Stephanie Baynham, senior solicitor in MacRoberts’ Glasgow office analyses the pros and cons of innovative ‘mini bonds’

What are retail bonds?

A special type of corporate bond which allows companies to borrow money from investors in return for regular interest payments. On a previously agreed maturity date, the bond will be redeemed and the investor will get their original investment back.

Retail bonds are offered to ‘retail investors’ (i.e the general public) and are traded on the Order Book for Retail Bonds (ORB).

Retail bonds tend to be issued by larger listed companies such as Tesco.

Why consider retail bonds?

A great idea for investors who want a steady income and a low risk investment.

Retail bonds have the advantage of being traded on the London Stock Exchange’s ORB system. This means that investors have an option to exit before maturity if there is an emergency need for the capital to be returned.

No corporate bond is completely risk free of course. The investors run the risk that the market price has fallen below the price paid at issue and not all of the capital can be recovered.

What are mini bonds?

Mini bonds are similar to retail bonds. They are a way for private investors to lend money to a company for a set period of time in return for interest.

The key difference is that mini-bonds are not traded on the stock market and as a result are subject to much looser regulation.

Why do these differences matter?

Firstly, if you have a bond which cannot be traded, then you have no choice but to hold it until its date of maturity – which can often be years in the future. A tradable bond like retail bonds gives you the flexibility to sell at any time.

Secondly, given that they are traded on the stock exchange, retail bonds have to go through a detailed listing process, which involves the publication of a prospectus which highlights the risks. Mini bonds do not have this, the issuers can advertise directly to investors in the press and do not have to make detailed disclosures of risks.

So which is better?

No corporate bond is completely risk free as every company runs some risk of running out of money. If an issuer does go bust, there is no protection from the government scheme that protects bank customers – the Financial Services Compensation Scheme.

However, not all bonds are equally risky to investors. Much depends on the issuing company’s finances and some bonds can be ‘secured’ meaning that investors have a claim on a particular asset in the event of a default.

As mentioned above, because retail bonds are subject to strict regulation before they can be issued, investors are more likely to be informed of the risks compared to when they buy mini bonds. However, because of the lack of regulation, it is cheaper to issue mini bonds and so this may be chosen as a funding option by smaller companies.

Which is a better investment option depends on how risk adverse the investor is and the financial security of the company, but both offer great investment opportunities.

MacRoberts are teaming up with Memery Crystal LLP to deliver a free seminar where they will introduce mini-bonds both in terms of legal issues, and using case studies will demonstrate how a mini-bond may benefit your company.

For more information log onto www.macroberts.com