You are here: Home - Investing - Getting Started - How to -

Q&A: What are retail and mini bonds?

Written by:
John Lewis, Hotel Chocolat, Tesco and Ladbrokes have made headlines by issuing retail or 'mini bonds'. But what are they and how exactly do they work?
Q&A: What are retail and mini bonds?

A relatively new way for companies to borrow money directly from private investors, retail and mini bonds have caused their fair share of debate.

Yet despite the controversy, some estimations suggest the value of the industry could rise to £8bn by 2017, up from just under £90m in 2012.

We get acquainted with these types of investment.

What is a mini bond?

Simply put a mini bond is a way for companies to borrow money directly from private individuals.

Like a traditional bond, the holders are paid interest until the bond reaches ‘maturation’, when they are repaid the full value of their investment.

Unlike traditional bonds, these are marketed directly to investors and not listed on any stock exchange.

Are retail bonds the same?

Not exactly. Retail bonds are also marketed directly to investors but they are listed on a stock exchange. This means their capital value fluctuates because they can be bought and sold.

It also means they are subject to much stricter regulation than mini bonds. For example, the issuer must produce a detailed prospectus outlining the risks and rewards to investors.

Mini bonds are not listed on a stock exchange so are far more loosely regulated. No prospectus is required, for example.

Which companies have issued these bonds?

Tesco has issued multiple retail bonds, and Ladbrokes issued one in May 2014 to raise money for debt repayments.

Both companies offered around 5% interest on their retail bonds.

Mini bonds have been successfully issued by retailers such as John Lewis and Hotel Chocolat, renewable energy suppliers Good Energy and Ecotricity and horse racing group, The Jockey Club.

The interest rates on mini bonds tend to hover at between 6% and 8%.

Are there any other incentives?

Some issuers offer special gifts as enticements. For example, Mexican restaurant Chilango launched its Burrito Bond at the beginning of June, a mini bond paying 8% interest per annum over four years.

Along with the standard interest payments, it promised two free burrito vouchers to every investor, while VIP investors sinking £10,000 or more into the bonds are entitled to free food for the duration of the bond.

This has led some people to call the products ‘passion bonds’.

The interest on Hotel Chocolat’s 2010 mini bond was paid in chocolate; hotel website Mr and Mrs Smith allowed investors to recoup interest due in holiday vouchers. John Lewis investors were paid a 4.5 per cent cash coupon plus a two per cent store voucher.

What are the risks of investing in mini bonds?

Mini bonds are unlisted. That means you can’t sell one if you think the company might go under.

Basically, once you buy a mini bond you’re stuck with it until the maturation point. If the company goes bust in that time period, you’re out of luck.

You’re also on your own if – as happened recently with Wind Prospect Group – interest is paid late. With a listed bond or a retail bond the regulator and Stock Exchange will step in on your behalf. But with mini bonds, you as an investor are forced to track down your payments.

Mini bonds are not covered by the Financial Services Compensation Scheme, so if you lose money you have no form of insurance.

As mini bonds aren’t as tightly regulated as standard bonds, advertisements don’t have to include detailed information about the company’s prospects or the risks involved in investing.

Lower regulatory costs also make them cheaper to issue. This means small firms, which normally wouldn’t qualify to issue a retail bond, can issue a mini bond.

If you think you can evaluate the financial health of these companies yourself, proceed with caution. Smaller firms with a limited trading history can be difficult to appraise.

Should I be steering clear?

Not necessarily.

When you buy one of these bonds you’re essentially betting that the company is healthy enough financially to stick it out until the maturation date.

According to Richard Troue, head of investment analysis at Hargreaves Lansdown, these are higher risk than bond funds but could be more suited to an investor who already has a diversified portfolio and is looking to boost his or her income.

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Coronavirus and your finances: what help can you get?

News and updates on everything to do with coronavirus and your personal finances.

Everything you need to know about being furloughed

If you’ve been ‘furloughed’ by your company, here’s what it means…

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

  • @YourMoneyUK All you need to know about the latest Current Account Switching winners and losers - hats off to Starl…
  • RT @WeareJust_PR: Many people struggling to make ends meet may not realise they are entitled to financial help or find the system too confu…
  • RT @WeareJust_PR: Many people struggling to make ends meet may not realise they are entitled to financial help or find the system too confu…

Read previous post:
Tax efficient ways to invest your pension pot

George Osborne's Budget bombshell shocked the pensions industry, handing more control over to pension savers and removing the need to...