Alnwick garden trust retail bond.

oz0707

What's the consensus on this?
Seems a sensible place for small portion of cash. What's the risks are bondholders entitled to claims on assets. Obviously I will "dmor" before putting any money in but thought it worthy of discussion. Would interest be treated like savings interest ie 1000 tax free or whatever it is  

bowlhead99

Interest on debt or bonds is treated like interest from a bank account for the purpose of income tax, that is, you can get up to '1000 tax free or whatever it is' as a basic rate taxpayer.

The underlying borrower is a charity which has made £800k-900k of operating losses in each of the last three financial years. In 2019 it brought in £5.2m of revenue and essentially spent £2.3m on fundraising expenses and £3.9m on charitable activities; eagle-eyed readers of the prospectus would spot from that highlight that the expenditure exceeded money coming in by a million quid. The losses were of a similar order of magnitude to the previous year, and visitor numbers of about 350k in both those years were down a little from the year before that. 

It is looking to use the proceeds of its borrowing "for or in advancement of its charitable purposes, including, but not limited to, the development of its existing projects". They hope to launch a new separately ticketed attraction which would make a positive operating margin to help fund some of the other stuff they do, but have only been able to get a grant towards some of the cost of setting it up on the basis that they raise at least £10m of bond finance from the public.  There is no guarantee that they will be successful or able to pay the interest on the bond or pay back any of the principal unless they can borrow a greater amount of money again from some other sucker, a few years down the line.

• The Bonds are limited recourse obligations of the Issuer  (a special purpose company set up to borrow money) and the rights of enforcement for investors are limited.

• Bondholders do not have direct recourse to the Charity in respect of any failure of the Charity to fulfil its obligations under the Loan Agreement. The Bonds are not protected by the UK Financial Services Compensation Scheme. If the Issuer or the Charity go out of business or become insolvent, investors may lose all of their investment in the Bonds.

• The Bonds do not have an established trading market when issued, and one may never develop. Even if an active secondary market does develop if you want to get your money back before maturity in 2030, you may find nobody wants to pay as much for your bond as you had paid to buy it, especially if the charity is looking less creditworthy or if market interest rates have gone up, because the rate of income being paid on the bonds will be relatively unattractive for the risk being taken and the other options available. And it's possible that even if there are people wanting to trade the bond with you on a market, the issuer may not keep the relevant factsheet or KID up to date so intermediaries may not allow trading by retail customers.

For an offered rate of return of only 5% I would not go anywhere near it. IMHO it's nowhere near a big enough rate of return on a loan to an operation that doesn't bring in as much money as it spends and does not have a profit motive in what it does, merely trying to get enough entrance fees, charitable donations or borrowed funds to keep the wolf from the door for another few years.

Obviously I will "dmor" before putting any money in but thought it worthy of discussion.

There are hundreds of retail bond offerings and most of them are not worthy of discussion other than to briefly mention that they exist and are not something the typical novice investor should go anywhere near.

Bluntly, thinking of this investment opportunity as a 'sensible place for a small portion of cash' sounds like a load of balls. If you have half a million to invest and are charitably-minded, then in that circumstance yes the minimum investment of £500 might be a bit of fun for a small portion (0.1%) of your investment assets, and leave you feeling like you helped them out. So, if you are local and like the facilities and the work they do, then sure, lend them the money. You might get some of it back, which would let you feel like you helped (good for the ego) without just giving them the money outright as a charitable donation.

Although, a charitable contribution would save you  income tax at your marginal rate, while the bond ending up partially insolvent just gives you a capital loss to offset against other capital gains, which you might not have any of, if (a) most of your investment is done inside ISAs or pensions or (b) is invested in equally unattractive retail bond schemes such as this., rather than investments which have a likelihood of offering investment growth and/or reliable income.