A report in The Daily Telegraph Your Money section on Saturday 31st October told us “Retail bonds lose 25% of their value”. There are many retail bonds listed on the London Stock Exchange’s electronic order book for retail bonds and their values had not fallen by 25%. This is not an exercise in semantics; if the headline had been “Retail bond loses 25% of its value” it would have been entirely accurate. As it is, the headline was misleading which highlights the caution needed when reading the financial pages.
NB. All price data has been taken from ShareScope, www.sharescope.co.uk
This is the company that was the subject of the Telegraph’s report. In August 2015 the share price was 3,760 cents (listed in the USA) and as at 30th October it was 1,117 cents. The price of the bond fell from 9,810p in early October 2015 (issued in UK in sterling) to 5,525p on 30th October.
The bond was issued in October 2014 and the reviewer in Bond of the Week issued by www.investorsintelligence.com at that time highlighted some issues of concern; a convoluted corporate structure with the founding family owning nearly 50% of the equity and the difficulty of understanding the Bollywood market and in particular putting a value on Eros’s film library.” It is a bond we did not and will not buy.
What is a bond?
Companies will often raise money for particular projects, for example Tesco does this when it is planning a new development. The company issues a bond (borrows money) and promises to pay a fixed rate of interest (paid without deducting tax and normally twice a year) and to repay the capital at £1 a share at some date in the future. Neither payment is guaranteed but we analyse the company very carefully.
We have bought retail bonds for the Fixed Income section of most of the portfolios we manage. These are the criteria we monitor before we will buy a retail bond:
- A high level of security, the company won’t go bust, so far as we can research it.
- A term to maturity of not more than six years because we think inflation is likely to be suppressed for most of that period.
- A running yield of 5% or more.
- A price at purchase of not more than 104p a share. A purchase at such a premium means that one year’s yield is taken up in the capital loss.
- The bond is listed in the London Stock Exchange’s Retail Order Book.
Don’t believe everything you read in the financial pages or hear on Money Box. For the cost of a telephone call speak to Robert Bewell on 01462 422507 for a second opinion.