The Junkiest of Junk Bonds

Beware The Risks of Minibonds

An investor, I'll call him 'Joe,' not his real name, contacted me over the weekend, concerned that he'd probably lost the ￡60,000 he'd built up in cash ISAs after transferring them into an Innovative Finance ISA (IFISA) or an 'Iffy-ISA' as I like to call them, a type of stocks-and-shares ISA designed to encourage investment in smaller and riskier businesses. The IFISA was operated by the grandly-named London Court and invested in minibonds issued by Whisky Scotland Ltd. Joe had not sought advice from us or any other adviser before investing and had agreed to a disclaimer acknowledging that he had not been advised to invest.

When Joe first called he thought he should be due compensation "because the FCA authorised London Court." WRONG! London Court's literature included risk warnings to the effect that the Financial Services Compensation Scheme did not cover the bonds, and in any case, the mere fact that the FCA authorises a firm to manage an ISA wrapper is no guarantee of the quality and/or security of any investment it might hold.

I know a lot of people don't get this, so I'll make it graphic, and easier to understand: If you have a Mars Bar wrapper with a nice wholesome genuine Mars Bar inside it, you have a lovely snack to eat after your lunch. If, however, some joker has slipped a dog turd into the wrapper...

Now do you get why an ISA wrapper itself is no guarantee of investment quality? It's the same with FCA authorisation. Just because a firm is authorised, that does not magically immunise investors from the risk of losing out through market movements, sentiment, changes in global economic conditions, fraud, sheer incompetence, or a host of other potential risks.

Sorry if I put you off your lunch, by the way!

Whisky Scotland Ltd set out to raise ￡6m in September 2022 and promised investors an interest rate of 6% pa with interest paid at the rate of 0.5% per month, the bonds having a three-year life. For whatever reason it hasn't worked out and Whisky Scotland Ltd is defaulting. That means their bondholders won't get their promised interest payments on time, if at all, and their investment may not be returned in full, or even at all, on the third anniversary.

Take a moment to understand how bonds work.

Bonds come in many different varieties and are used by companies and governments to raise capital via the markets rather than by borrowing from banks. They represent a promise by the issuing company or government to pay interest at regular intervals and to repay capital on a fixed date in the future. UK government bonds are known as Gilts, US Government bonds as Treasuries, German bonds as Bunds, and so on. Corporate bonds are issued by companies.

Minibonds such as those issued by Whisky Scotland Ltd are corporate bonds issued by relatively small companies to raise funds from individual private investors, rather than being floated (issued) and listed on recognised bond markets to raise money from institutions such as insurance companies and investment houses, as tend to be the target market for the major blue chip corporate bond issuers. It is fair to say they have a patchy history at best with many investors losing large amounts of money. The phrase ‘junk bonds’ has fallen into disuse these days, Michael Milken, the ‘Junk Bond King’ having successfully changed the vernacular to ‘High Yield Bond’ back in the late 1980s, but you could with justification call minibonds the ‘junkiest of junk bonds.’ They are not covered by the Financial Services Compensation Scheme.

The main three risk factors affecting all corporate bonds are –

• Inflation. Bond prices will fall if inflation increases or is expected to increase.
• Rising interest rates. Bonds’ market values are affected most by changes in the general level of interest rates. They pay a fixed level of interest and their capital values will fall if general interest rates increase or are expected to increase.
• Default risk, i.e., the risk that the bond issuer might not be able to keep its promise to pay interest on time and/or repay the principal when it falls due. Unlike a government which can tax to meet its bond commitments, a company must be able to make profits. If trading conditions are poor and/or it gets its strategy wrong and/or if the entity raising the funds is essentially fraudulent, as was the case with London Capital & Finance (LCF) which defaulted on its minibonds to the tune of some ￡237m, it is perfectly possible to lose all your investment with little prospect of recovery. (I warned the FCA about LCF four years before it failed, by the way. Google 'Neil Liversidge LCF' and you can find the coverage online.)

When a bond issuer defaults its bondholders must wait their turn to be paid out after the costs of the administration and after more senior creditors have been paid their due. Whisky Scotland investors like Joe might get back pennies in the Pound if they are lucky.

If You Didn't Take Advice, Nobody 'Mis-sold' You. You Mis-Bought

I have seen many minibond failures and have been publicly advising against investing in minibonds along with land banking, carbon credits, wine, whisky, ostriches, and other such junk for 30+ years. I issued any number of such warnings during my seven-year weekly 'Money Guru' slot on BBC Radio Leeds. The bottom line is this: No advice means no protection.

One final word of warning. As always, a host of no-win no-fee law firms are circling like sharks and making all sorts of promises. It's difficult to see what they might achieve for investors, as opposed to earning a share of any payouts for themselves. Fraudsters also tend to target victims in situations like this, figuring that those who've been fooled once can be fooled twice. Think carefully before you sign up for anything, and never, ever, pay fees in advance to anyone promising they'll get you compensation.

The FCA has issued a notice here: https://www.fca.org.uk/news/news-stories/london-court-limited-update-investors