Mini-bonds are all the rage just now, what with Hotel Chocolat, Mexican restaurant chain Chilango and coffee shop Taylor Street Baristas having recently completed successful fundraisings. As this is a relatively new form of alternative finance, we thought it would be helpful to set out a beginner’s guide to mini-bonds.
What is a mini-bond?
A mini-bond is like any other bond: it is essentially an IOU issued by a company to an investor, in exchange for regular interest payments and the value of their investment returned at the stated maturity date.
The coupon on a mini-bond is often higher than on a retail bond (for the reasons explained below), and some companies have offered unusual coupons instead of or along with cash – for instance John Lewis offered a fixed coupon of 4.5% in cash with a further 2% in gift vouchers, and Taylor Street Baristas offered its customers who bought mini-bonds in-store credit to buys its coffee.
Ok, I understand now. But how do they differ from retail bonds?
The main difference is that mini-bonds are not traded on the stock market. There are two major implications of this:
- Firstly, investors who purchase mini-bonds will be holding them until they mature, unlike retail bonds which can be traded on the London Stock Exchange’s Order Book for Retail Bonds. This makes mini-bonds a fairly illiquid investment.
- Secondly, a prospectus is not required to list them – this means that mini-bonds will not be subject to the same intense scrutiny as retail bonds, whose prospectus will be drafted and signed-off by lawyers and financial advisers.
However, investors do receive some protections – for instance the issue of a mini-bond will still be subject to the financial promotions regime under the Financial Services and Markets Act 2000, meaning that all documents marketing the mini-bond will have to be by a person approved by the Financial Conduct Authority.
What are the risks for an investor?
Mini-bonds have a relatively high risk profile – they are often issued by small to medium sized private companies who are in need of capital, with the probability of a default greater compared to retail bonds issued by larger companies.
Further, as they do not need to file a prospectus, there is less financial disclosure involved with the issue of mini-bonds, making it more difficult to ascertain the issuing company’s financial health.
Also, it’s worth noting that mini-bonds are generally unsecured – if they are unsecured, the holders will rank behind any secured debt holder (such as the issuing company’s bank), should the issuing company default on its debts.
Should my company consider issuing mini-bonds?
A major advantage of issuing mini-bonds versus retail bonds is that as they are not to be listed on the stock exchange, there are less regulatory hurdles to be met (as no prospectus is required) – it is therefore much cheaper to issue mini-bonds to market. However companies listing mini-bonds will still need to abide by parts of the UK’s financial services legislative regime.
One point to flag is the nature of the companies issuing mini-bonds: most of them are in the retail or food and drink sector, and have direct contact with consumers. Like with crowdfunding, companies that are able to market a mini-bond directly to those customers who are willing to ‘buy-into the concept’ may have the most success with fundraising.
Fox Williams LLP are experts at advising entrepreneurs and fintech businesses. For more information as to how Fox Williams can help you (including arranging a free consultation) or for further information on the issues discussed in this article, please liaise with either Jonathan Segal or Elliot Cowan.