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Quick-fire Q&A with WiseAlpha CEO
What are bonds and loans?
When companies borrow they take out a loan or issue a bond. Lenders/investors who provide the money receive a rate of interest (called a coupon) and receive their capital back at maturity.
What does ‘Senior Secured’ mean?
This means the loan or bond is secured on substantially all of the assets of the company. This collateral provides some protection for investors in case the company fails to pay back its loan or bond. A similar concept is when you take out a mortgage from a bank, the bank has your property as security in case you don’t pay your interest or repay the mortgage and can take ownership of the property.
Why the focus on senior secured loans and bonds?
The senior secured loan and bond market offers some of the best long term fixed income investment opportunities.
Are these loans and bonds like those on the ‘retail bond’ market?
The senior secured loan and bond market is a different segment of the bond market to the ‘retail’ corporate bond market accessible via the London Stock Exchange ORB (Order Book for Retail Bonds). Companies that issue in the retail corporate bond market are mainly within the financial and insurance sectors but the senior secured loan and bond market has a wider number of companies including large established brand name companies operating in a wide range of sectors.
Why are retail investors neglected when it comes to the best fixed income assets?
In today’s market, retail investors are often crowded out by institutional investors and investors choice is often limited. The primary reason is that banks tend to focus on the big ticket investors and the little man gets left behind. That’s what we are trying to change.
Regulators have historically been timid in allowing individual investors to make investment decisions for themselves in asset classes outside of mainstream equities and retail bonds although that is now changing.
Who invests in senior secured loans and bonds?
Until now, investing in individual senior secured loans and bonds has only been possible with a minimum investment size of £100k- £1m, making them the preserve of the financial elite (ultra-high net worth’s, banks and pension funds). But through wiseAlpha individuals can participate alongside us in minimum sizes of £100.
What are the returns for these instruments?
Annual interest coupons range between 5-9% and while prices can vary below or above face value (i.e. 100%) average returns are between 5-8%.
Can the price of loans and bonds change?
Yes, they can. Some factors that can cause movements in price include: Company performance, interest rates and general investor and market sentiment.
Popular loans and bonds can trade at a price above face value (i.e. 100%) because investors in the market are happy to accept a lower return than the annual coupon because the perceived risk is lower or because they aren’t willing to sell and a premium is required to purchase it. Conversely prices can also be below par if investors feel the coupon isn’t giving them sufficient reward for the risk.
What’s your background?
I started my career at Deutsche Bank structuring numerous multi-billion debt financing and advisory transactions and then worked in the fund industry. I also had a stint on the board of a large cable television business in Germany helping to turn it around.
What does wiseAlpha look for when choosing companies to list on the wiseAlpha platform?
We look for a strong brand and companies which have leading positions within their industry. If companies have products we understand, like and use that helps.
Our focus is on companies that are valued at £1bn or more as we feel these tend to fail less often than small companies and have more resources to adapt to changing trends within their industries.
Once we like the look of a company we assess the company’s financial profile, performance during a recession and we pay particular attention to credit statistics such as the LTV (loan-to-value), interest coverage ratios, debt ratios, free cash-flow generation and balance sheet liquidity. Hard assets on balance sheet and assets that can be sold quickly are a plus. We then check the loan or bond documentation to make sure there is nothing out of the ordinary.
Does wiseAlpha invest in the investments it lists on the site?
We pre-purchase the investments and then hold some of each investment so that we can provide immediate execution to new investors on the site.
What is wiseAlpha’s preferred investment style?
We prefer long-term investments in solid, leading companies. We have a bias to income-based investments with returns of between 5-8% because we like the predictability and like the elegance of compound interest. Boring is good.
What is your favourite investment on wiseAlpha?
I like all of the companies we have listed on wiseAlpha although Virgin Media is probably my favourite given I was part of the team that structured their loans and bonds back in 2004 and because I’ve worked in the cable television industry.
What’s your least favourite?
I don’t have one, I like them all. We only list companies we like.
Why is diversification a good thing?
It’s sometimes tempting to go for just the highest yielding investment or to just to invest in your favourite companies but diversification is important in spreading risk. Most academic research shows that the benefits of diversification tend to diminish above 8-10 investments so having 20 is a good number to aim for. Asset classes or platforms that require you to diversify above that number in order to make a return is a clear sign that there is more embedded risk.
Will you put on any special situation investments?
We may add some high return investments with double-digit type returns for more sophisticated investors who want to take higher risk for higher reward. Those investors should reach out to us.
What do you feel the outlook in 2017 will be like for senior secured debt?
In terms of our asset class of I expect senior secured loans and bonds to remain steady with high income offsetting low price volatility. While we don’t list these types of investments yet for subordinated high yield bonds (i.e. not senior secured) I expect them to continue to provide high income but show price volatility in cyclical sectors and maybe provide interesting buying opportunities for investors willing to take higher risk.