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Product analysis: The Providence mini-bond

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We analyse the Providence mini-bond, launched last week with a headline income of 8.25 per cent per year.

What’s new?
Providence Bonds, the UK arm of financial services provider Providence, has launched a mini-bond paying an income of 8.25 per year per year for investors willing to tie up their money for four years.

They say…
Paul Everitt, Providence Group European CEO and Director of Providence Bonds plc, says: “This mini-bond is allowing us to help with two problems – lending to help businesses grow and giving savers a higher return on their investment. The fact that mini-bonds are not freely tradable and your money is locked in is sometimes seen as a weakness, but if the underlying business is strong, we think it can turn out to be a benefit. Yes, you are committing your cash to a fixed return and term loan product. For many people there is some peace of mind to be gained from an investment that offers 8.25% a year for four years!”

Good news?
With most bank accounts paying less than 1 per cent interest, 8.25 per cent is undoubtedly an attractive income. The key decision for investors is whether Providence Bonds has the financial strength to continue to pay this high level of income over four years.

The group specialises in ‘factoring’ a secured form of short-term business funding for small and medium-sized businesses. It buys invoices and post-dated cheques at a discount from companies that would rather not wait the traditional 90 or more days for customers to settle their accounts. It makes its profit when the payments are fulfilled. The funding can help businesses with short-term cash flow problems. The bond is guaranteed by Providence Financial, the parent company.

Any caveats?
No-one gives an 8.25 per cent yield for nothing. This is a risky business and while Providence Financial’s business looks to be in OK shape for the time being – with lowering default rates and increasing customer numbers – there are no guarantees that this will last.

Retail bonds have been controversial. For the time being, they are not covered by the Financial Services Compensation Scheme, so investors are not protected if the company goes bust. Also, bonds can have complex covenants, covering the amount bondholders would receive in the event of a default. These may be impenetrable for non-expert investors.

Phone: +44 (0) 20 7155 1968

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