20 March, 2016

The Shenton Asset-Backed Mini-Bond: Be Careful.

The Shenton mini-bond has recently caught our attention, offering a 9%, asset backed investment over a two-year period. The headlines seem attractive but evaluating exactly who Shenton are and how the funds will be spent is difficult to determine.

The Shenton Group is a Singaporean investment house originally giving Singaporean investors access to international real estate investments. The Shenton International Bonds Plc is a new company registered in the UK raising funds from the British public through the Shenton Asset Backed mini-bond. This is the Shenton group’s first steps into the European market.

The funds raised from the Shenton mini-bond will be used to fund real estate developments in the USA and Brazil. Any funds deployed will be secured by a charge held against the value of the development asset. There is however little regards detail about security, the ranking of the charge and the loan to value (LTV) of the lent funds. There is a list of developments in the pipeline, along with past developments but no exact details on how your funds would be lent. It is therefore impossible to properly assess the use of funds, hence the risk. In the age of transparency driven by the growing peer-to-peer lending market this may be difficult to accept for savvy UK peer-to-peer investors. Saving Stream, a UK based peer-to-peer lending platform for example offers 12% returns on UK property development investments. The developments you are investing in are listed in full and the security details are clear.

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As with all mini-bonds details on the investment can be reviewed in the Invitation Document. A worrying aspect of the Shenton Bond Invitation Document is the detail of the Shenton Group being placed on the Monetary Authority of Singapore Alert list. Although forthcoming with this fact, the fact remains that their past business activity was alerted to investors by the Singapore Central bank.

Shenton is clearly a global operation with funds being raised in the UK, managed from Singapore and spent in the USA and Brazil. To get comfortable with this investment you will need to get comfortable with Shenton managing the funds and the macroeconomics of the regions where the money is spent. The question is: do you trust the Shenton Group to manage your funds correctly and return your capital at the end of the term as expected?

What is a mini-bond?

A mini-bond is an unlisted, generally unsecured debt instrument. Simply put, an IOU made by a company in return for a fixed interest over a fixed period. Typical investment terms range from two years to five years with investors receiving their money back at the end of the investment term following regular interest payments.

Unlike listed bonds, such as retail bonds or corporate bonds, you are unable to sell your investment before the term ends. This means you are locked into your investment and cannot gain early access during the investment term.

Mini-bonds have become popular in the past five years, particularly when the company raising funds has a strong
loyal customer base. In 2014 Chilango, a burrito takeaway chain raised £2.2million from its customer base through the Crowdcube platform. Investors received 8% and even free burritos!

Are mini-bonds regulated?

Yes, they are regulated to some degree but it’s a light touch from the regulator. A company issuing a mini-bond must have appropriate permissions to receive deposits and make interest payments but the specifics about how the raised capital is used is not regulated. This presents a risk to investors as companies have greater freedom on how the funds are used.

In short, mini-bonds are one step up from an unregulated investments but one step down from a fully regulated product such as a retail bond.

How do I decide if a mini-bond is right for me?

Specific details of mini-bonds are held within the Invitation Document, which accompanies any mini-bond issue. When making an investment decision you need to review this document very carefully. Within the document, reading between all the legal and marketing spiel, you should be able to determine how the funds are being used. The Invitation Document will also explain how to apply and invest in the bond.