Wellesley Mini-Bonds: Earn 7%pa + 1.5% Cashback
If you're looking for a bit more excitement in your portfolio, you can lend to a P2P lending company itself, rather than lending to lots of borrowers through the P2P lending company's website.
Wellesley & Co., the property loans P2P lending website, will pay you cashback up front, and then interest every six months for three or five years, if you lend to it through its Wellesley Mini-Bond.
Here's the deal
The minimum amount you can lend to Wellesley & Co. – or, I should say, a subsidiary called Wellesley Finance – is £100.
You're paid 6% over three years and 1% cashback, or 7% over five years with 1.5% cashback.
Then you can get your money back or roll over the loan for six-monthly periods.
In order to get the rate shown on an annualised basis you'll need to re-lend the interest you receive every six months. If Wellesley stops issuing new bonds you could lend the interest payments in P2P loans instead.
If you don't re-lend your interest, you'll get less than the rate shown on an annualised basis: the equivalent of 5.6% over three years and 6.1% over five.
The Wellesley Mini-Bond can be wrapped in a SIPP, but not an ISA. SIPPs add extra charges, but if you invest larger amounts, the tax savings make it worthwhile.
Why is Wellesley borrowing money?
Wellesley primarily wants to borrow your money to lend it to others at a higher rate. It is also intending to use the money to expand.
Wellesley's property lending history
Wellesley Finance, the subsidiary that is issuing the Mini Bond, has made 80 loans worth £50 million, based on security of nearly £90 million. On average, it is lending just 63% of the estimated property values, which is a large margin of safety.
The overall company has currently got nearly £200 million-worth of loans outstanding secured against properties that are estimated to be worth £320 million. While the size of its loans compared to property values have risen here a bit recently to 65%, they still offer a great margin of safety.
No Wellesley Finance property loans have had any bad debts. In the overall group portfolio, Wellesley is recording just 0.46% bad debts, although it actually expects to recover that money by repossessing and selling the single property in question.
Experience in property lending
Paul Cragg is the Chairman of the Credit Committee at Wellesley, which means he leads the discussions on improving borrowers.
His profiles indicate he's had at least five years experience in property lending, including through a good chunk of the property crisis. And now one-and-a-half more years through Wellesley & Co.
How the bonds compare to P2P lending
The interest rates on the Wellesley Mini-Bonds are about one percentage point higher than if you do P2P lending through Wellesley. This is because the risks are higher.
When you do P2P lending through Wellesley, you're lending to over 100 borrowers and the borrowers' properties can be repossessed if they can't repay their debts.
With the Wellesley Mini-Bond, you're lending to just one business – Wellesley itself – and you will be either last or joint last in the queue if Wellesley goes bust and it has other loans elsewhere (e.g. bank loans).
However, you do less directly benefit from secured property loans to the extent that Wellesley will use a large chunk of your money to make secured loans.
Similarly, you get some indirect protection from Wellesley's bad-debt provision fund – a pot of money set aside to pay for losses if the property values aren't high enough to do so.
It's reassuring that Wellesley has set up a separate company for its bonds, which indicates its taking steps that could help to protect you from other businesses lending to Wellesley.
A key risk
Graham Wellesley, chairman and founder of Wellesley & Co. writes “In the Board's opinion, there remains a significant demand for funding from reliable borrowers who can offer high quality asset security and therefore our business is presented with significant growth potential.”
Indeed, the company has grown very quickly. I remember speaking to Graham at the beginning of 2014 when it had done about £14 million in loans, so it's completed around 13 times as many loans since then.
Wellesley can potentially borrow £100 million through selling its Wellesley Mini-Bonds and it has access to up to half a billion through its Retail Bonds. That doesn't mean Wellesley will borrow anything like that much money, but the more it borrows, and the more quickly, the more the risks rise.
So a key risk for Wellesley is that it borrows too much before a surprise and dramatic slowdown occurs. If it can't lend your money out without taking greater risks, it might struggle to keep paying you.
Another key risk is that you need the money early and you can't get it.
Mini bonds are not easy to get out of. You usually have to wait till the full fixed period is up before you get your money back.
While you can't sell the Wellesley Mini-Bond, according to the terms and conditions in the invitation document*, bondholders are in the fortunate position that Wellesley could potentially buy you out any time after the first 12 months if you ask it too.
But this will depend on their being enough cash to comfortably do so. If lots of people want to leave at once, e.g. because they fear a property crash and worry how it will affect Wellesley, getting out early is going to be difficult.
No credit rating information
It's usual to look up a company's credit rating, but Wellesley Finance does not offer this information in its mini bond investor document (the “invitation document”*) or its prospectus for its other “retail bond”.
Taking a look for ourselves, Wellesley Finance's last filed accounts are unfortunately nearly 12 months old. For what it's worth, they show positive cash flow, profits of nearly three-quarters of a million to end June 2014 and a positive balance of roughly the same.
In addition, the February 2015 prospectus for Wellesley's retail bonds states “There has been no material adverse change in the financial position or prospects of the Issuer since 30 June 2014 (the date of its last published audited financial statements).”
No government protection (FSCS)
As usual for all investment products, you're not protected from losses by the government through its Financial Services Compensation Scheme. That scheme is to protect your savings, not your investments.
Signing up to the Wellesley Mini-Bond
You need to open an online account with Wellesley & Co. [link required] before you can deposit funds and choose to invest in the Wellesley Mini-Bond.
Note that the “Lender agreement” you see when filling in Wellesley's online form to open a account refers to doing P2P lending through Wellesley, so it's not relevant to you if you just want a Wellesley Mini-Bond.
The mini bond is a single loan, so it is comparable to one loan in a P2P lending portfolio. If you take part in the Wellesley Mini-Bond scheme [link required], you still need to spread your risks across other loans or investments too.
*You'll need to read the invitation document before taking part to get a somewhat better understanding of what you're getting into before you leap in.