In 2014, Cambridge based charity Allia launched a company that enabled charities to access the bond market in a flexible and cost-effective manner.
Retail Charity Bonds plc has launched nine bonds totalling almost £300m for a variety of charities ranging from care home operators, providers of key work accommodation and recently the Alnwick Garden Trust.
These bonds (RCBs) can be quite small by the standards of conventional bonds issues, typically £10-50m. However, they meet the same, or tighter, regulatory standards of large corporate bond issues overseen by the Financial Conduct Authority (FCA); and they are tradeable on the London Stock Exchange (LSE).
The term “bond” is perhaps best known in translation of the LSE’s motto: “Dictum meum pactum” – “My word is my bond.” However, the word bond is so widely used that its meaning has been devalued.
So let me begin by setting out what a bond is in the context of mainstream investment.
Bonds are a form of loan finance and each bond represents a contractual promise by the issuer of that bond (the borrower) to repay the holder of the bond (the investor) an agreed amount, usually its face value, on the maturity date. The issuer will pay a rate of interest at regular intervals over the life of the bond.
If the bond is freely tradeable, the investor can realise the going rate for the investment during the bond’s life rather than waiting for maturity.
Whoever acquires it, has the right to receive interest and the redemption amount if held to maturity. As with any investment, if the issuer fails during the life of the bond, the holder may not get back what is owing.
A bond can be drawn up in many forms, from a private contract between two parties to a widely offered negotiable security, either unlisted or listed on a stock exchange, unregulated or subject to different levels of scrutiny by a regulator.
RCBs are tradeable securities, listed on the London Stock Exchange. As such, any offer of bonds RCB makes has to comply with a range of regulatory directives (largely relating to disclosure and carrying severe penalties for misrepresentation) and is subject to scrutiny by the FCA. Moreover, the bonds can only be bought and sold through a regulated body such as a stockbroker or wealth manager; and they are generally eligible to be held in Self invested Personal Pensions and ISAs.
So they are very different from the instruments known as mini-bonds which do not have to comply with these directives and are not subject to the same level of scrutiny. Mini-bonds are generally sold directly to the public, through newspaper advertisements, and there may be no market for the securities after they are issued.
As securities tradeable on a regulated exchange, RCBs are part of the multi-trillion global bond market, used by governments, supranational agencies, like the World Bank, companies and not-for-profits to raise term loans.
These borrowers use the bond markets to diversify away from bank funding, and because it offers them something that banks cannot offer, or at least not at the same price – for example, long tenure, fewer restrictive terms, foreign currency or a fixed rate of interest.
In the UK, borrowers generally issue in sterling and the market is known as the Sterling Corporate Bond Market. Bonds issued in this market are usually fixed rate and the return they offer at issue references rates available in the Gilt Edged Market (the UK government bond market) which is considered a “risk- free” benchmark + a margin for additional credit risk.
Most issues in this market are targeted at institutional (wholesale) investors and large in size (£250-£300m for each bond) so they are eligible for the bond indices which many asset managers aim to track. The documentation is costly to produce due to the legal due diligence required in a regulated market.
This cost is increased further if issuers wish to offer their bonds to retail as well as wholesale investors as the level of disclosure and legal scrutiny is even higher.
Since the introduction of the European Union’s MiFID II regulatory framework, the process has become so burdensome than the number of retail eligible bond offers across Europe has diminished markedly. So it is perhaps not surprising, that most large companies do not consider it worth the extra cost in fees and resources. However, retail eligible bonds can be issued in much smaller sizes as the investors in the target market do not tend to track the same indices.
This means that smaller borrowers, such as many charities, with limited requirement for funding each year, do have a way to access these markets with all their advantages – but at considerable cost.
Investing in charities
Retail Charity Bonds plc, a not-for-profit company, was set up to provide investors with a tradeable way to invest in charities; and to meet the issuing challenges referred to above. It uses standardised documentation and process to cut issuance cost, and manages the regulatory process and administration centrally on behalf of each borrower who is then advanced a loan by the company.
To fund each loan to an individual charity, Retail Charity Bonds plc issues a bond in the name of the charity. It is on a non-recourse basis which means if one charity gets into trouble it will not impair other loans and bonds issued by the company for other charities.
The bond proceeds are on- lent to the charity on the same terms as on the bond – for example, the recent bond for Alnwick Garden Trust carried a 5% coupon for 10 years. So the loan to the charity is at 5% pa and is repayable in 10 years from the issue date.
To date, all the loans have been unsecured due to the complexity of charging charitable assets. However, the borrowing charities have to use the proceeds for investment to accelerate their social impact, not simply as working capital.
Each of the nine bonds has been bought by a wide range of investors with a bias towards ethical bond funds run by fund managers such as Royal London Asset Management, Rathbone Investment Management and Edentree. However, for investors who still prefer to be self-directed and are keen to see investment directed towards positive social outcomes, as LSE listed instruments, they should be available through your stockbroker, including the majority of the popular online platforms such Hargreaves Lansdown, AJ Bell and Eqi.
Finally, it should be noted that prices of tradeable bonds are subject to market conditions, they are not covered by the Financial Services Compensation Scheme (nor are mini-bonds) and as with any loan, bond-holders are at risk if the issuer becomes insolvent or is unable to pay its debts.
Henrietta Podd is head of Debt Capital Markets at Allia C&C.