My wife and I recently went to see Skyfall, the latest Bond movie in which Daniel Craig successfully continues to differentiate his more aggressive 007 character from that of Roger Moore and others who have performed the role.
If you have not seen it, I am not giving anything away when I reveal that yes, there is a scene in which the film’s hero turns to a stunning brunette and issues the money line: “The name’s Bond. James Bond.”
Great stuff and marvellous, escapist entertainment for a couple of hours. Plus my wife loves Mr Craig. Apart from 007, however, bonds of a different hue have been making the news amongst investors of late.
Few of us, for example, would immediately associate the name Eddie Stobart with that of Bond. Reference to the ubiquitous trucker, famed for its careful drivers and distinctive livery, is more likely to be found on the M6 than in say, Asian honeypots or Middle eastern souks populated with characters linked to regular espionage activity.
Nor is there any obvious connection linking the names of Tesco, Enterprise Inns or First Group with a secret instruction from ‘M’ to exterminate a baddie intent on taking over the world.
The reason, of course, is because we’re talking about retail bonds, not James Bond, though investors may consider them no less exciting.
As company access to bank borrowing has been squeezed, primarily by a new mood of risk aversion prevalent amongst those in charge of our banks, coupled with an inexorable rise in the cost of loans that are available, many companies, not just minnows, have found it difficult to raise finance to fund expansion.
As an alternative, therefore, they have effectively said to their bankers, ‘forget it’ and gone to the market in search of funding instead, issuing retail bonds carrying attractive-looking rates of return, or ‘coupons.’ Many investors believe that when it comes to trustworthiness, companies such as Tesco, Vodafone and M&S appear a better bet than many high street banks whose supply of trust, rarely brimful, has diminished to such an extent that some are running on empty.
Eddie Stobart is the latest well-known company to launch a retail bond. The company is promising a fixed 5.5 per cent return until December 4 2018, a level unlikely to cause it any problems as the cash its operations generate is more than 12 times its current interest charge.
And there is the rub. Stobart expect to raise about £25m from the bond issue, a sum that will enable the company to effectively pay off some of its more onerous borrowings and keep the average interest rate it pays on the balance of outstanding loans at five per cent.
Alternatively, you could buy Stobart shares which, at the time of writing, yield 5.4 per cent and are priced at 108p, although they have been on a steady downward trend since peaking at 160p last year.
But Stobart’s entry to the retail bond market is not simply a move to get rid of expensive bank borrowing — it plans to use the cash receipts to develop its burgeoning business.
The company already owns Southend airport (which opened in March) and now intends developing Carlisle airport too. Its plans for Carlisle were finally given the green light recently, providing Stobart with an opportunity on its doorstep to add momentum to the development of its freight operations.
As returns generally remain pitifully low, investors’ heads are being turned by a raft of high-profile retail bonds, some paying 10 times more than the interest available on high street bank accounts, for example. However, the ultimate aim of creating a bond portfolio is to reduce volatility — if each bond you own is rated BBB, then their pricing will tend to react in the same way.
There could be great merit in creating a ‘ladder portfolio’ of retail bonds — differently-rated securities maturing in different years — and as the entry level cost of the Stobart issue is £2,000, a number of investors intend doing just that starting with this particular bond. The Stobart bond.
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