Why I’d avoid these unlisted bonds like the plague

The world’s stock and debt markets originated with individuals (often farmers) going to others to raise money for their ventures.

Originally such deals took places in private houses, coffee shops, and even on the roadside.

Over time these early markets matured and were formalised and regulated. Together with the invention of limited liability companies, we got the financial system we enjoy (or otherwise!) today.

So why would a company want to set back 700 years of history to offer its own bonds directly to the public? And who want to buy them?

That’s the question I ask myself as I read this pitch from UK shaving supplier King of Shaves, which has just started offering a three year, 6% bond:

“IT’S TIME TO SHAVE AND SAVE BETTER…”

The King of Shaves Company Ltd., owner of the successful shaving brand King of Shaves, is delighted to offer an opportunity to the general public to invest in its first ever ‘Shaving Bond’, a way for you to save money (with a 6% per annum interest rate) and shave better (with our multi-award winning King of Shaves products).

The proceeds of the Shaving Bond will be used entirely on marketing the King of Shaves shaving brand, a multi-award winning company founded in 1993 by me, Will King. […]

With only five thousand of the £1,000 Shaving Bonds available, and with one million men and women shaving with King of Shaves every day, we are expecting this savings opportunity to be heavily oversubscribed, and to avoid disappointment, we would recommend applying early.

Please note: To apply you must be a UK resident aged 18 or over.

Answering the first of my two questions is easy. Besides $5 million in cheap money, King of Shaves will get plenty of publicity from its ‘shaving bond’.

There is equally a risk of bad publicity if it can’t pay the bonds, but in such circumstances it’ll probably have other problems to deal with.

For investors though, I see no attraction short of the free shaving stuff you get for investing – and those admittedly nice products can be picked up cheaply for a few quid without risking a grand.

You might think a 6% fixed rate sounds good compared to savings account rates of 3.5%, but King of Shaves’ bonds have about as much in common with a savings account as I do with Brian Blessed.

Here’s why I’d avoid them:

This is not a savings account

The literature states:

SO WHAT IS THE SHAVING BOND?
It’s an opportunity for you to ‘shave and save’ with King of Shaves. Yes, we’re offering you a 6% per annum, 3-year non-transferable, non-convertible savings bond. That’s a massive 12 times the current Bank of England base rate. You simply won’t get that from most High Street banks, or the Back Street ones for that matter.

This is all completely irrelevant, because this is not a savings account backed by a giant bank.

It’s a corporate bond backed by a small, unlisted company.

Comparisons should be made with other corporate bonds, not with cash savings.

These shaving bonds are too risky

No investment is guaranteed, and nor are conventional corporate bonds. But the shaving bonds have particular properties that make them much riskier than normal corporate bonds.

You don’t have to take my word for it – just read the offer details from the company closely!

Once you’ve clicked to apply for the bonds, the company says this in its notes on risk factors:

Investment in an unquoted security of this nature, being an illiquid investment, is speculative, involving a degree of risk. It will not be possible to sell or realise the Shaving Bonds or to obtain reliable information about the risks to which they are exposed.

The Shaving Bonds are an unsecured debt of the Company and there is no certainty or guarantee that the Company will be able to repay them.

The Shaving Bonds may not be a suitable investment for all reviewers of this Invitation or the Instrument.

Too right.

How do you judge whether King of Shaves can meet its debt repayments? This is an unlisted company, and there’s no balance sheet or profit-and-loss statement in the offer material.

You’re effectively taking a punt on the company’s brand name, and that of the accountant BDO Stoy Hayward who is helping with the offer.

A bit of Googling reveals King of Shaves was expected to turnover £25 million in 2008, but I can’t find anything more up-to-date on turnover than that.

The £5 million it proposes to raise seems a lot to me, in comparison with its turnover.

The 6% return is a lousy reward

There are plenty of conventional corporate bonds offering more than 6% from large, blue chip companies. Obviously in the current climate we’ve all been reminded that no company is bomb-proof, but personally I’d rather buy debt from a big listed company with a decent credit rating than an unlisted tiddler.

Better yet, you could invest in a broad spread of high grade corporate bonds via an investment trust yielding over 6%, if you want income from this sector.

To be fair, one difference is the shaving bond will (hopefully) return your capital in just three years – in contrast with corporate bonds that will fluctuate in value over a long time frame before repaying their par value. (Remember the time value of money means that the longer you lock your money away, the higher rewards you should look for).

Of course there are mainstream corporate bonds with just three years left to run, but I’m not certain of their rates. The shaving bond yield will probably look more favorable compared to them, but I bet the overall offering won’t.

If you want to root about for proper corporate UK bonds, Fixed Income Investor is a good place to learn more.

The shaving bond is illiquid

As far as I’m aware, you won’t be able to trade your shaving bonds.

Rather, you’ll have to lock away your money for three years. If you need cash before the end of the term, too bad.

This is a terrible risk/return situation for private investors. Either the bonds will pay out for three years in a row and you’ll get your money back, or they won’t. There’s no middle ground.

You’ll happily lock money away into a savings account because you can have a lot of confidence the bank and the government will guarantee your cash is repaid.

This security means 6% for a savings account would be a very good return in the current climate.

But for a bond you can’t touch from an unlisted company, you’d want to get more like 10-20% (at which point you’d wonder why the company wasn’t getting money cheaper from elsewhere).

There’s no smart money evaluating the bonds

We’re basically being presented with the bonds and asked to like them or lump them.

All corporate bonds are issued on that basis to some degree, but:

• The issuer is aware sophisticated market professionals will be evaluating the bonds and comparing them to other corporate bonds, and so will price them accordingly.

• Normal corporate bonds are tradeable, so you can always buy after they’ve been issued if you think they’re over-priced and likely to fall.

The King of Shaves bond has been priced according to what it will take to get 5,000 retail investors to part with £1,000 each.

Great product, bad investment

I’ve been known to use King of Shaves products, when I’m feeling flush and they’re on special offer. (I’m usually not a sucker for brands, especially in the bathroom, and the own label gel does me fine).

I’ve also got a sneaking admiration for the company for trying it on with this bond. With trust in financial institutions at an all-time low, you can see the rationale. Founder Will King has also said he thinks he will get 5,000 ‘brand ambassadors’ for his shaving products as well as investors, which makes sense. His cheeky offer will increase sales as well as raise money.

As an investment, however, I wouldn’t touch it. The shavings bond is illiquid, the yield is too low, and I’ve got no financial information about the issuing company it – and nor does a savvy after-market, because there isn’t one.

I suspect 5,000 people will feel differently. If you’re one of them, you can read more about it on the shaving bond offer page.

What would trouble me is if King of Shaves started a craze for unlisted bonds. One company doing a one-off deal for headlines is one thing, but dozens of companies raising money direct from an always-credulous public would surely end in tears.

Anyone out there more tempted? Do let us know in the comments below! 🙂