little assets and track record of LC&F.
The lack of transparency and disclosure have been a major cause of past minibond failures as the lack of checks allows the steps to failure. Besides lack of verification of the LC&F commercial lending business, the investors, nor the security trustee, are able to check bond capital usage, to verify it is used for stated purpose. The financial history of recent mini bond failures (Providence Financial, Secured Energy Bonds) shows that the loan capital is often not used for stated purpose. Past mini bond failures indicate bond issuers and trustees of corporate trusts set up to protect the investor interests have fallen short in performance of duties resulting in interest and capital losses.
We have suggested perhaps the commercial lending is contracted out or outsourced. However, we are aware of the contracted marketing company but not a contracted lending company. LC&F Operations say it is a direct lender, confirmed by NFACB. Substantial wages are paid out to financial contractors, according to LC&F 2015-16 Companies House Annual Account return. Presumably from the sme loan interest. It should not come directly from bond capital which is used for stated purpose: interest returning loans to smes. Clarification and disclosure on this may help to remove doubts re validation of the LC&F business lending model to fund bond interest.
LONDON CAPITAL AND FINANCE MINI-BOND REVIEW PART 2
Turning to the CEO and sole owner of LC&F Plc. Companies House searches reveal there are many other companies related through directorship to LC&F Plc director and CEO Michael Andrew Thomson (Andy Thomson), director ID 917033053. Some appear to be profitable others not, looking at Companies House Annual Accounts returns. However, many are dissolved or are inactive. The website www.companycheck.co.uk states the CEO has had a total of 25 company directorships, including 2 active, 11 resigned, 12 closed. Qualifications, education and employment history of the directors, including the CEO and Operations staff, are listed on LinkedIn.
There is no implication of fraud or dishonesty here on the part of LC&F. Nor have internet searches in the past or present shown such in relation to LC&F and the company officers and directors. Audited Annual Accounts appear in order. The company has a right to company non-disclosure, unlike companies that issue traded company or corporate bonds on the stock market. Many LC&F criticisms can apply to other business lenders. However, it is in the company and investor interest to provide evidence to prospective and present investors indicating clearly how LC&F are raising funds through a working, reliable and practical business plan to pay the interest to the bondholders. Indeed they are behoved to do this under the FCA Handbook Principles. (See APPENDIX 1).
LC&F investors may think they have a legal right to information, to prove that the company is doing what it states it is doing, because it can impact the investment value. However, legally, because of the unregulated status of minibonds, the company does not have to disclose, although it is clear that the FCA Handbook Principles apply here. The EU is in process of mini-bond financial regulation. Hopefully they will address this company non-disclosure issue. Brexit should not affect implementation in the UK of these EU regulations of mini bonds. The UK government will in all likelihood adopt them.
We have seen earlier the business and consumer loan industry is very competitive. Consumers and businesses can get an unsecured bank loan between 3-5% APR. Rates on secured business loans can be similar. Not good for LC&F, offering business loans at 12-20%, as this is the only means of company profits and bondholder interest payments. There is also the possibility of some of the many loan contracts defaulting resulting in loss of invested capital term income. LC&F state there have been no loan defaults as of June 2017.
However, if we go by updates and reviews on the LC&F website, bond interest is being paid to date. Although earlier above we have considered relevant issues of disclosure, evidence and practicality in relation to the means of earning bond interest payment and capital repayment, and company profit and expenditure through the LC&F commercial lending model.
Even if a mini bond provider pays interest, as was paid to bondholders in the recent collapsed Secured Energy Bonds (SEB), it does not ensure return of capital. In SEB the Australian parent company illegally siphoned off the bondholders' capital and later declared bankruptcy. The SEB bondholders have been unable to recover invested capital. The bond security trustee (IPM) denies liability for bondholder losses. Assuming assets are recovered, in the hierarchical order of asset liquidation payouts, bondholders would be low in the creditor list. Remember interest payments on due date do not mean the capital will be returned, although if they are delayed it may be a sign of impending failure. However, most schemes that fail have never defaulted.
Another cause of failure could be running out of capital and unable to continue commercial lending. This could lead to another round of fund raising to refinance, or even insolvency. The auditors raised the lack of capital issue in the last Annual Account in regard to the Wellesley mini-bond. Recently the issuer, Wellesley, has raised refinance capital. This will always be a problem if a firm's lending to businesses comes from borrowed finances and not from its own financial assets.
Turning to the LC&F legally required corporate trust setup to secure the beneficial interests of the bondholders. According to Wikipedia a trust is a three-party fiduciary relationship in which the first party, the trustor or settlor (the issuer in the case of a bond); transfers (settles) a property (often but not necessarily a sum of money) upon the second party, the trustee; for the benefit of the third party, the beneficiary or beneficiaries. You can put money, investments or other assets into the trust. Depending on the type of trust you use, it may have to pay tax, which may be recoverable by the bondholder, as is the case of LC&F corporate trust, and the trustees may need to complete tax returns. The corporate trustee duties include issuing monthly statements, ensuring interest is paid, and the principal returned at end of term to the beneficiaries.
The security trustee of the corporate trust (see definition in Wikipedia), arranged by the LC&F bond issuer, the trustor or settlor, holds the bondholder capital in trust for the beneficiaries, the bondholders. A debenture charge with terms is registered with LC&F at Companies House. The corporate trustee for LC&F is Global Security Trustees (GST). The corporate trustee's role is to act in the interests of investors by being an independent supervisor of the security and a custodian of assets. The prime responsibility is that of a prudential supervisor, and not a hands-on manager. Issuers of securities to members of the public are bound by a trust deed and require a trustee by law. The trust deed document sets out the conditions for the investment. The trustee's role includes to: represent the collective interests of investors; ensure the company offering the investment complies with the trust deed; hold assets in trust separate from the scheme manager (in some cases).
What is fine in legal terms does not necessarily mean it can be implemented in practice. How would a bondholder enforce a corporate trust in the case of non performance? How would a corporate trustee settle the trust if the capital has been misused? The bondholder only has a beneficial interest. It is the corporate or security trustee that enforces the trust in the interest of the beneficiary. This can be time consuming, costly and difficult. The corporate trustee, usually legally qualified, is paid to set up and administer the beneficial trust in favour of the bondholders. The trustee solicitor will also want payment for enforcing the beneficial trust. Problems could go on for years in relation to mismanagement of the bondholder capital, if that happens.
With mini-bond investments that have collapsed recently, the security trustees have been unable in administration to help the investors with return of principal. Often because the trust assets have been missappropriated. Yet trustees have to be regularly informed as to the use of the trust assets, although they may not have hands on managerial rights. In practice the issuer or settlor in a corporate trust controls the use of the trust capital. The rule: "If it's gone, it's gone" appears to apply here.
Re LC&F, the corporate trust was set up by Global Security Trustees (GST), the security trustee company for the beneficial trust for the bond. That is, to administrate the trust and the return of end of term capital to bondholders as beneficiaries of the trust. GST was incorporated not long before the launch of the mini-bond. A search for Global Security Trustees at Companies House reveals there is one officer, the director, and the company has no assets. At the time of the search no Annual Account had been lodged. The independent trustee, Robert Mannering Sedgwick, the director of GST, is related to Michael Andrew Thomson through directorships and through recommendations on LinkedIn.
In the minibond corporate trust the bondholder has a beneficial interest through the trust for due term interest and end of term capital return but, like the security trustee, no control over its use by the company bond issuer settlor during the bond term. The bond loan capital could possibly be used for paying interest, for promotion of the bond, for paying marketing or other contractors, etc. although the stated purpose is for short term business loans to smes in order to fund bondholder interest payments. For instance, investors with a total of £8.15 million tied up in Providence Bonds under administration lost all their monies. Two mini-bonds, launched by a firm called Providence Financial in 2014 and 2015, attracted 825 investors at an average of £10,000 each after offering quarterly interest payments of 8.25% and 7.5%. Providence then went into administration in September 2016 showing a huge 20% value of the bonds issued was spent on launch and marketing costs. The security trustee (IPM) accepted no fiduciary liability under corporate trust law. Remember: "If it's gone, it's gone."
Be warned. Even though the growing mini-bond investments have incentive driven higher than average bond yields, comparing bond market yields, they are not high enough from a historical comparison to risk all the invested capital. Interest on traded retail and corporate bonds and bond funds on the London Stock Exchange (LSE) is low under present market conditions yet investors are also risking the capital. It is not acceptable that traded bond and bond fund managers offer dismal returns expecting investors to risk all their capital. However, retail and corporate bonds, unlike mini-bonds, can be traded within the loan period up to end of term. With minibonds you have to hold them full term, although it is likely in the future, as in Greece, they will be traded. Mini-bonds are untransferable and cannot be redeemed unless the issuer defaults, as in missing due interest payments.
Mini-bonds are unregulated and have a greater capacity to fail and to attract smaller high risk companies and sometimes people who think they can make money returns at the expense of others leading to financial abuse. For tips to spot scams see http://forums.moneysavingexpert.com/showthread.php?t=5515642&utm_source=MSE_FS&utm_medium=Email&utm_term=12-Sep-17#4. However all financial instruments regulated or not, subject to legal and financial scrutiny or not, are subject to fraud, incompetence and other causes of market failure. Private investors have invested in startup company lPO LSE listed shares with top company directors' names as advisors but who did nothing. Such offerings should never have seen the light of day. Well, the destiny of every company is to go bust or be taken over.
Many experienced investors and IFAs doubt the genuineness of unregulated minibond offers because, like tooth cavity amalgam fillings, they are somewhat designed to fail, at least until EU and UK regulation. It is not in their favour that they tend to be used by start-ups and often by highly speculative businesses. They are often not well-capitalised nor profitable. So if you are considering investing in a mini-bond look in the company for the opposites to those disadvantages. Some have failed already, more will follow. Having said that some minibond offers have been successful. But they have been offered by respected and popular companies, such as the John Lewis £50 million minibond, with good track records and involving their customers in the business thereby trading on loyalty.
Transparency, openness, disclosure, good communication, are important factors in determining success and preventing financial abuse. Potential investors should be able to access information which allows them to perform a Fundamental Analysis: a method of evaluating investments by studying a company’s earnings, growth rate, or other data related to. It is important to address concerns raised by potential and existing investors, something many mini-bond issuers including LC&F fall short of. But then so do some much larger companies with higher capitalisation. (See FCA Principles in APPENDIX 1.)
Always look at the business track record. It helps, but not always. Always manage your risk exposure. There is rarely a sure thing in financial investments. Get independent financial advice, if needed. Try to perceive the reasons why some are successful for investors and others not. It is easier to hide mismanagement in small firms which have few employees who are involved, but not always the case. You are more likely to find a whistleblower in a larger company with greater employee numbers. Sometimes struggling companies are taken over by unscrupulous predator companies and then the employee pension funds get raided, for example. A deceased newspaper magnate was infamously reputed for doing that. Sometimes the little fishes copy the big fishes.
Look on the FCA website for their blacklist of companies. Investors are advised to do their homework and if you cannot get answers to relevant questions about the financial company and business activity, that is a que to walk away. This is especially the case if issuing company directors will not provide evidence of the business means to fulfill the bond terms in relation to the bondholders, including interest and capital payments. For further tips on evaluating private investment opportunities visit http://forums.moneysavingexpert.com/showthread.php?t=5743551&utm_source=MSE_FS&utm_medium=Email&utm_term=14-Nov-17#5
Unregulated mini-bonds are not suitable for savers or mainstream investors. They are highly risky and according to FCA rules should only be offered to certified investors. These include sophisticated investors, high net worth investors, restricted investors or advised investors, as defined by the FCA, who can afford to lose investment capital. The rule is to not risk more than 5-10% of your portfolio in such unregulated investments, assuming you are a FCA certified investor. Nor should mini-bonds be classed as preferred investments for such certified investors. Mini bond offers do follow FCA rules on financial promotions regarding this. Yet mini bond issuers and marketing teams wrap up their loan offers in retail marketing packages, directly offering them to consumer markets through websites and the press.
Problem is ordinary bank and building society savers, inexperienced investors, are attracted by the savings-like retail marketing packages and the higher interest rates, mistakingly thinking the FCA regulation is a sign of approval of the mini-bond. Such savers are looking for alternatives to low interest rates of banks and building societies. But higher bond rates may be offered, along with asset security, as an incentive to invest irrespective of the market realities because the issuer may have little in the way of investment attracting attributes such as no track record, reputation or capital. In the MFSA LC&F Bond Prospectus the issuer admits the initial 8.5% APR interest coupon for the Series 2 Bond was over optimistic for the market and it was offered by the issuer primarily as an incentive to invest. Perhaps the issuer is also over optimistic about the earnings potential of the 12-20% sme lending rates.
However, do not think that your low risk High Street bank savings account monies are entirely secure. The last few years of the 2007-8 financial crisis illustrates this with the transposition and implementation in the UK of the Bank Recovery and Resolution Directive (BRRD) by the Banking Acts 2009 to 2016 (1/1/2016). To help avoid a state bail-out of a failing bank, now all of your savings deposits may legally be confiscated, converted into bank equity, a bail-in, by the UK Bank of England Prudential Resolution Authority (PRA). Not just shareholders but depositors as unsecured creditors will be bailed-in. Savings deposit accounts will be converted to equity, share accounts, in the bank company and the value will be used to recapitalise the bank and pay off the bank's liabilities. Possibly FSCS protected deposits to insured value could be included, although at present they are excluded. The ECB pushed for bail-in inclusion and approves of recent revocation of deposit protection schemes, as in Austria. For more on this see thread post "BRRD, BofE, bank failure resolution, bail-in rule, FSCS, and bank savings deposits" in moneysavingexpert.com Savings and Investments forum. There are many online sites, including government, and press articles re the BRRD rules, including the toolkit bail-in rule.
The This is Money website has a handy checklist on what you need to know before buying mini-bonds, corporate and retail bonds: - Any investor buying individual shares or bonds would be wise to learn the basics of reading a balance sheet. - When looking at bonds, research all recent reports and accounts from the issuer thoroughly. You can find official stock market announcements including company results on This is Money website. - Check the cash flow is healthy and consistent. Also look at the interest cover ratio, the ratio which shows how easily a firm will be able to meet interest repayments on its debt. This is calculated by dividing earnings before interest and taxes (known as EBIT) by what it spends on paying interest. See This is Money guide to doing investment sums like this. - It is very important to find out what the bond debt is secured against, and where you would stand in the queue of creditors if the issuer went bust. This should be included in the details of the bond offer but contact the issuer direct if it is unclear. - Consider whether to spread your risk by buying a bond fund, rather than tying up your money with just one company or organisation. - Inexperienced investors who are unsure about how retail or mini-bonds bonds work or their potential tax liabilities should seek independent financial advice. - If the interest rate is what attracts you to the bond, weigh up whether it is truly worth the risk involved. Generally speaking, the higher the rate on offer, the higher the risk. - If the issuer is a listed company, before you decide whether to buy it is worth checking the dividend yield on the shares to see how it compares with the return on the bond. Share prices, charts and dividend yields can be found on This Is Money. - Investors should bear in mind that it can be harder to judge the risk involved in investing in some bonds than in others. It is easier to assess the likelihood of Tesco going bust than smaller and more specialist businesses. For the complete article visit: www.thisismoney.co.uk/money/guides/article-1714423/Corporate-bonds-A-guide-investing.html
Retail Bond Expert and sister site DIY Investor have consistently called for investors to be wary of mini-bonds and to be fully apprised of the risk they may be exposed to and the differences that exist between mini-bonds and other forms of fixed income products such as retail bonds.
The writers of this review hope that the LC&F mini-bond is a genuine fixed term investment offer and all the investors receive their dues including 100% of their capital principal at end of term, and that LC&F is able to continue to offer successful investments in the financial markets. They also hope LC&F will address criticisms in the review.
APPENDIX 1
The Financial Conduct Authority (FCA), along with the Financial Ombudsman, are responsible for the regulation of authorised companies in relation to consumers. They are unable to help in a financial loss case with an unregulated financial product, such as a mini-bond, only a regulated product. The FCA has published principles of conduct which apply to all FCA regulated companies. These can aid you in your communications with investment providers. These principles are laid out in the FCA Handbook, available online, as follows:
The Principles
1 Integrity
A firm must conduct its business with integrity.
2 Skill, care and diligence
A firm must conduct its business with due skill, care and diligence.
3 Management and control
A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
4 Financial prudence
A firm must maintain adequate financial resources.
5 Market conduct
A firm must observe proper standards of market conduct.
6 Customers' interests
A firm must pay due regard to the interests of its customers and treat them fairly.
7 Communications with clients
A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
8 Conflicts of interest
A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9 Customers: relationships of trust
A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
10 Clients' assets
A firm must arrange adequate protection for clients' assets when it is responsible for them.
11 Relations with regulators
A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice. (Note: check FCA website for updates to Principles.) _____________________
NOTE [This financially independent review article of London Capital and Finance Plc mini-bond investment results from requests from interested potential and existing investors. No authors of the review have any financial connection with any of the organisations, companies, directors and officers named. Financiars, IFAs, lawyers, trustees, authors, writers, researchers, politicians, regulators and private investors have contributed information without payment or charge. The text will be updated with relevant news re performance of the mini-bond and LC&F Plc as information comes to light.]
