Risks And Rewards Of P2P Mini-Bonds Revisited


Our colleagues in the peer-to-peer (P2P) sector of alternative finance, Zopa, have been at pains to point out that P2P loans are not the same as mini-bonds. This commentary has been taken up and recycled at P2P Finance News.Here's an extract with which we agree – having pointed out the difference, and the higher risk of mini-bonds nearly three weeks ago.

ZOPA has highlighted the difference between peer-to-peer loans and mini-bonds, deeming the latter "riskier than P2P".Natasha Wear (pictured), chief executive of Zopa's P2P business, explained the ways that the consumer lender mitigates risk for its investors and said that mini-bonds "should not be confused" with P2P loans.It's not for us to comment on the loan portfolios of other P2P platforms. Suffice it to say that Money&Co.'s portfolio is, we believe, among the very safest of the major P2P players, with an annual default rate of under 0.3 per cent, across around £15 million facilitated since 2014. Average gross returns achieved by lenders are over 8 per cent across the same time period.

P2P v Mini-Bonds: Risks Explained

Here's our take on the topic, as published on 20th March.Mini-bonds are loans or credit notes issued directly by private companies; they typically have no listing on any exchange. This means that if you invest in a mini-bond, you will not be able to get your capital back until the end of the term. Mini-bonds generally have a term of between three and five years. During the term, interest is paid to the bond holders at regular intervals, usually every three or six months. Mini-bonds cannot be included in an Individual Savings Account (ISA) and so tax will be payable on the interest received.Mini-bonds are unregulated. For investors, this means that there is a high degree of risk. If the company goes bust, an administrator will be appointed and account will be taken of all the company's debts; there will be an order of priority in which those debts are honoured.If a bank has lent to the company, it is likely that the bank will have a debenture over the company's assets and will be repaid first. There may be other lenders that also rank ahead of the mini-bond holders. In addition, mini-bond holders are not covered by the Financial Services Compensation Scheme as the mini-bond issue will almost certainly be unregulated. Mini-bonds are generally unsecured, non-convertible, and not tradable - they carry a high degree of risk.
  • Money&Co., as stated above, does not offer mini-bonds.
Money&Co.'s loans are peer-to-peer (P2P) business loans; the lender is making a loan to the borrower directly. As a P2P platform, Money&Co. is regulated by the Financial Conduct Authority. However, P2P loans are not covered by the Financial Services Compensation Scheme. Money&Co. always ensures that security is provided by its borrowers, taking a debenture over each company's assets. If we are making a loan to a property company, we also take a first charge over the underlying property. Although capital loaned is at risk, we try to protect our lenders' money as much as possible.

8% Yield Loan - 69% Subscribed

The latest loan from property-backed Seascape (is proving popular. This A-rated tranche yields 8 per cent gross, at a fixed rate for five years. It is now more than 69 per cent subscribed. As is the case with earlier tranches of credit, we have used our best efforts to ensure the truth of the assertions made, but cannot warrant their absolute accuracy. Fuller detail is available to logged-in members.

A Process Guide To Innovative Finance ISA Investment

Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). That figure is the result of almost £15 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders' capital is at risk. Read warnings on site before committing capital.All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.So here's our guide to the process:
  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you've put cash in your account it will sit there - and it won't earn interest until you've bought a piece of a loan. It's this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans - all loans on the Money&Co. site can be held in an IFISA - and your money will start earning tax-free interest.
The ISA allowance for 2018/19 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We're assuming a 7 per cent return, net of charges and free of tax here.Once you have made your initial commitment, you might then consider diversifying - buying a spread of loans. To do this, you can go into the "loans for sale" market. All loans bought in this market also qualify for IFISA tax benefits.

Risk: Security, Access, Yield

Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here's one of several earlier articles on security, access and yield.

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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.