LendInvest launches retail bond offering 11.5% rate over three years – what are the risks?

Real estate finance specialist LendInvest has issued its fourth retail bond and will offer investors the chance to earn an income of 11.5 per cent.

The company, which calls itself a “mortgage technology platform”, offers loans to homeowners, developers and intermediaries in the UK.

LendInvest’s rate is significantly higher than you could get on a savings account, but retail bonds carry a lot of risk and savers should tread carefully when purchasing company debt through bonds like this.

The money you get back depends on the company not going bankrupt and, unlike a savings account, the bonus is not protected by the UK Financial Services Compensation Scheme, which protects against losses of up to £85,000.

How to invest in the new LendInvest bonus

A fixed rate bond raises funds from investors and has a fixed life. The issuing company, in this case Lendinvest, agrees to pay a fixed interest rate to the investor until the maturity date of the bond, at which time it also promises to repay the amount borrowed.

The value of this bond, issued by LendInvest Secured Income II, which is a wholly owned subsidiary of LendInvest, is £100, although you will need to purchase a minimum of £1,000 during the offer period.

The bonds will mature in 2026 and pay an income of 11.5 percent annually.

Interest will be paid in two installments per year: April 3 and October 3 of each year. On the maturity date, LendInvest will refund the full value of the bonds, which are worth £100 each.

The official deadline to purchase the bonds is September 27 at 4 p.m., but retail bond offerings can often close earlier if they are popular and fundraising goals are met quickly.

The company may also, in certain circumstances, redeem, purchase or cancel the bonds early.

Unlike minibonds, which must be held until maturity, LendInvest’s retail bond will be tradable on the London Stock Exchange’s Orb market.

This means that investors will be able to sell if the bond is trading above the offer price, but they may also lose if the price is lower. It offers a possible exit route for investors who want to exit if there are buyers.

What are the risks?

If you decide to sell your bonds at any time before the bond’s maturity date, you could receive less than the amount you originally paid, depending on the market.

If interest rates continue to rise, then the income paid could be less attractive and the price you get if sold could go down.

Similarly, LendInvest warns that if bonds are purchased on the secondary market, the overall return will be different from the overall bond return.

There is no guarantee of the market price and you may not be able to sell your bonds if there is no appetite.

Retail bonds and minibonds come with serious risk warnings – read ours at the end of this article.

Retail bonds differ from minibonds, which must be held to maturity and have come under scrutiny in recent years following the collapse of London Capital & Finance.

Regulators have banned companies from offering minibonds to ordinary investors.

Bestinvest’s Jason Hollands says only experienced investors should consider the bond

However, there are still risks associated with retail bonds. Different interest rates reflect the risk they carry, and generally, the higher the rate offered, the greater the risk.

As a result, you should be careful not to invest too much of your savings in one or just a few bonds. It is worth considering a corporate bond fund, which lends to large companies and is a good way to spread risk.

Should retail investors get involved? We asked an expert

Jason Hollands, managing director of Bestinvest, said: “While the very high interest rate on these bonds of 11.5 per cent may be tempting, do not be blinded by the high interest rate without fully considering the risks and whether this is appropriate for you”.

‘The reason a borrower will pay high rates to investors is because of the risks involved.

‘LendInvest’s business is the granting of real estate loans and it must be taken into account that we are currently in a very difficult period for the real estate sector with considerable uncertainty in the economic outlook.

‘It is important to keep in mind when investing directly in any corporate bond issue, that while the interest rate may be fixed once the bonds are issued and traded in the markets, the principal value of the bonds may decrease or increase. until expiration.

‘If a lender encounters financial difficulties, there is a possibility that it will default on interest payments or the value of bonds at maturity.

‘Unlike investing in a savings account at a UK bank, investing directly in bonds is not covered by the Financial Services Compensation Scheme. The principle of caveat emptor (buyer beware) definitely applies.

“In my opinion, direct investment in bonds should only be considered by experienced investors who understand the risks and are comfortable with the prospects of the borrower.”

What to check before buying retail bonds and minibonds

*Any investor who buys individual stocks or bonds would do well to learn the basics of reading a balance sheet.

* When searching for bonds, thoroughly investigate all recent reports and accounts of the issuer. You can find Official stock market announcements, including company results, on This is Money here.

* Verify that cash flow is healthy and consistent. Also look at interest coverage: the ratio that shows how easily a company will be able to meet the interest payments on its debt. This is calculated by dividing earnings before interest and tax (known as EBIT) by what you spend on paying interest. Read our guide to making investment sums like this here.

* It is very important to find out what the bond debt is secured against and where you would be in the line of creditors if the issuer went bankrupt. This should be included in the details of the bond offering, but please contact the issuer directly if it is unclear.

* Consider spreading your risk by purchasing a bond fund, rather than tying up your money in a single company or organization.

*Inexperienced investors who are unsure of how retail bonds or minibonds work or their potential tax obligations should seek independent financial advice.

* If the interest rate is what attracts you to the bond, evaluate whether it is really worth the risk. Generally speaking, the higher the rate offered, the greater the risk.

* If the issuer is a listed company, before deciding whether to buy or not, it is worth checking the dividend yield of the stock to compare it with the bond yield. Stock prices, charts and dividend yields can be found on This Is Money here.

*Investors should note that it may be more difficult to judge the risk involved in investing in some bonds than others; It is easier to assess the likelihood of Tesco going bankrupt than smaller, more specialized companies.