“All payments made in full” – what does it mean?

Sounds good?

An increasing number of offerors of unregulated loan notes have started proudly advertising the fact on their website that “all of our investors have received every payment in full and on time”.


This may sound very reassuring, but is it?

Let’s suppose that I launch an unregulated bond paying 8% per annum for a term of three years. And that I attract 100 investors a year who each invest £10,000. And let’s suppose that I do nothing except sit on the money.

Actually, scratch that last sentence, as the companies making these statements might rightly object to me talking about fraud, even hypothetically. Let’s instead suppose that I invest investors’ money in property, but due to a combination of bad luck and incompetence, the property never makes any money – all the rent goes on the costs of maintaining the properties, my staff, etc, and the net return before payments to bondholders is zero.

In the first year, I take in £1 million, and have to pay out £80,000 to investors – easy.

In the second year, I take in £1 million, still have £920,000 from the first year’s investors sitting in property, and I have to pay out £160,000 – still easy.

At the end of the third year, the first year’s investors’ capital starts falling due, so on top of £240,000 in interest I have to pay out £1 million. Not a problem when I have £1.76 million in assets – not counting the £1 million I’m taking in this year.

In the fourth year, the same happens – but now I have £1.52m in assets. In the fifth year, £1.28 million in assets. Uh-oh. But it’s not until year 10 that I actually run out of money and I finally become physically unable to pay investors.

10 year business
The slow death of a failing business. Until 2028, “every investor paid in full”. And even in 2028, I can walk away from the wreckage proud that despite not making a single penny of profit, I still paid seven out of ten investors in full.

In reality, I would probably run into trouble earlier than that, what with having to fire-sale properties to raise enough money for capital repayments, and the unlikelihood of being able to convince investors to keep investing £1 million a year in a business gradually sliding into the abyss. But the point is that until the very end, I could proudly boast on my website “every investor payment made in full and on time”.

What I am describing is not a Ponzi scheme. A Ponzi scheme is where you use new investors’ money to pay off existing ones. My existing investors are being paid with rental payments and property sales. It just happens that I don’t have enough of them and run out, despite my honest best efforts to refinance the business and turn it around. It’s just a failed investment, and it’s not illegal to run a failed investment.

For avoidance of doubt, I am not suggesting that any particular company offering unregulated loan notes, reviewed on this blog or not, is not making returns and is going to default in ten years or at any other point. This model is simply to illustrate how little it means to a new investor to say that previous investors have been paid in full.

So what does it mean when a company offering unregulated loan notes proudly states “all investors so far have received 100% of their payments?”

Well, if they’ve been going for 20 years or more, it does suggest that they have a sustainable business that generates sufficient returns to maintain their coupons.

But this does not apply to many of the businesses offering unregulated corporate loan notes, many of which started soliciting investment around 2015. For a company that has only been soliciting investment for a few years, a statement that so far all payments have been made is almost meaningless.

In fact, “all investors paid in full and on time” is a statement of the bleeding obvious. If any investors hadn’t been paid, they would most likely put the company into administration, in order to recover as much of their investment as they could. In which case the company would not be soliciting new investment.

“All investors paid in full and on time” is a statement which may appear to reassure investors who don’t want to risk their money, but is in fact both irrelevant and redundant.

Investors who actually have the experience and knowledge to invest in unregulated loan notes won’t care whether payments have been made on time so far – they know there is a risk that they might lose their money in the future and they will only invest a small part of their portfolio accordingly.

Anyone who thinks that there is some measure of security in the statement “all investors paid in full and on time” should almost certainly not invest in unregulated corporate loan notes with a risk of 100% capital loss.

If they are looking for security of capital, they should stick to deposits from an FCA-regulated institution which is covered by the Financial Services Compensation Scheme and therefore offers certainty that they will be paid in full and on time.

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