London Capital and Finance

raynair wrote: »

would you/one of you call the FCA and the FSCS and enquire as to what activities they have registered for etc as you would have the right questions to ask.

No, because "what regulated activities are they registered for" is the wrong question.

Correct questions to ask would be - what is your attitude to risk, are you prepared to risk total loss, do you have a sufficiently substantial diversified portfolio of stocks and shares that it makes sense to allocate a small percentage of your portfolio to individual corporate bonds, if the answer is yes then is this particular corporate bond the best you can do.

AS I said before i talked to them but came out convinced..

There's one born every minute.

http://forums.moneysavingexpert.com/showthread.php?p=72739908#95

NOTE: THIS REVIEW IS AN ORIGINAL DOCUMENT AUTHORED AND POSTED BY BAIL-IN AND MSE HAVE GIVEN PERMISSION TO POST

LONDON CAPITAL AND FINANCE MINI-BOND REVIEW PART 1

London Capital and Finance (LC&F) Plc https://www.londoncapitalandfinance.co.uk describes itself as a commercial lender and corporate financier, lending to small and medium business enterprises (smes). According to company info site Endole, the purpose of LC&F is the provision of raising funding through the issuance of private bonds. The direct issue of the LC&F fixed term investment mini-bond is intended to raise income to finance business lending activity. Details of the unregulated mini-bond certificate of debt offer are not presented here in the review. Visit the LC&F website for info about the up to 8% APR fixed rates interest 1-3 year term LC&F mini-bond investment security.

The LC&F Bond Prospectus for the debt security or loan note is available online: Malta Financial Services Authority (MFSA) Bond Prospectus £100,000,000 Secured Bond Issuance Programme London Capital and Finance (20161018_Final_Base_Prospectus2.pdf
Download from https://www.mfsa.com.mt). Issuer: London Capital and Finance Plc, {Text removed by MSE Forum Team} UK Companies House no. 08140312. Financial Conduct Authority (FCA) no. 722603.

LC&F, a past NFACB member, is an FCA UK authorised and regulated firm. As of 7/6/2016 it has permissions to provide regulated products and services: accepting deposits, providing credit to consumers, giving investment advice, arranging deals in investments. The firm cannot hold client money. It is able to control client money for corporate finance business only. LC&F can lend monies directly without FCA permission if each loan amount is over £25,000. A financial company without relevant FCA permissions may also engage in such financial activity by selecting an appointed firm with such FCA approval and permissions e.g. for lending. The FCA authorised company contracted by LC&F at time of launch to ensure FCA compliance of the bond information memorandum was appointed in this way.

For company and financial information about LC&F Plc and the directors visit the following UK websites:
https://www.companieshouse.co.uk
https://www.duedil.co.uk
https://www.endole.co.uk
https://www.companycheck.co.uk
https://www.bizdb.co.uk
https://anonymouslcafgmail.weebly.com/
These websites provide accounts and returns information, officers, address, current liabilities, current assets, net assets, cash, turnover, and more for UK companies registered at Companies House.

The LC&F website and well-staffed mini-bond marketing and financial team are mostly about the direct marketing of the corporate minibond and the prospectus. Little about LC&F loan business, track record and means of bond interest payments. As with other online mini-bond offers, the website is about marketing the bond, not the loan business side and practical discharge of financial obligations to investors. The Feefo invited customer reviews in 2016 are from investors, no reviews from business loan borrowers. No results in Google for a commercial lending platform under the company name. Financial services in Tunbridge Wells and surroundings are unaware of LC&F.

Financial regulatory requirements are less stringent for unregulated mini-bonds than for listed corporate bonds. Great for firms issuing them as it saves on paperwork and reduces the problems of dealing with banks. In the case of a UK stockmarket traded corporate bond the detailed prospectus, with FCA mandatory requirements, for the corporate bond and the bond issuer are legally and financially scrutinised before a LSE listing. In contrast, mini-bond issuers do not have to provide a detailed, legally, financially, independently scrutinised prospectus for the company itself, nor a prospectus following FCA regulations. However, any financial promotions, including public offers must be approved by a FCA authorised person, who must approve the invitation document and all related promotional material as financial promotions.

Unlike a UK exchange (LSE) listed bond, an unregulated mini bond issuer is only required to provide a prospectus or financial promotion document for the offer following FCA rules for the publication, the type and description of the financial product, and that the retail investor is appropriately certified, that is, a sophisticated, high net worth, restricted or advised investor. (For more info about mini bonds as instruments of investment see: Being part of the crowd: mini-bonds and crowdfunding for franchise growth - Lexology https://www.lexology.com).

Of relevance here, unlike a UK stockmarket traded corporate bond, the mini bond issuing company is only required to state, in the bond prospectus or financial promotion, the business means to fulfill financial obligations under the bond. This is an evidential disclosure issue which is considered further later.

The LC&F mini bond security is a certificate of debt or debt security, an IOU or loan note issued to raise finance. It is unregulated, unprotected, non-convertible, un-tradeable and carries a significant risk so a return on investment and return of capital is not guaranteed. As an FCA unregulated financial product, the investor has no protection against losses under the Financial Services Compensation Scheme (FSCS) which does not apply to such fixed term investments.

However, the LC&F website states this unprotected investment is secured. It is asset-backed, that is secured on the assets of LC&F. The risk to investors is spelled out here in the disclaimer of liability: "The Bonds are secured by a debenture over the assets of the Company. There can be no assurance that, in the event that this security is realised, the amounts realised will be sufficient to satisfy the obligations to repay principal and accrued interest under the Bonds." (For the full LC&F disclaimer of liability visit http://londoncapitalandfinance.co.uk/disclaimer).

To add to this, a credit reference search at the time of the minibond public launch revealed the company's liabilities cancel out most of the value of the property assets of LC&F. (For a more up to date summary of LC&F latest financials, as of 30/4/2016, visit https://www.endole.co.uk/company/08140312/london-capital-and-finance-plc).

In addition to the mini-bond secured with a debenture charge on LC&F assets, the issuer claims the bond is secured by a fixed and floating charge on the assets of the borrowing businesses. Many secured business loans take this format. But the assets of the borrowing smes are not the lender's assets, rather LC&F has a fixed and floating charge over them in case of loan default and insolvency.

This illiquid scenario is not good in the case of loan default and consequential insolvency administration of LC&F and the borrowing companies, especially if challenged by existing creditors of both LC&F and/or the borrowing companies. Just because it is claimed that the mini-bond is secured by assets, whether of the lender or the borrowers, it does not mean it is secured in practice. Enforcing a registered charge on assets in case of default and insolvency can be difficult, expensive and time consuming, especially if many parties are involved. There is no guarantee of sale at initial valuation of the assets and it may be difficult to find buyers, in turn affecting bondholder compensation. Skilled risk evaluation and debt recovery would be needed to avoid such problems. (For info on the difference between a secured and unsecured bond visit https://www.thebalance.com/secured-bonds-vs-unsecured-bonds-417067).

Any money returnable in LC&F and sme borrower insolvency is dependent on the liquidation process. Bondholders are low in the compensation ranking order, although secured ranks higher than unsecured. Bondholders receive payments before shareholders. Neither are paid before the company settles debts with past and future higher ranking creditors: banks, mortgage holders and other senior creditors. We have seen there are little in the way of LC&F property assets, which are mortgaged, and the asset liquidation of defaulting loan borrowers is complicated, time consuming and expensive with administration, legal and other fees reducing value. It is highly likely bondholders would lose most if not all of their investments.

There may also be problems with default when enforcing the legally required independent corporate trust in favour of the bondholders to secure interest and capital return. Recent mini-bond failures reveal a corporate trust may not in practice prevent nor remedy corporate issuer default. The independent trustees deny liability, even though their duties include monitoring and protecting the trust monies in the interest of the bondholders as beneficiaries, and administration in default. Prevention is better than cure. (More later on corporate trusts and trustees in relation to this.)

Turning to the viability of the LC&F business lending model. The up to 8% APR interest (coupon) on the mini-bond is declared payable to bondholders quarterly minimum to yearly maximum, depending on the bond series loan 1-3 year period, with the capital principal repaid to bondholders end of term. The periodic interest return is declared raised from short term loan interest at 12-20% APR paid on asset secured loans (minimum £500,000) to smes. Note the lender, LC&F, will need to cover contractors, profits, wages, promotion and marketing as well as the bondholder interest out of the sme loan interest.

How viable is this business loans model in relation to meeting the financial obligations by LC&F?

The LC&F website states it has over 4,300 investors (10/06/2017) and an increasing loan book in excess of £66m. Since 2012 LC&F has lent over £108m, £42m in loans have been repaid since 2012 and the repaid funds have been re lent to other borrowers. However, Companies House Annual Accounts indicate that LC&F has very little past experience in short term sme loans. More on this later.

The business loan market is highly competitive. An online study indicates the current average small business bank loan rate is 6-13% APR from lowest to highest, much less than the business loan interest rates of 12-20% offered by LC&F. A business loan provider online comparison website indicates rates approx. 3.5-5.5% APR on secured business loans. An application with good credit standing for an unsecured one year business loan for £25,000 results in a 4.9% APR interest rate from Santander. Much less than LC&F secured business loan rates at 12-20%.

With low current loan interest rates and the large number of loan companies, the 12-20% lending rates by LC&F may not be competitive in the UK asset secured sme loan industry. But it is unlikely that lending rates below 12-20% would be sufficient to cover the LC&F company and mini bond marketing expenses, wages, contractor fees, and profit, as well as bond interest. No other business model is put forward by LC&F.

A reason a business would be charged a higher loan rate of 12-20% APR is higher default risk. Not good for LC&F bondholder interest payments, nor return of sme loan capital and bondholder principal, nor for company expenditure and profits.

The following five factors pull the most weight in credit underwriting or loan risk evaluation: capacity, credit history, the size of the loan, collateral and conditions. These are the factors the LC&F loan team would apply to sme loan applicants. Risk evaluation and management in relation to business lending is a very skilled job, with negative financials for the lending company investors if credit underwriting is mismanaged. Both interest and capital can be lost.

Financial regulators are concerned that such risk mismanagement is potentially a primary cause of future large scale failure in the rapidly expanding peer-to-peer lending. Lord Adair Turner, former City regulator, said in 2016: "You cannot lend money to small and medium sized enterprises without someone doing good credit underwriting." Proper checks were required to ensure a company actually possessed the premises, equipment and expertise it claimed. However, the P2PFA cites the low 2-3% loan default amongst its members, but they are the established largest P2P firms. The peer-to-peer lending sector came under FCA regulation in April 2014. This has resulted in further safeguards for investors, as sites must ensure they have arrangements in place for loan agreements to continue if the platform goes bust.

There are other broader UK economic and financial factors affecting business loan interest rates. The economy is still recovering from the credit crunch and global market turmoil of the 2008 financial crisis. Brexit hit UK company confidence. Profit margins are low. Defaults can occur in an economic downturn. The present financial market conditions in the UK are in some ways similar to the pre-2008 crisis, including very low interest rates, 0% credit card lending, very low fixed rate mortgages. Consumer debt has risen to the crisis levels. The interest base rate could rise. The small business loan model in the UK and other countries is subject to financial mismanagement reminiscent of the high default risk in the subprime mortgage investments crisis. Small business lending falls through the regulatory cracks.

Following the bank crisis sme business loans have been hard to obtain, despite government interventions like the Bank of England's Funding for Lending Scheme. Conditions eased recently but most lenders still have strict requirements for borrowers. It was the crisis that led UK banks to withdraw small business loans. In turn leading to the birth of minibonds whereby companies could directly approach the public, with restrictions, privately for investment loans. As also happened in Greece, where mini bonds are popular as banks severely reduced lending.

LC&F states no borrower defaults as of June 2017. However, there is a high default risk with sme loans, especially if inadequate credit underwriting. The minimum LC&F loan of £500,000, unlike P2P, is spreading the risk thinly among borrowers. The Bank of England estimates 6.5% of smes are in receipt of bank forbearance, 13% if property companies included. Default would impact LC&F company expenditure and profits, and bond interest payment. Issuer default may trigger immediate return of all interest and capital to bondholders, if a 75% bondholder vote in favour. Another point here is outstanding loans at end of bond term may delay return of principal.

However, to help avoid this scenario, it is possible to contract a competent third party loan provider, with relevant FCA permissions, to provide and expertly administer the business loans. But then contractor fees need to be paid from the sme loan interest as the only source of available finance. They cannot be paid from bondholder capital the stated purpose of which is sme loans by LC&F to generate earnings.

Turning to loan numbers. It is difficult to find evidence for the marketing team claim that LC&F have lent approximately £15 million to approximately 120 small and medium sized business enterprises (smes) secured on £33 million asset value since launch of the mini bond. These figures from 2016 are out of date by a few months. As of June 2017, the LC&F website states in excess of £66 million invested with over £215 million worth of asset security. Up to that latter date LC&F state no borrowers have defaulted on the loans.

LC&F are so far paying out due interest to bondholders. However, where is the value of interest paid if you lose all unprotected capital before or at the end of term. All capital and interest is at risk, and will continue to be so until it has been returned. The higher, but not historically high, incentive driven mini-bond interest rates, also indicative of the level of risk, may not justify the risk of loss of the entire capital.

We said earlier that Companies House audited Annual Accounts reveal that LC&F have little experience of sme lending. LC&F claim on the website a 100% track record of paying out interest, between 2012 and 2017. However, this appears to be the first marketed issue of the minibond. Companies House LC&F audited Annual Accounts clarify the picture. Before 2014 Annual Accounts indicate no loans of any significance were made. The Companies House audited Annual Account return 2014-15, re related financial transactions, indicated only one loan customer and the director of the lender LC&F, Michael Andrew Thomson, was also the director of the loan receiving company, One Monday now dissolved. Although bond interest payments were made 2016-17, the little activity in 2012-14 and the one loan client in 2014-15 does not really support LC&F's claim of 100% record of interest payment to investors since 2012.

From one loan to one company in financial year end 2015 (a period when no mini bond was offered by LC&F) to 120 sme loans in financial year end 2016 (a period when a mini bond was offered by LC&F). From a few thousand pounds single loan in financial year end 2015 to £15 million plus in the financial year end 2016. An update on the website in 2017 claims excess of £66 million invested with over £215 million worth of borrowers. A lot of work for employed directors and two Operations employees. LC&F can contract out the commercial lending, although Operations state LC&F is lending directly to smes. It is also possible that secured loans are being lent via peer-2-peer lending platforms, however they do not offer 12-20% interest and are more long term.

The 2015-16 Companies House audited Annual Account return shows much greater revenue and expenditure to previous years. The 2014-15 audited Annual Account mentions only one loan client, disclosed as a risk factor. There are figures in the 2015-16 audited Annual Account indicating considerable expenditure on contractual outsourcing by LC&F. (For info re audited requirements visit https://www.rapidformations.co.uk/blog/will-my-limited-company-be-audited/). The 2015-16 accounts, as well as an update 7 months up to 30/11/2016 can be downloaded (http://www.lcaf.co.uk). According to LC&F Annual Return in the financial year 2015-16 there were two directors and two employees. As of July 2017 four directors and two secretaries are listed at Companies House as officers.

Turning to the investor customer interface, the front marketing team for the minibond marketing and financial administration. According to the 0800 helpdesk, this is an outsourced financial service: Surge Financial Ltd. Companies House no. 09395654. Officers: {Text removed by MSE Forum Team}, {Text removed by MSE Forum Team}. However, staff acted like employees of LC&F although unaware of the LC&F lending business. This gives the impression that LC&F is bigger than it really is. The marketing team claimed approx. 50 employees in LC&F, really referring to Surge. The LC&F Companies House Annual Account return for 2015-16 indicates two salaried employees at LC&F. According to LinkedIn they are education students working in Operations. The CEO, {Text removed by MSE Forum Team}, should also be salaried.

In 2015-16 all customer contacts, regarding LC&F business and the minibond offer and administration, were through the contracted marketing company. The marketing team knew little re the commercial lending side, sometimes wrongly citing data protection laws. Want to speak to the CEO about this? Not so easy and may well be unproductive. Like politicians, company directors can say meaningful sounding meaningless statements. However, directors have duties to act in the interests of creditors as well as to maintain confidentiality of the company affairs.

The marketing team pass queries on they cannot address, but only to senior account managers in their own team who know little about LC&F's commercial loans business. This results in going round in circles, without getting answers to relevant questions by potential and existing customers searching for information disclosure.

Of course this is part and parcel of their job. As a financial marketing contractor they are there to deal directly with customers in relation to the administration of the bond offer by LC&F. They do not directly deal with issues relating to the LC&F company and associated officers and employees. However, it is frustrating to have nobody deal with issues, e.g. proof of business lending to smes, which could impact earnings of potential and existing investors. Banks and other large financial institutions are also skilled in ensuring customers can only contact retail banking and retail head office but not the head corporate office where officers are based. The FCA Handbook Principles shed more light on this, on the behavioural relations between firms and customers, existing and potential. (See APPENDIX 1.)

In 2015-16 the marketing team were unable to substantiate to potential or existing investors the sme trading interface. Unlike other sme business loan providers, there appeared to be no available company website for sme borrowers to apply for LC&F business loans. No physical location other than the registered office in Tunbridge Wells. No available names of existing sme borrowers, no names of the lending team employees. No credit underwriter name. No lending team employee contact, no phone, no email address, no loan statistics, reviews by investors but no reviews by borrowers. Business loan enquirers were asked to email the bond marketing team. No internet searches revealed evidence of the sme lending, nor how the bondholder interest was paid through sme loan interest, nor was there such evidence on the LC&F website, nor could the bond marketing team provide such when asked. However, many of these concerns also apply to other commercial lenders.

A year later on 1/12/2017 a new domain name http://www.lcaf.co.uk was acquired by LC&F. The new lcaf.co.uk website was not linked to in the londoncapitalandfinance.co.uk website. In Google the whole name lcaf.co.uk, including the suffix, is required in the search. The site has three sections: business loans (£500,000 minimum), introducers, and investing; with online application forms but still no evidential info re business loans. No loan statistics, no borrower reviews, no lending team details or contact. However, other sme loan providers will not provide such evidence either, some citing data protection laws. Incorrectly, as data protection laws only apply to living individuals not companies. Any smes out there have a LC&F secured business loan? Recent LC&F accounts can be downloaded from the lcaf.co.uk site.

This does not mean LC&F are not carrying out commercial lending activities. This does not mean that LC&F are not paying out due interest payments to bondholders. Interest payments are paid to date. But where is the evidence where this money is coming from? The only info given by LC&F is that it is a commercial lender to smes and the lending totals, and lately an online loan application form. Investors want more disclosure, especially in light of the little assets and track record of LC&F.

The lack of transparency and disclosure have been a major cause of past minibond failures as the lack of checks allows the steps to failure. Besides lack of verification of the LC&F commercial lending business, the investors, nor the security trustee, are able to check bond capital usage, to verify it is used for stated purpose. The financial history of recent mini bond failures (Providence Financial, Secured Energy Bonds) shows that the loan capital is often not used for stated purpose. Past mini bond failures indicate bond issuers and trustees of corporate trusts set up to protect the investor interests have fallen short in performance of duties resulting in interest and capital losses.

We have suggested perhaps the commercial lending is contracted out or outsourced. However, we are aware of the contracted marketing company but not a contracted lending company. LC&F Operations say it is a direct lender, confirmed by NFACB. Substantial wages are paid out to financial contractors, according to LC&F 2015-16 Companies House Annual Account return. Presumably from the sme loan interest. It should not come directly from bond capital which is used for stated purpose: interest returning loans to smes. Clarification and disclosure on this may help to remove doubts re validation of the LC&F business lending model to fund bond interest.

CONTINUED IN PART 2

http://forums.moneysavingexpert.com/showthread.php?p=72739908#96

Hi folks

bail-in's posts have been reported a couple of times to us for suspected copyright reasons.

bail-in has confirmed he/she wrote the documents contained in their posts.

There is no need to report the posts to us for suspected breach of copyright.

MSE_Andrea wrote: »

There is no need to report the posts to us for suspected breach of copyright.

They weren't reported for breach of copyright, they were reported for repeatedly spamming multiple threads with drivel which aims to swamp the thread and drown out discussion of ultra high risk unregulated minibonds.