Godwin Capital – unregulated bonds paying up to 11.3% per year

April 27, 2018April 25, 2018 ~ Phoenix ~ 19 Comments

Godwin Capital is offering 2 year investment bonds paying either 10% per year with income paid out twice a year, or 11.3% per year if income is rolled up and paid at the end of the term (12% simple interest rolled up for two years = 11.3% compounded annual growth rate).

Who are Godwin Capital?

The bond is issued by Godwin Capital No. 2 Limited. This company is wholly owned by Godwin Capital Limited, which is in turn owned by the parent company, Godwin Property Holdings Limited. Godwin Property Holdings Limited was incorporated in June 2016.

The parent company is owned in equal quarters by the directors Stuart Pratt, Stephen Pratt, Richard Johnston and Andrew Mitchell.

The parent company’s last accounts (31 December 2016) show net assets of £94, while Godwin Capital No. 2 has not yet filed its first accounts.

How safe is the investment?

These investments are unregulated corporate loans and if Godwin Capital No. 2 defaults you risk losing up to 100% of your money.

The purpose of the bonds is to allow Godwin Capital No. 2 to lend to other Godwin companies in the group, which in turn will invest bondholders’ money in property.

If Godwin’s sister companies fail to make sufficient returns from their property investments, resulting in them defaulting on the intercompany loans, or for any other reason Godwin Capital No. 2 runs out of money to service these bonds, there is a risk that they may default on payments of interest and capital to investors.

Asset-backed security

A legal charge over Godwin Capital No. 2’s investments will be held by a Security Trustee (More Group Capital Services Limited). These investments will consist of loans to other Godwin group companies.

The Security Trustee will also hold a first legal charge in respect of funds provided under inter-company loan agreements.

Investors should not assume that because their loans are secured on these assets, they are guaranteed to get at least some of their money back through sale of the collateral if the issuer defaults. Investors in asset-backed loans have been known to lose 100% of their money (e.g. Providence Bonds and Secured Energy Bonds) when it turned out that the collateral was insufficient to pay investors after paying the insolvency administrator (who always stands first in the queue).

We are not in any sense implying that the same will happen to investors in Godwin Capital, only illustrating the risk that is inherent in unregulated corporate loan notes even when they are asset-backed.

If investors plan to rely on this security, it is essential that they undertake professional due diligence to ensure that in the event of a default, these securities are valuable and liquid enough to raise sufficient money to compensate all investors, as well as any other creditors that Godwin Capital has borrowed money from.

This will require due diligence on the legal charges held not only over the assets of Godwin Capital No. 2 (which are intercompany loans) but on the legal charges over the physical propertes that Godwin group companies are to invest in.

Should I invest with Godwin Capital?

This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.

As with any unregulated corporate bond, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment offering up to 10% per annum yields should be considered very high risk. As an individual security with a risk of total and permanent loss, Godwin Capital’s bonds are higher risk than a mainstream diversified stockmarket fund.

This particular bond is described as asset-backed. Before relying on the security backing the bond, investors should undertake professional due diligence to ensure that in the event of default, the security could be easily sold and would raise enough money to compensate all the investors, after the adminstrator deducts their fees and any higher-ranking borrowers are paid.

Before investing investors should ask themselves:

How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
Have I conducted due diligence to ensure the asset-backed security can be relied on?

If you are looking for a “guaranteed” investment, you should not invest in unregulated products with a risk of 100% capital loss.

Manchester Evening News promotes unregulated investments, virtually no mention of risks

April 24, 2018June 18, 2018 ~ Phoenix ~ Leave a comment

On Sunday the Manchester Evening News published an article entitled “It’s not just for houses – unusual things on Rightmove that you can buy or invest in“.

Unusual isn’t the word I’d use. All of the investments are extra-high-risk or ultra-high-risk, with the majority being individual – as opposed to collective – investment in land plots.

(Although I couldn’t help wondering why on earth you would buy a former bank on the basis that “it could potentially be converted” when it is Grade II listed and therefore potential for conversion will be strictly restricted. The selling agent states “if you buy this property and don’t rent it out to a tenant – you don’t have to pay business rates” – which is nice, if we ignore the fact that if you don’t rent it out to a tenant, and you aren’t a bank and can’t use the property yourself, you can’t make any money from it either.)

Halfway down we come to hotel rooms, which according to the article, “If you aren’t quite ready to take on a buy-to-let property, but want to invest in brick and mortar- this could be the perfect solution.”

The perfect solution after discounting regulated mainstream REITs or unit trusts, diversified over a range of bricks and mortar commercial properties? No, just “the perfect solution” apparently.

For £80,000, an investor is offered an annual return of 8% and 110% buyback at the end of year five.

Fees are paid monthly and according to Katar Investments, there are zero ownership fees.

Nowhere in the article does it point out that the annual return of 8% is dependent on the financial strength of the company backing it, presumably Katar Investments. The same is true of the 110% buyback.

Nor does the article point out that should Katar Investments becomes unable to pay the promised 8% return, investors will be dependent on the hotel keeping their room occupied if they are to see any yield. And that it is not clear why the hotel would put guests in investors’ rooms when it won’t get the guests’ money, and it may have its own rooms to fill up before it fills up any rooms belonging to others.

Nor does the article point out that if Katar Investments is unable or unwilling to buy the hotel room back after five years, investors will be relying on the secondary market to get their money back. External demand for a room in a building to which someone else controls access is extremely limited. And it is questionable why anyone would want to buy a second-hand hotel room, when they can get one from someone like Katar Investments offering a guaranteed yield and a buyback option.

In fact, the word “risk” is only mentioned once in the article – at the very beginning: “Would you take a risk on any of these?”

Financial promotion

Arguably the MEN article crosses the line from mere journalism into a financial promotion.

Obviously simply writing about unregulated investments isn’t in itself a financial promotion (*points to disclaimer at the bottom of this article*). The distinction is found in the Financial Services and Markets Act, which states that a financial promotion is an “invitation or inducement to engage in investment activity“.

The MEN article crosses the line from talking about unregulated investments to inducing people to invest at least twice:

Investing in some of these could seem a little bizarre, but if you get your thinking cap on, there’s potential to make some serious money.

This [the Katar Investments hotel room investment] could be the perfect solution.

This means the article becomes subject to the law on financial promotions which states that such promotions must be clear, fair and not misleading.

The lack of any real risk warnings when describing the hotel room investment, or the other investments, means the MEN article clearly fails in this regard.

The Financial Conduct Authority’s financial promotions rulebook states that a financial promotion must “be balanced and, in particular, not emphasise any potential benefits of a product or service without also giving a fair and prominent indication of any relevant risk.”

Promotion of the failed Store First investment

Incredibly, in the original version of the article this wasn’t even the worst case in the article of an investment promoted without all the facts.

The original promoted a Store First pod which was on the market for £2,000, and stated

If you bought the pod, you could earn up to £150 a month by renting it out to people who need some extra storage space.

There’s a reason the investment is on the market for £2,000 despite supposedly offering a potential income of £1,800 a year (a 90% per year gross return). It doesn’t.

The article also did not mention that whoever is trying to sell their Store First pod for £2,000 on Rightmove probably paid a sum in the high five figures or more for it.

The MEN has now deleted this part of the article without any correction or acknowledgement of the change. Given that it has essentially admitted that this part of the article should not have been printed, I will not dwell on its error further. Although it is poor form to pretend it never existed, without issuing a correction or acknowledgement of the change.

And it does not resolve the issue of MEN’s misleading financial promotion of the hotel room investment.

The MEN has also refused to disclose what commission or other inducements they received in exchange for promoting the unregulated hotel room investment.

It has not disclosed whether the article was the MEN’s own work, or based on a press release issued by one of the investments promoted in the article. There is no “advertorial” declaration on the article.

Quite possibly the journalist who put this list together was only interested in the whimsy value of the various offerings.

But if you’re going to talk about unregulated high-risk investments as “making serious money” and “the perfect solution”, would a little due diligence hurt that much?

Privilege Wealth “possibly a Ponzi scheme” say administrators

April 23, 2018April 23, 2018 ~ Phoenix ~ 4 Comments

The administrators of the collapsed Privilege Wealth investment scheme, which offered unregulated bonds paying 9.85% per year, have filed a Notice of Administrator’s Proposals with Companies House on 23 March.

A detailed breakdown of the reasons for the company’s collapse can be found in the full administrator’s report, but here is the executive summary: Privilege Wealth invested investors’ money in a Panamanian pay day loan company run by a man wanted by Interpol (who was later shot), as well as other pay day loan books run by Rosebud Lending, a Sioux Indian sovereign nation lender, and a company called The Oliphaunt Group. None of these investments paid a return.

With the lack of returns and running costs of $550,000 a month, described as “rental and payroll” (so presumably this does not include the 9.85% per annum that Privilege had promised to investors), collapse was inevitable.

What is left is a range of payday loan books held by Privilege Wealth after the failure of its subsidiaries and the companies it invested in. The value of these loan books is described by the administrators as uncertain.

Complicating any chance of recovery for individual investors is that Privilege Wealth’s second-biggest creditor, Helix Investment Management (which is owed £8.3 million, compared to £28.4 million owed to Privilege Wealth One LLP, believed to represent investors in Privilege Wealth’s bonds) is claiming security over some of Privilege Wealth’s assets, such as the Rosebud loan book.

If Helix’s claim is successful, these assets will not be available to compensate other creditors. The administrators continue to maintain a dialogue with Helix.

“Possibly operated as a Ponzi scheme”

A line that jumps out of the report is paragraph 2.46, which states

The Joint Administrators’ findings at this early stage would lead them to believe that the Privilege group was possibly operated as a Ponzi scheme, with only an estimated $9m invested into actual assets out of a total $40m of capital raised from investors. Investigations continue in this regard.

It’s quite remarkable that a High Court Judge, in the libel case of Privilege Wealth v David Marchant, could have described Privilege Wealth as “clearly not a fraud”. Yet only six weeks into the administration (barely enough time to make a cup of tea in forensic accountancy terms), the administrators feel sufficiently sure of their ground, when administering a collapsed investment formerly run by people known to be litigious, to describe it as a possible Ponzi scheme.

We can only hope that the next time an ultra-high-risk unregulated investment uses its investors’ money to sue an independent blogger, the High Court will be more cautious before endorsing the ultra-high-risk unregulated scheme. It is true that the judge had little option but to award the case to Privilege Wealth, because Marchant elected not to defend himself. There was, however, no need to go above and beyond this by endorsing the scheme as “clearly not a fraud”.

This libel case is commented on in passing by the administrators, who say

During the Autumn of 2016 articles were published on a financial reporting web site, Offshore Alert, suggesting that the whole operation was an investor scam and warning against investment into the business. The directors advise that this compounded the cash flow issues.

“This compounded the cash flow issues” translates as “We ran out of new investors’ money to pay off old ones with. Also, it’s this guy’s fault for telling everyone that we were running a Ponzi scheme, not ours for running a Ponzi scheme.”

The whereabouts of the other $31 million of capital raised is not known.

Since I last reported on Privilege Wealth’s administration, the administrators have recovered a total of £18,000, mainly from cash received when the Rosebud investment failed and Privilege Wealth took over Rosebud’s loan book. The administrators are working on a percentage basis, with 30% of all recoveries to be paid to the administrators.

Whether there will be sufficient recoveries to repay any significant amount of the £28 million owed to Privilege Wealth investors looks highly uncertain – whether or not Helix Investment Management succeeds in claiming some of Privilege’s assets for itself.

Marcello Developments – Unregulated bonds paying 8-10% per year over 5 years

April 20, 2018January 10, 2023 ~ Phoenix ~ 68 Comments

Marcello Developments offers 5 year investment bonds paying 8% in years 1 and 2, 9% in years 3 and 4 and 10% in year 5. The bonds can be redeemed in full after one year.

Who are Marcello Developments?

Bryan Gauson, Marcello Developments co-owner

The company was incorporated in February 2015 and has been issuing loan notes since June 2015. Marcello Developments is a subsidiary of Marcello Group, which is 50/50 owned by the directors, Keith Wotherspoon and Bryan Gauson.

Both Wotherspoon and Gauson were previously involved in Ixe Group, the controversial agribusiness and commodities group. Wotherspoon was previously a director of Ixe Agro Limited, although that subsidiary has now been dissolved. Bryan Gauson describes himself as an employee of Ixe Agro on his blog.

keith-wotherspoon — Keith Wotherspoon, Marcello Developments co-owner

Marcello Developments had net assets of £5 million according to its last accounts (February 2017), after allowing £3.6 million for the liabilities represented by the 5-year bonds. These accounts were not audited, due to Marcello Developments being exempt under the small companies regime. According to the accounts Marcello raised £900k from its 5-year bonds in 2015, £2.4m in 2016 and £311k in 2017.

How safe is the investment?

These investments are unregulated corporate loans and if Marcello Developments defaults you risk losing up to 100% of your money.

The purpose of the bonds is to allow Marcello Developments to invest in the prime London property market, including bridging and mezzanine finance, buy-to-let residential and commercial property, and off-plan property acquisitions.

If Marcello fails to make enough income from its property investments, or for any other reason Marcello runs out of money to service these bonds, there is a risk that they may default on payments of interest and capital to investors.

Early redemption option

The bonds are described as being fully redeemable after one year. However, the ability of investors to exit after one year will depend on whether Marcello Developments has sufficient liquid funds to repay them.

Asset-backed security

Marcello Developments’ loans are backed by the assets of Marcello developments, with a legal charge held by a Security Trustee (Jade State Wealth). Jade State Wealth is owned by Graham Arnott and has been linked to a lot of collapsed and fraudulent investments including Essex and London Properties Ltd, Osage 1 Ltd, Phenco Ltd, Green IS Group, European Property Coin and many others.

We are not in any sense implying that the same will happen to investors in Marcello Developments, only illustrating the risk that is inherent in unregulated corporate loan notes even when they are asset-backed.

Should I invest with Marcello Developments?

Any investment offering up to 10% per annum yields should be considered very high risk. As an individual security with a risk of total and permanent loss, Marcello Development’s bonds are higher risk than a mainstream diversified stockmarket fund.

Before investing investors should ask themselves:

How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
Have I conducted due diligence to ensure the asset-backed security can be relied on?

If you are looking for a “guaranteed” investment, you should not invest in unregulated products with a risk of 100% capital loss.

Christianson Property Capital files April 2017 accounts, reports minus 4.7 million in net assets

April 19, 2018April 19, 2018 ~ Phoenix ~ Leave a comment

Christianson Property Capital Limited has finally filed its April 2017 accounts (3 months overdue), resulting in the strike-off action against it being suspended.

The accounts are micro-entity accounts and are therefore exempt from auditing and from filing a profit and loss account, meaning there is very limited information that can be drawn from them.

Nonetheless, a few facts can be gleaned from the accounts:

Current assets as at April 2016 have been significantly revised compared to Christianson’s previously filed accounts. The April 2016 accounts stated that the company’s current assets at that date were £6.9 million, consisting almost entirely of amounts owed by group undertakings. The April 2017 accounts however have changed this figure to £4.3 million, a significant write down. This in turn meant that 2016 net assets have been revised from minus £1.1 million to minus £3.2 million.
Why the April 2016 figure needed to be revised is not known, nor is Christianson Property Capital obliged to provide any explanation, given its micro-entity status.
Current assets as at April 2017 “increased” from the revised figure of £4.3 million in 2016 to £5.3 million in 2017. (Although when I describe this as an increase, it feels a bit like The Ministry of Truth announcing that the chocolate ration has been increased from 10 grammes to 20 grammes, when it was 30 grammes last month. It is still a decrease compared to the figure reported in the 2016 accounts.)
Net assets however decreased from minus £3.2 million to minus £4.7 million. The increase in the value of current assets was more than cancelled out by an increase in creditors due after more than one year, which rose from £8 million in April 2016 to £10.5 million in April 2017. This £10.5 million is likely to predominantly represent investors in Christianson’s 10 year bonds.

(H/T to commenter Stephen for spotting the discrepancy between the 2016 and 2017 accounts in regard to April 2016 current assets.)

The first big test of Christianson Property Capital’s solvency will arise in 2019, when their earliest investors have the right to withdraw 50% of their investment after 5 years, subject to an unspecified exit fee.

The Care Home Group – unregulated investment in care home rooms offering 10% per annum

April 18, 2018July 15, 2019 ~ Phoenix ~ 1 Comment

The Care Home Group Ltd (part of Carlauren Group Ltd, previously Corporate Land Solutions Ltd) is offering unregulated investment in care home rooms.

Investors pay up to £69,950 to purchase the leaseholds of individual care rooms, at what is described as a 30% discount to market price, in dilapidated care properties which The Care Home Group plans to renovate. They then receive returns in one of three ways:

Option 1: Investor as Landlord: Investors receive variable rental income, initially based on the market rate of the room, with a 3% “developer’s cash back” on completion of refurbishment. They then receive rental income when the room is occupied (with no income if the room is vacant).
Option 2: Managed Service: Investors receive a fixed income of 10% each year, paid monthly, regardless of whether the room is occupied or not. 2.25% developer’s cash back is paid on completion of refurbishment (3% minus a one-off 25% charged by the managing agent).
Option 3: Self Occupancy: The investor may choose to use the room for themselves or a family member.

Investors may swap between the three options at six months’ notice. If they change their option within the first year, a penalty fee of 25% of the annual rent is payable. An investor switching from option 1 or 2 to option 3 must pay the difference between the discounted purchase price and the full market price.

The Care Home Group undertakes that investors will be able to sell their investment via a buy-back option and receive 110% of their investment back in years 5-6, 115% in years 7-8, 120% in year 9 and 125% in year 10. It says in the FAQ section that this buyback option applies “when [the room] is permanently vacated”.

Who are The Care Home Group?

The operator of the care homes is described as Carlauren Care Limited (formerly Caring Communities Limited), while the developer is Carlauren Devleopments Limited.

Carlauren Care Limited is 100% owned by Carlauren Lifestyle Resorts Limited (formerly The Care Home Group Limited), which is in turn 100% owned by Carlauren Group Limited (formerly Corporate Land Solutions Ltd). Carlauren Group Limited is 99% owned by Sean Murray with the remaining 1% held by Nicola Mason.

Carlauren Developments Limited is 100% owned by Sean Murray.

Carlauren Group Limited had net assets of minus £142k according to its last accounts (December 2016), which were filed under the small companies regime and therefore exempt from auditing. Carlauren Developments has yet to file accounts as an active company.

How safe is the investment?

These are unregulated investments in individual units of a care home and you risk losing up to 100% of your money if the yield dries up and a buyer cannot be found for your units.

This investment follows the “pod” model, where an investment firm divides its property into units (or “pods”), and then sells those units to investors in return for a fixed yield (in the case of option 2), or variable payments based on income from the investor’s individual unit (option 1).

The difference between a “buy-to-let” flat and a pod investment is that with buy-to-let, the investor has full control over who they rent their property to. A buy-to-let investor may employ letting agents to do the job for them, but they can hire and fire the letting agent at will. They may also have to pay ground rent to the freeholder of a block of flats, but the freeholder does not have the right to stop the leaseholder letting out their flat.

In the case of this investment, The Care Home Group retains control over who uses the care home’s rooms. Individual investors have no ability to fire The Care Home Group if they fail to keep their room occupied.

This means that investors must satisfy themselves that The Care Home Group will not fill up its own rooms before it fills up those belonging to investors receiving rental income. At a minimum, The Care Home Group will hold rooms (and the income thereof) which it has not yet sold to investors, or from investors who exercised their buyback option.

The promise to pay investors a fixed return of 10% per annum is only as good as the company backing it. If The Care Home Group fails to make sufficient income from its care homes to pay a fixed return of 10% per annum, it may default on payments of income to investors.

If The Care Home Group becomes unable to meet the payments of 10% per annum, this would leave investors relying on The Care Home Group keeping their room occupied and generating sufficient rental income from it.

Likewise, the promise to buy back investors’ units at up to 125% of the purchase price (once the room is permanently vacated) is also dependent on The Care Home Group having sufficient liquid funds to do so. If The Care Home Group is unable or unwilling to buy back the units, investors will be relying on selling to third parties on the secondary market if they want to get their money out.

In the extreme, investors in pod-type investments have been known to lose all their money (e.g. Store First) when:

the investment firm stopped paying the promised fixed returns and refused to buy the units back
it became clear that there was no realistic prospect of the investor’s individual pod being occupied by a renter and generating any yield
and as the units generated no yield, this made them effectively worthless on the secondary market.

We are not implying that the same will happen to The Care Home Group’s units, but this example illustrates the risk that is inherent in investing in individual units within a larger investment property. Investors should not assume that as a care hoom room is a physical property, it must have some value. The value of a room in a care home to which someone else controls access depends entirely on what yield can be expected.

“30% discount” and market price

The Care Home Group states in its literature that investors can purchase care rooms for a 30% discount on their full market price.

There is virtually no recognised secondary market for buying and selling individual rooms in a care home. The “market price” is therefore likely to be based on the opinion of a valuer hired by The Care Group, rather than actual purchases and sales.

Investors should therefore undertake their own due diligence on the purchase price to ensure it is fair. Just as when buying a house, you would hire your own valuer and not just accept the valuation of the estate agent (who works for the seller).

It is highly unlikely that anyone would buy a second-hand care room in one of The Care Home Group’s properties, when they could get one direct from The Care Home Group with a 30% discount and the promise of a guaranteed 10% yield.

This means that for as long as The Care Home Group is making this offer, investors wishing to exit their investment will be reliant on The Care Home Group having sufficient funds to exercise the buyback option.

Should I invest in The Care Home Group?

As with any unregulated investment, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment offering returns of 10% per annum should be considered very high risk. As an individual security with a risk of total and permanent loss, The Care Home Group’s care units are higher risk than a mainstream stockmarket fund.

Before investing investors should ask themselves:

How would I feel if the Care Home Group became unable to pay fixed returns or to buy the units back, the care room generated no rental income, there was no secondary market for my care room and I lost up to 100% of my money?
Do I have a sufficiently large and well-diversified portfolio that the loss of 100% of my investment in The Care Home Group would not damage me financially?

If you are looking for a “secure” investment, you should not invest in unregulated investments with a risk of 100% capital loss.

Exmount Commercial Developments – unregulated bonds paying 9.12% over 3 years and 10.35% over 5 years

April 16, 2018July 10, 2019 ~ Phoenix ~ 7 Comments

Exmount Commercial Developments offers unregulated bonds paying 9.12% per year for 3 years and 10.35% per year for 5 years, paid quarterly.

The bonds can be terminated early halfway through the term (1.5 years for the 3 year bond and 2.5 years for the 5 year bond) at 45 days’ notice for a nominal admin fee of £75 + VAT.

Who are Exmount Commercial Developments?

Exmount Commercial Developments is a trading name of Exmount Construction Limited. ~~Joe (Joey) Mason is the sole director and shareholder.~~

Exmount Commercial was technically incorporated in 2013, but only became active in July 2017 when ownership was transferred from a company formations outfit to Joe Mason. It is yet to file accounts as an active company.

The other board member listed in Exmount’s literature is Head of Commercial Development Edward Fall, described as previously of Minerva. I was unable to confirm whether his previous position was with Minerva Lending or the much larger and unrelated company Minerva Limited.

Update 9 May 2018: In May 2018 control and ownership of Exmount Construction Limited was passed from Joey Mason to Ousama Moufid, a French national.

How safe is the investment?

These investments are unregulated corporate loans and if Exmount defaults you risk losing up to 100% of your money.

The purpose of the loan is to allow Exmount to acquire and develop commercial property.

If Exmount fails to make enough money from its property developments, or for any other reason Exmount has insufficient funds to service these bonds, there is a risk that they may be unable to pay investors their interest and capital.

Asset-backed security

Investors’ money is secured against the underlying assets of Exmount Construction Limited. A Security Trustee (Jade State Wealth Ltd) is responsible for taking control of Exmount’s assets should it default.

Investors should not assume that because their loans are secured on these assets, they are guaranteed to get at least some of their money back through sale of the collateral if the issuer defaults. Investors in asset-backed loans have been known to lose 100% of their money (e.g. Providence Bonds and Secured Energy Bonds) when it turned out that there was no money left for investors after paying the insolvency administrator (who always stands first in the queue).

We are not in any sense implying that the same will happen to investors in Exmount Construction, only illustrating the risk that is inherent in any corporate loan notes even when they are asset-backed.

The literature states “Before each tranche [of loans] is offered and issued, the Security Trustee will check and ensure that the total outstanding value of all the bonds (including those being issued in the new tranche) will not exceed 16 times the net asset value of the company.”

If the total outstanding value of all the bonds exceeds 1 times the net asset value of the company, the collateral will be insufficient to fully repay investors in the event of default.

As the collateral – the net asset value of the company – is permitted to be as little as 6.25% of the outstanding value of all bonds (16 x 6.25% = 100%), there appears to be little point in investors relying on this security.

Early redemption option

Other than a nominal £75 charge and 45 days’ notice, there appears to be few conditions attached to the early termination option.

However, investors should bear in mind that their ability to exit the bonds early at the halfway point will depend on whether Exmount Construction has sufficient liquid funds.

Should I invest with Exmount Commercial Developments?

Any investment offering up to 10.35% per annum yields should be considered very high risk. As an individual security with a risk of total and permanent loss, Exmount’s bonds are higher risk than a diversified stockmarket fund.

This particular bond is described as asset-backed, however, according to the literature, Exmount is permitted to borrow from investors up to 16 times the value of the assets on which the bonds are secured, so in practice this security may only cover an almost irrelevant 6.25% of investor’s money.

Even this assumes Exmount’s assets remain valuable and liquid enough to cover this much, after paying the insolvency administrator.

Before investing investors should ask themselves:

How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
Am I willing to place any reliance on the asset-backed security given that according to the literature, it may only cover 6.25% of bondholders’ money?

If you are looking for a “secure” investment, you should not invest in unregulated products with a risk of 100% capital loss.

Bond Review Komix Korner: “Do Your Research”

April 13, 2018April 11, 2018 ~ Phoenix ~ Leave a comment

One of my pet hates at the moment is the phrase “Do Your Own Research” (DYOR) – most commonly seen in discussions of day-trading, higher-risk “pick-your-own” P2P, and lately cryptocurrency.

How can I be against people being informed before they invest money? Clearly I’m not. The problem is that research is worthless if you don’t know what you’re looking for; all it achieves is to instill a false sense of security and one’s own insight.

I’m not a great believer in the Dunning-Kruger effect (the theory that most people significantly overestimate their intelligence), but it applies here. Otherwise we wouldn’t see so many people lose money in day-trading or other speculative investments despite having spent long hours on the computer looking at Google Finance. Either their research would allow them to avoid poor investments, or they would pull out before investing.

For a professional who does know what they’re looking for, these are the kind of things that would be considered research / due diligence into an individual security:

drilling down exhaustively into a company’s projections, checking that the assumptions behind them are sound, even making sure all the formulae add up correctly
auditing the monthly management accounts to ensure they are consistent
site visits to check that everything is as the company management claim it is
reading through a company’s contracts, with a legal expert if necessary, to ensure their contracts are watertight

These are the kind of steps that a corporate lender would require its due diligence accountants to take before they handed over a large sum of money (in the good days when banks used to lend to companies).

By contrast, here is what research typically means to a retail investor labouring under the Dunning-Kruger effect:

Reading the information memorandum cover-to-cover (for cryptocurrency, substitute the whitepaper for the IM)
Speaking to the management or their representatives on the phone
Reading through data which is already known to the market, or broker reports that regurgitate data already known to the market and add some guesses

All of these are essentially equivalent to staring really really hard at the back of the opponent’s cards. Without independent verification of the claims made by the potential investment opportunity, using professionals paid by you (not the people you are giving money to) if necessary, they mean almost nothing.

Most retail investors should invest using regulated mainstream diversified funds. While these still require some research, it is mostly to check that their funds are actually those three things. This is trivial compared to the research necessary to invest with any genuine confidence in an ultra-high-risk investment with a risk of total loss.

Fuzzy Brush – unregulated 1- and 2-year bonds paying up to 14.43% per annum

April 12, 2018April 12, 2018 ~ Phoenix ~ 8 Comments

Fuzzy Brush Products is offering unregulated one- and two-year bonds (described as “redeemable shares”) paying up to 12.43% per annum interest over one year and 14.43% per annum interest over two years.

The returns are dependent on the amount invested:

1-year bonds: 9% for investments up to £5k, 10.7% for investments up to 10k, and 12.43% for investments up to £25k.
2-year bonds: 11% for investments up to £5k, 12.7% for investments up to £10k and 14.43% for investments up to £25k.

£25k is the maximum that may be purchased per investor. Fuzzy Brush are seeking to raise a total of £400,000 in this round of fundraising.

Who are Fuzzy Brush Investment?

Fuzzy Brush Investment states that the business dates back to 1996 when the founder James (Jim) Drew first came across a similar product in Amsterdam.

The redeemable shares appear to be issued by Fuzzy Brush Products Limited, which was incorporated in December 2008. James Drew is the sole director and owns 100% of the ordinary shares in the company. The redeemable shares offered to investors have no voting rights.

A chart of sales figures states that retail sales of Fuzzy Brush started in mid-2013.

Fuzzy Brush Products Limited’s last accounts (December 2016) were filed under the small companies regime, which means that they did not provide a profit and loss statement or require auditing. They show net assets of £1.3 million.

Promotion

Fuzzy Brush has been promoted in the Daily Express in an article described as “Sponsored by Fuzzy Brush”. The advertorial mostly trumpets Fuzzy Brush’s recent growth and job creation, but promotes its bonds in the last paragraph, including the 14.43%pa rate and a notice that the bonds are only suitable for high net worth and sophisticated investors (how many of the Daily Express’ readership qualify is questionable).

Fuzzy Brush is also promoted via theinvestorcrowd.co.uk, a platform run by Nick Lomax. Nick Lomax was banned from being a company director in 2014 for being involved in a fine wine investment fraud. There is no suggestion that Lomax is breaching his ban or doing anything else illegal by promoting Fuzzy Brush.

How safe is the investment?

These investments are unregulated corporate loans and if Fuzzy Brush defaults you risk losing up to 100% of your money.

Buzzy Thrush… er, Fuzzy Brush (sorry, it’s surprisingly difficult to say that name several times quickly) is a small start-up company. As with any company, no matter how large or small, if Fuzzy Brush fails to make sufficient income after costs from its disposable toothbrushes, or for any other reason Fuzzy Brush runs out of money to service these bonds, there is a risk that they may default on payments of interest and capital to investors.

Should I invest in Fuzzy Brush bonds?

This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.

Any investment offering up to 14.43% per annum should be considered very high risk. As an individual security with a risk of total and permanent loss, Fuzzy Brush’s bonds are higher risk than a diversified portfolio of mainstream stockmarket funds.

Before investing investors should ask themselves:

How would I feel if the investment defaulted and I lost 100% of my money?
Do I have a sufficiently large and well-diversified portfolio that the loss of 100% of my investment in Fuzzy Brush would not damage me financially?

If you are looking for a “safe” investment, you should not invest in in unregulated securities with a risk of 100% capital loss.

Store First and Park First accounts filed: £42m net loss, £31m net liabilities, £62m provision made for repaying Park First investors

April 10, 2018June 18, 2018 ~ Phoenix ~ 55 Comments

The Group First group of companies, comprising the unregulated store pod investment scheme Store First and the unregulated car park space investment scheme Park First, has just filed the group’s accounts for the period ending June 2017.

Some selected highlights of the accounts follow. Anyone seeking a full picture of the companies’ accounts should consult the originals on Companies House, where they can be downloaded for free.

Group First Global Ltd, the holding company (note: the following are the results for the group, rather than the individual Group First Global Ltd company)

Total turnover was £163m. Cost of sales was £185m, meaning that the group was making a gross loss of £22m before we even get to overheads. After overheads (administrative expenses), the group made a loss of £44m, with the final loss after tax and interest being £42m.
Toby Whittaker, Managing Director and 100% owner of Group First Global Ltd

Despite Group First’s heavy losses, ordinary dividends of £250,000 were paid. These would have been paid to Group First Global Limited’s sole shareholder, which is Toby Whittaker. Note that there is nothing illegal about this because Group First Global as a company had retained earnings from previous years, even though the group as a whole had negative earnings.
In 2017, Park First was ordered by the FCA to stop promoting a collective investment scheme without authorisation, and instead allowed to restructure its investment offering as a “lifetime leaseback” scheme. Investors have two options: either continue in the lifetime leaseback scheme, which means that instead of receiving a “guaranteed” 8% per annum return as originally promised, they receive 2%pa plus variable dividends depending on profitability. (Park First was, and remains, heavily loss-making – see below.) Or receive their money back, minus any returns already paid to them, after at least a year.
Group First Global has made a provision of £62 million in its accounts for making repayments to investors under both these options.
After allowing for this provision, Group First is £31 million in the red (net liabilities). They would have had net assets of £29 million had this provision not been needed.
The Government has lodged a petition to wind up the Store First companies. Group First intends to defend this petition, and has put in place a provision of £2 million to cover the cost of doing so.
Group First’s previous auditors, Pierce C.A. Limited, resigned in September 2017. The latest accounts are audited by the new auditors, Lopian Gross Barnett & Co.

Park First Limited

Total turnover in the period was £18m. Cost of sales was £41m, meaning that the company was making a loss before we even get to overheads. The final loss after overheads, interest and tax was £30 million.
Net liabilities were £30.2 million.
With Park First failing to even cover the gross cost of its services, even before overheads are taken into account, it is clear that a significant turnaround will be needed before there is a prospect of dividends for investors who opt for the lifetime leaseback option.

Store First Limited

Store First Limited made a gross profit of £1.1 million on turnover of £4.0 million. After overheads, however, it made a £7.1 million net loss.
Net liabilities were £14 million, consisting of £466k debtors (mostly trade debtors and amounts owed by other Group First companies), minus £12.2m creditors (mostly amounts owed to other Group First companies) and a £2m provision for liabilities.
In regard to the winding up petition, the directors state “On the 1 August 2017 a hearing was scheduled in High Court by the Insolvency Service calling for a petition to wind up Store First Limited. The result of this hearing led to an adjournment. Subsequently it remains uncertain whether Store First will remain trading or enter into insolvency proceedings. The outcome of this is likely to be reached after a period of 12 months and while this casts significant doubt on the entity’s ability to continue as a going concern in the long term future, it does not cast significant doubt on the entity’s ability to continue trading for the forseeable future.”

Group First has a number of other subsidiaries, which I will summarise very quickly below as they were exempt from filing full accounts under the small companies regime, so little meaningful information is available. “No P&L” indicates the company did not file a profit and loss statement.

The following subsidiaries were all listed as dormant: Residential First Ltd, Select Escapes Ltd, B1 Workspace Ltd, Group First International Sbn Bhd (registered in Malaysia), Store First Singapore Branch and Park First Singapore Branch (both registered in Singapore).
Simonstone Parking Limited – no P&L, net assets £53k
Park First Skyport Limited – no P&L, net assets minus £21.5 million
Store First St Helens Ltd – no P&L, net assets £450k
Equestrian First Ltd – no P&L, net assets £6.7 million
Ground Rental Ltd – no P&L, net assets minus £27k
SFM Services Ltd (formerly Store First Management Limited) – £19k profit, £765 net assets
Business First Ltd – no P&L, net assets minus £1.4 million
Park First Management Ltd – no P&L, net assets £9k
Help Me Park Gatwick Ltd – no P&L, net assets minus £16 million
Cophall Parking Gatwick Ltd – no P&L, net assets minus £16 million
Help-Me-Park.com Ltd – no P&L, net assets £506k
London Luton Airport Parking Ltd – no P&L, net assets £11 million

Conclusion

Park First investors who opt for the new “leaseback” scheme paying 2% and variable dividends will clearly have to hope for a remarkable turnaround in Park First Limited’s profitability, given that as at the date of its last accounts it doesn’t even cover the cost price of offering its car park spaces, according to its accounts.

As for those who opt to receive their initial investment back, they face a long wait (at least a year, plus however long it takes for Park First to transfer the title to their parking space) while they hope that Park First has enough money to pay them back, despite the significant net liabilities reported by Park First and its associated companies.