Raising finance with retail bonds

What are Retail Bonds?

Retail Bonds are an unsecured debt of the issuing company (similar to an unsecured loan note). One of the great advantages of the Retail Bonds is their flexibility – subject to certain key legal requirements, there is broad scope for the issuing company to decide their terms e.g. repayment date, interest levels, and whether interest will be paid in cash or by way of products or services etc. For example, gift vouchers could be offered as all or part of the interest coupon attaching to the Retail Bonds.

Many companies are experiencing a sustained period where bank lending has been difficult to obtain – at least on terms that are acceptable. Retail Bonds can be used as an alternative way of raising finance;
either instead of bank lending or, more often, in addition to existing banking arrangements. In the latter case, the terms of existing banking arrangements will, no doubt, require the bank’s consent to any further borrowing (which would include the Retail Bonds). However, given that the Retail Bonds (generally) are an unsecured debt, existing lenders tend to be supportive.

Some other benefits of raising funds by issuing Retail Bonds include:

•  the ability to raise funds without incurring the costs and delay associated with an issue of shares; and
•  an increase of general marketing profile and brand awareness.Other companies who have carried out issues of Retail Bonds include The King of Shaves, Ecotricity, Hotel Chocolat, Caxton FX and John Lewis. Ultimately, the size of the database of potential subscribers for Retail Bonds will be an important factor in the success of Retail Bond issue.The database of customers, whether actual or simply the existence of an identifiable and receptive audience, which many restaurants and bars have, is one which makes Retail Bonds particularly suitable for this sector.

What are the key terms of the Retail Bonds?

For legal reasons, there are certain key characteristics which must be included in the terms of the Retail Bonds. The Retail Bonds cannot be traded on any market and must not be transferable. The Retail Bonds are not shares, and cannot convert into shares or other form of equity – which has the benefit that the Retail Bonds will not dilute shareholdings in the company, nor require shareholder approval.

The terms of the Retail Bonds will need to be set so as to be commercially attractive to potential subscribers and, therefore, the interest rate attaching to the Retail Bonds may need to be more attractive than can currently commonly be found at UK high street banks. To date, the rate of interest offered by companies who have carried out Retail Bond issues has been between 6% and 7.5% (gross) per annum.

Another key term will be the period of time before the Retail Bonds are repaid. Again, this can be decided by the issuing company and there is discretion as to what this term will be. Commonly, however, companies have chosen repayment terms of between 3 and 4 years. This can either be a fixed repayment date or, for example, an initial fixed term when the bondholder can redeem their Retail Bonds if they so choose and, after which, the Retail Bonds continue for further one year terms until redeemed.

What is the process involved?

The issuing company, with the help of its advisers, will prepare and publish an invitation document or information memorandum which explains to potential subscribers the terms of the Retail Bonds themselves and provides information on the issuing company, restaurant, bar or its group of companies. Typically, this will include a letter from the chairman setting out the reasons why the company wishes to carry out the Retail Bond issue, what the funds raised will be used for, an explanation of the terms of the Retail Bonds themselves, and the risks associated with the Retail Bonds and the company or sector issuing the Retail Bonds. Financial information will also be included in the form of previous recent audited accounts and, depending on the reference date of those accounts, unaudited interim accounts.

The invitation document and advertisements, and the offering of the Retail Bonds, will be a financial promotion under the Financial Services and Markets Act 2000. As such, these documents will need to be approved by a person authorised by the Financial Services Authority; such as BDO LLP. The “authorised person”, in approving the documentation, will commonly require working capital projections to be prepared which will demonstrate the company’s ability to repay the Retail Bonds, and the interest accrued, as and when due. However, these projections are prepared for internal purposes and will not form part of the information made available to the public. The success of the Retail Bond issues to date, coupled with the potential investor base in the form of customers, would suggest that the Retail Bonds could be a useful and significant fundraising mechanism for the hospitality sector in the future.