Mini-bonds – an alternative funding solution

Thursday 4 December 2014

What are mini-bonds?

A ‘bond’ is a debt instrument under which an investor lends money to a borrower, usually a corporate entity. Bonds are issued by the borrower on specified terms which are contained in a ‘bond instrument’.

Traditional bonds are issued by companies to both private and institutional investors and are traded on a stock market. Such bonds are commonly known as ‘corporate bonds’ or ‘retail bonds’ (although unlisted bonds are also sometimes referred to as retail bonds) and are issued by a variety of companies, including well known brands such as Tesco, National Grid and GlaxoSmithKline.

There is no legal definition of a ‘mini-bond’. However, the term is generally used to describe bonds which are offered mainly to private individuals and which are not listed or traded on any stock market. Typically, mini-bonds are not redeemable prior to maturity and are non-transferable, so the investor is tied in for the term of the bond.

Mini-bonds, as opposed to corporate bonds, tend to be issued by much smaller companies. Mr and Mrs Smith, Hotel Chocolat, Ladbrokes and the University of Cambridge are examples of some more well-known companies and organisations which have issued mini-bonds to raise money.

Mini-bonds, like crowd-funding, have become an attractive method of raising capital for smaller companies as a result of the difficulties in securing bank finance over the last seven or eight years. As Capita Asset Services, a leading administrator of mini-bonds, says “Mini-bonds offer a number of other potential benefits to companies including brand building, increased company profile and customer loyalty.”The market has seen mini-bonds issued across a wide range of sectors including commercial real estate, confectionary, leisure and gambling, retail, food and beverage and education.

One of the main attractions of mini-bonds is the better interest rates they offer compared with the high street banks. Typically, mini-bonds will have a coupon of anywhere between five and 10 per cent., whereas current deposit rates offered by banks may be as low as one to two per cent.