New 7% bond is tempting but not without risks

The new seven-year bond from ICG is well worth a look as it can be held within an ISA or Sipp, making the return tax free, says Lorna Bourke.

An alternative to inflation-linked savings

Inflation-linked bonds have proved popular with investors. Tesco Bank's new bond, which has both capital and the 1% interest rate linked to changes in the retail price index (RPI), has gone well. But not everyone believes that inflation will carry on at its current level of 5.2% annual growth – not least because the 2.5% rise in VAT falls out of the annual RPI figures in the New Year. 

For those who prefer a fixed return, a new seven-year retail bond from Intermediate Capital Group (ICG) with a 7% a year return looks interesting. Maturing in 2018, the bond can be included in an ISA or a Sipp where the return is tax free. It should prove a good hedge against inflation, but with the certainty of a fixed return.

Like the Tesco bond, the ICG offer will be traded on the stock exchange, and the only way to be certain of getting your money back in full is to hold it to maturity in 2018. In between the capital value will go up and down depending on movements in interest rates generally. It will be listed on the London Stock Exchange (LSE) and will trade on the exchange's order book for retail bonds (ORB), which currently lists 151 bonds. The bond is on offer until 16 December and will be issued on 21 December.

How risky is it?

There are risks, of course. ICG specialises in arranging finance for medium-sized companies, and splits its operations between providing direct loans to these companies and the management of external funds operating in the same sphere. The finance provided is largely ‘mezzanine finance’, a type of capital below senior debt, but above equity. Loans are arranged by private placements, and the vast majority of borrowers are in Europe and the UK.

‘ICG trades on the LSE with a market capitalisation of just under a billion,’ explains Mark Glowrey of Fixed Income Investor, which specialises in analysing bonds. ‘The company is closely followed by a number of analysts and has good track record, having successfully weathered the credit storm to date.’ 

The bond is rated BBB-/BBB by credit rating agencies S&P and Fitch. Some £50 million is on offer. Interest is paid half yearly, the minimum investment is £2,000, and you can invest in £100 increments above the minimum. The price is £100 for each £100 of stock. You can apply through a number of stockbrokers such as Redmayne Bentley and Evolution Securities, which is the lead manager. 

Should you invest?

So is it worth subscribing? ‘A 7% yield to maturity is certainly tempting – the average yield on retail-denomination bonds of that maturity is just 5%,’ says Glowrey. 

But how about the risk? ‘Providing mezzanine finance to mid-size companies can have its ups and downs. However, ICG has been in this business for over two decades and they know their game, running a diversified portfolio with a strong focus on recovery of assets. Consider also that the company’s gearing, which stands around 100%, is a small fraction of that which might be employed by a bank,’ he says.

So how does the bond compare with other retail issues? Glowrey says that there are few direct comparables. Given that ICG makes around 40% of its income from the management of external funds, fund managers might be a useful comparison. ‘Both Fidelity and Henderson have medium-dated sterling bonds outstanding, yielding 6.6% and 6.2% respectively,’ Glowrey says.  

A good addition to a diversified portfolio

Glowrey takes the view that the new ICG bond is fair value and offers a decent yield to maturity. As a seven-year investment it is long enough for ISA inclusion but short enough to make redemption a realisable goal for most investors.

‘The bond is a useful addition to a diversified bond portfolio, but given the nature of the issuer’s business, should be viewed as slightly higher risk than some of the recently launched retail-targeted bonds,’ says Glowrey.

This is a corporate bond issue and investors should remember that these bonds are not covered by the Financial Services Compensation Scheme (FSCS). If ICG were to default, the income payments and capital could be at risk.