Burrito Bond offers a tasty 8pc return – but is it safe?

More companies are targeting savers tired of low interest rates. Are these worth the risk or ‘uninvestable’, asks Sam Barker

Savers hunting for returns in an era of low interest rates may be tempted by a trio of new bonds paying up to 8pc a year. The high return is offered by the second issuance of the “Burrito Bond” by Chilango, the Mexican restaurant chain.

The four-year mini-bond can be taken out with £500, and has no upper limit.

Interest is paid twice a year. At the end of the four-year term investors can either get their initial investment back or extend it for another year.

Chilango wants to raise money to open more restaurants, which cost £500,000 each. It wants to raise at least £1m, but if it exceeeds its expectations, then it will open more branches or refinance existing debt.

Investors who put in £10,000 will also get a free meal a week for the term of the bond.

The “Burrito Bond 2” is a repeat of an earlier Chilango offering in 2014, which raised £2m from 700 investors.

Mini-bonds offer good returns. The 8pc offered by Chilango far outstrip those of other bonds. Retail bonds typically offer returns of around 4-6pc. The best fixedrate bond return to consumers is currently 2.75pc, available with Islamic bank BLME for a seven-year deal.

But mini-bonds come with risk attached. Unlike retail bonds, minibonds are unlisted, meaning more risk for investors should anything go wrong. Investors cannot sell them mid-term, unlike retail bonds.

Mateusz Malek, of investment firm Killik & Co, said his firm classed mini-bonds as “uninvestable” due to the risk and relative lack of information available to investors compared to retail bonds.

Mini-bonds can also fail dramatically. In 2015, Secured Energy Bonds lost investors £7m. This was followed by Providence Bonds in 2016, which went into administration with £8m of investors’ money.

Mark Taber, a bond expert, said the size of the firms offering minibonds adds to the risk. He said: “The companies that issue them tend not to be large, established companies.”

Michael Dyson, of Bond Advisors, the consultancy, said if investors had a balanced portfolio and were comfortable with the risk, they could consider a small exposure to the Chilango bond.

He said: “It’s very difficult to bring conventional assessment to these products. I don’t know if it’s good or bad – but it’s a good return. I would probably put quite a small amount in.”

Eric Partaker, chief executive of Chilango, defended the bond and said the first version had a “perfect” payment history.

Chilango’s parent company, Mucho Mas Ltd, made a loss of £1.4m in the year to March 25 this year. It made losses of £3.19m the year before.

But Mr Partaker said the underlying health of the business was strong and that some of the £1.4m loss was due to costs such as setting up new stores.

Before tax and other deductibles, the firm made profits of £373,771 in the year to March.

Inflation-linked

The second bond is an inflation-linked 10-year retail bond issued by Heylo Housing Group, a residential property firm. The bond pays 1.625pc interest every year.

The money raised from the bond will be invested in new-build shared ownership houses, where tenants’ payments will rise in line with inflation and are guaranteed not to fall.

The bond itself is also limited, meaning the investment will rise during periods of inflation but will not fall in the event of deflation. Investors need to put in at least £2,000 to take part.

Someone investing £2,000 would get £359.60 in interest at the end of 10 years, while the bond would be redeemed at £2,445.20, assuming inflation rates of 2pc for the period.

The deal is the first UK inflationlinked retail bond for more than six years, according to Mr Malek.

He said: “Inflation-linked bonds offer protection against rising inflation and are a good diversifier for most investors’ bond portfolios, which are predominantly exposed to fixedcoupon bonds.”

Oliver Butt, of Contisec, the bond broker, said the deal was “attractively priced”, but that it came with risks.

These include Heylo shareholders not putting their own cash into the project, the fact that it is a young company, any fall in house prices and tenants not paying their rent.

However, Mr Butt said the risk of the last two points was small.

Mr Butt said: “Shared ownership is heavily promoted by the Government and others and there is a waiting list. However, it is part of the ever-more labyrinthine social housing market. At the moment it suits all concerned, but the wind may change.”

Mr Dyson, whose sister firm BondInvest Capital will manage the Heylo bond issue, said: “You get a deflation-protected RPI-linked bond, which I think is brilliant for Sipps and Isas, frankly.”

Hidden homeless

The third bond is the inflationlinked “sanctuary bond” issued by Equfund, the social investment firm. The money raised from this mini-bond will be used to buy and renovate homes to let to the “hidden homeless”. These are people who may not be sleeping rough but have no permanent home.

Investors can either waive the interest, letting Equfund buy more houses, or pick the inflation-linked option.

An Equfund spokesman said: “This will enable Equfund to continue to provide affordable housing and is aimed at investors who want to invest for societal good, but still need their money to work for them and not be diminished by inflation.”

The maximum interest will be capped at 5pc a year, linked to the Consumer Prices Index, a measure of inflation.

The minimum investment is £1,000 and the maximum is £250,000.

The bond can be taken out for terms

of three to 15 years. Equfund wants to raise up to £5m from the bond.

Mr Dyson said the mini-bond was for a good cause but hard to fully assess as an investment.

He said: “I think these are for people with large portfolios who are happy to broaden out.”

An Equfund spokesman said the deal was aimed at sophisticated long-term investors who wanted to do direct social good and who were happy with the possibility of no guaranteed returns.

‘It’s very difficult to assess these products – I don’t know if it’s good or bad’