Mini-Bonds

A mini-bond issue enables a company to raise debt funding from a group of individual lenders, usually its customers. Bond issues below €5m do not require a full legal prospectus and any bonds issued cannot normally be traded from one investor to another. In effect, most mini-bond issues are unsecured loans that must be held for their full term or until the borrower redeems them.

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The Informed Funding two-minute guide: Mini-Bonds

• What is a Mini Bond?
  This is a way of raising debt finance that has been successfully tried by a small number of companies in the UK. They are sometimes known alternatively as Retail Bonds, but this term is also used for bonds issued by larger companies that can be bought and sold by retail investors on the Stock Exchange. The term Mini Bond refers solely to “debt securities” that cannot be traded from one investor to another. Instead, anyone who lends money to a company buy buying a Mini Bond must hold it for the full term, unless the company that issues it decides to repay early.
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  • What are the main features of Mini Bonds?
    Debt raised via a Mini Bond is effectively an unsecured fixed-term loan, usually for three to five years. During that period, the company will make regular interest payments but will not repay the capital until the end of the term. However, it may reserve the right to repay the bond early, either in full or in part – for example if a cheaper source of finance became available. In many of the Mini Bond issues so far, the companies involved have chosen to pay the interest partly in cash and partly in “rewards” such as free or discounted products or services.
  • What sorts of company have successfully issued Mini Bonds?
    The businesses that take this route normally serve consumer markets and have therefore been able to find willing investors among their customer base, for example the luxury chocolate company Hotel Chocolat or the restaurant chain Chilango. Issuers usually see Mini Bonds as a way to raise money and at the same time to increase customer awareness and loyalty. They may be particularly appealing to the owners of growing companies that need to finance expansion, are not in a position to take out a secured loan and do not want to dilute their ownership by selling shares.
  • How much can businesses raise?
    Mini Bond issues are normally used to raise fairly large sums: the retailer John Lewis borrowed more than £50m from its customers using this method in 2011. Because you will have to take on professional advisers in order to draw up the paperwork involved in issuing a Mini Bond, it will not be economic to raise small sums, say less than about £500,000, as the fees will eat up too much of the proceeds. Most Mini Bond issues have raised a few million pounds and issuers can decide how much to borrow based on the demand they experience, so a company might aim to raise a minimum of £1m but subsequently decide to increase the total if there is strong appetite to lend among its customers.
  • What rates of interest do Mini Bonds usually pay?
    Companies usually pay rates in high single figures - 6%-9% is a typical range. However, the headline annual return can be made up of a mixture of cash and payments in kind, whether that’s restaurant meals, discount vouchers or other “rewards”.
  • What does it cost?
    There will be several sets of professional fees involved in issuing a Mini Bond. You will need lawyers to draft the documents involved in the issue and you may need accountants to help draw up the accompanying financial information. You will also need to engage a firm of registrars that will receive the money from investors who buy the Mini Bond and arrange the regular interest payments to them on your company’s behalf. Finally, you will need a firm that is registered by the Financial Conduct Authority to authorise the issue of the Mini Bond documentation to the public.
  • Need to know:
    • An offering of Mini Bonds to the public counts as a “financial promotion” in law and as such the documents involved must be approved by a firm that is legally entitled to do so. In practice, this means a firm that has the relevant authorisations from the Financial Conduct Authority.
    • Companies that issue Mini Bonds are entitled to set a minimum amount that anyone can subscribe, which may be as little as £500 or £1000. They may also choose to set a maximum. Allowing very small minimum subscriptions will increase the administrative work involved in issuing the bond and therefore the costs.
    • If your company has existing debts, for example bank loans, you should make sure before you go ahead that issuing further debt via a Mini Bond, even if it is unsecured, will not put you in breach of any conditions or covenants attached to your existing borrowing.
    • Because Mini Bonds are interest-only products, you will have to identify a way to repay the capital at the end of the term. This could involve refinancing the debt with borrowings from another source, offering Mini Bond holders the opportunity to extend the life of their existing bonds, or repaying the debt from the company’s cash resources.
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