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The Friday Five: things to remember when investing in retail bonds

Before you dive into the retail bond market make sure you understand exactly what you're dealing with. Here are five pointers to watch out for...

 

by Victoria Bischoff on Jun 22, 2012 at 10:00

The Friday Five: things to remember when investing in retail bonds

More and more big UK names are opting to raise cash via the retail bond market.

Just yesterday Severn Trent yesterday followed in the footsteps of the likes of National Grid, Places for People and Tesco to become the first water company to launch an inflation-linked retail bond.

Here, with the help of Henrietta Podd, head of debt advice for investment bank Canaccord Genuity, we run through five things you need to think about before diving into retail bonds.

1. Understand the risk

First, it’s important to understand that investing in retail bonds, or corporate bonds as they are also known, involves more risk than simply putting your money in a savings account.

When you buy a retail bond you are not protected by the Financial Services Compensation Scheme, which covers up to £85,000 of savers’ money in the event a firm goes bust. This means you stand to lose some or even all of your money if your retail bond provider becomes insolvent.

However, investing in retail bonds is considered less risky than buying shares, as when a company is wound up bondholders rank ahead of shareholders in the queue of creditors – ie, they are paid back first.

2. Know your bond

Without the FSCS safety net it’s crucial you research the company thoroughly before you invest. 

Make sure you are comfortable with how the firm operates, look at how it is rated by agencies such as Fitch, Moody’s and Standard and Poor’s and check its accounts – these are usually available on their website.

You should also be able to find details of the bond on the London Stock Exchange’s website. It’s advisable to be particularly careful when reading the detail on inflation-linked retail bonds as these are more complicated.

3. Check if the bond is listed, regulated and tradable

It’s crucial you understand the difference between regulated retail bonds that can be traded on the London Stock Exchange, like those issued by Severn Trent and National Grid for example, and other types of bonds.

A number of firms have recently started using innovative ‘retail bonds’ as a way to raise money. Hotel Chocolat, for example, offered investors a ‘chocolate bond’ a while back which paid interest in chocolate boxes. 

However, this type of bond is not tradable on the London Stock Exchange which means you are locked into the product for the full-term – three years in the case of Hotel Chocolat – and do not benefit from being able to buy and sell the bonds at any time according to their financial circumstances.

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3 comments so far. Why not have your say?

Mike Deverell

Jun 22, 2012 at 13:25

Some very good advice here.

However, Citywire, please be careful when describing how these bonds work. Severn Trent does not offer annual interest of RPI plus 1.3%. It offers annual interest of 1.3% which increases with RPI each year.

So if RPI is 5% in year 1 the interest rate rises to 1.365% and so on.

The maturity value also increases each year with RPI, but during the life of the bond the capital value will fluctuate.

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GCH.

Jun 25, 2012 at 11:53

Very confusing,

RPI inflation plus1.3% is miles away from from the above example of 1.365% based on a RPI of 5%?

Please confirm Citywire if Mike Deverell is correct.

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helpmeboab

Jul 09, 2012 at 20:59

mike deverell is correct

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