Creative bond funding for growth

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Using bonds as a form of funding has recently been in the press after the Scottish Government announced its plan to use them to raise up to £450m p.a. for much needed infrastructure investment. But what about private companies using them for growth?

I have helped private companies raise funding from mini-bonds when the banks closed up for business in 2008. Today it is equally difficult for many companies with weak covenants and balance sheets unable to secure bank funding - so bonds could be making a come-back.

The beauty of bonds is their simplicity - they are unsecured, often with a 3 to 5 year term and with an annual interest coupon. With high interest rates you could need as much as 10% to make them attractive.

You also need to have something special to offer. It might be your fan or customer base or some form of ‘extra frill’ as part of your product offering that you can include as part of the offer:

💡 in 2009 King of Shaves launched their ‘Shaving Bond’ which was a £5m bond issue comprising 3 year non-transferable and non-convertible bond with a 6% p.a. interest coupon. You could apply for up to £5k of Shaving Bonds which also gave you free shaving products for the term. At the time it was a market first;

💡 in the same year we helped an energy company develop and launch its ‘energy bonds’ - for each £5k bond at 6% p.a. interest you also received credit for £1k of gas/electricity in the first 2 years;

💡 in 2010 Hotel Chocolat launched £5m of ‘Choclate Bonds’ including boxes of chocolates p.a. equivalent to 6.75%;

💡in 2013 Naked Wines offered a bond that paid 7% in cash or 10% in booze;

💡 BrewDog raised tens of millions from bonds with 5% cash interest and 1% beer interest via ‘BrewBucks’!

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Unlike with corporate bonds, these private companies would not have their bonds graded by a credit ratings agency. The risk for the bond holder is that the company goes bust or is just not able to repay the principal and interest on the due date - so caveat emptor applies! To lawfully market one of these bonds to the public you need a prospectus and the help of an authorised person, so be mindful of the expense and process. You can also market them to HNW or sophisticated angel investors in the same way as companies go after these individuals for equity funding. BrewDog used FCA authorised Crowdcube as their platform of choice which in recent years has become much more mainstream.

Time will tell if bonds by private companies will make a comeback.

In the meantime good luck to SG on its corporate bond issue planning - to have any chance of success with the markets and rating agencies it will need to show it can balance its books and will put IR2 firmly on hold for the duration of any bond issue.

If you would like to consider whether this type of funding might help you then feel free to get in touch.

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