I use this term to distinguish them from retail bonds which have been issued by larger companies to retail investors and which are traded on the London Stock Exchange’s Order Book for Retail Bonds.
Mini bonds are a type of unsecured debt that are not transferable by investors. In other words, once an investor has purchased a mini bond, they cannot sell them but have to hold them until the company buys them back, which is typically after three to five years.
The return obtained by investors is in the form of interest which is paid in cash, interest paid in kind (for example, discounts on the company’s products or services) or a mixture of the two.
Here at BDO, we have worked on three mini bond issues: King of Shaves, Hotel Chocolat and, most recently, The Jockey Club. Our role was to approve the bond documentation as financial promotions, using our authorisation from the Financial Conduct Authority. Since the mini bonds are not transferable, the offering documentation is not a prospectus but is a financial promotion which cannot be issued by a company that is not authorised by the FCA.
It needs to be stressed that these mini bonds are not a source of funding for all companies. In particular, start up or early stage companies should really be funded by equity, or possibly bank overdrafts, rather than these bonds. Even for more established companies, our experience has shown that really only consumer facing companies (such as retailers, restaurants etc) that have a database of customers and potential customers should consider issuing these bonds since these customers and potential customers will be the main target for the fundraising. Since these mini bonds are a very specialist type of financing, a scatter gun offer to the public at large will not work.
So if you are a consumer facing company, you have got over the most important hurdle. What else do you need to consider?
Firstly, don’t assume that your customers will invest in your bonds, so before you engage the lawyers and accountants to help you with the issue, you really should survey your customers to establish whether they would be interested in investing in your mini bonds. Assuming that the feedback from customers is positive, you then need to decide on the structure of the issue, covering the following points:
- Decide on the target aggregate fund raising, both a maximum and a minimum below which the issue would not proceed. For example, the minimum could be £500,000 and the maximum £3 million. Don’t be too ambitious with a high minimum.
- Decide whether the interest rate you offer will fluctuate with bank base rate or will be a fixed percentage. Although base rate is likely to remain low for a number of years, at some point it will increase so you may want to maintain the margin over base rate that you are paying your bond holders.
- Decide what form of customer incentives you might want to offer bond holders, for example discounts off your goods or services.
- Decide on the minimum individual subscription and whether there should be a maximum. Usually, bonds are issued in tranches of £500 or £1,000 which would form the minimum. Some companies set a maximum, but others don’t mind if investors buy many tens of thousands of pounds of bonds.
- Check that your bank would let you issue the bonds. Your company is taking on more debt which will rank below bank debt, but it’s still best to check with your bank.
- Decide on the life of the bonds. Typically, this is three or five years but you can offer bond holders the option to extend beyond the strict term.
To assist in the mini bond process, you need to engage a firm of lawyers to draft the legal documentation, a firm that is authorised by the FCA to authorise the issue of the documentation (such as BDO), and a registrar that will handle the funds from investors and then pay out the interest.
To conclude, these mini bonds are only suitable for a minority of companies but they are a way of both raising money for a company and increasing engagement with customers.
