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A Caffeine Fuelled Minibond That's Worth a Closer Look




By Sam Griffiths on 1st July 2015


In this week’s Bondwatch we take a look at Crowdcube’s latest minibond offering, the Grind Bond. Grind is a group of Espresso and Cocktail Bars in London that setup in Shoreditch in 2011. The brainchild of an Australian DJ and musician and his entrepreneur buddy, these coffee houses exude the ‘urban cool’ that is the trademark of the Shoreditch area of London. The pairing of a daytime coffee bar with a nighttime cocktail bar is an innovative and economical use of the prime locations that Grind occupies. Having expanded from its first bar to a total of four last year and with ambitious plans to take that number to ten within the next 2 year, Grind is looking to raise between £750k and £1.5m through its minibond to help fuel this expansion (the cost of setting up a new site is between £200k and £300k).

 

The minibond has an initial term of 4 years with bondholders having the option to extend the bond at the end of that term. The bond is scheduled to make quarterly repayments at an interest rate of 8% per annum. Minimum investment is £500 with increments of £500 thereafter. The bond can be repaid by the issuer at any time. The bond also provides investors with various free coffees and cocktails depending on how much they have invested. Invest £500 and get ten free coffees or cocktails, invest £25k and get a free cocktail or coffee a day for the life of the bond – this equates to almost £3k a year in Espresso Martinis! Ideal if you have a Grind next to your office, not so ideal if you live out of London.

 

This is one of the better minibonds that I have looked into recently:

  • The bond is transferable (assuming someone wants to buy it) after the first year, which I see as a major benefit.
  • The financials of the company include projections to the maturity of the bond which gives investors a steer on how management feel the business could go (not always included in minibond pitches).
  • The leverage does not appear to be too ridiculous after the first year with net debt to EBITDA projected to be just over 2x.
  • The company is projected to have good free cashflow which will delever its balance sheet, reducing its net debt to EBITDA to less than 1x at the maturity of the bond (assuming the company performs as projected).
  • It looks as though there is some shareholder debt that is subordinated to the bond, although it is tough from the documentation to determine exactly how much this amounts to. It is also likely that the £183k loan from HSBC will be senior to the bond, but again, this is not clear from the documentation.
  • The company has had recent equity backing and is projecting a healthy cash balance, providing a cushion in the event of unanticipated adverse events.

 

Crowdcube’s website gives a full rundown of the Key Risks of this investment. For me, however, the key risks are:

  • Grind is a young and expanding business, there is a lot of execution risk in its business plan which, if not performed well, could impact the ability of Grind to payback its investors.
  • Grind’s business model very much relies on it being ‘on trend’, offering premium coffee in a premium setting for a premium price. Boutique coffee shops are very fashionable at the moment, (this is the second coffee shop minibond that we’ve seen in the past 6 months), but what if fashion moves on? Not transferrable for first year.
  • The minimum £500 investment means that if an investor is properly diversifying their portfolio (max of 1% in any one instrument), then the bond is not open to many smaller investors.
  • The lack of transferability of the bond for the first year and the lack of clarity as to how the transfer process/secondary market will work after that is a concern for those who may wish to access their investment early.
  • The bond is redeemable at anytime by the company, so if the business takes off and your risk in holding the bond decreases, it’s possible that you will have your, now safer, return taken away from you.
  • The bond is unsecured and likely subordinated to existing bank debt.
  • The bond has a bullet repayment, concentrating refinancing risk in the case that the company does not produce enough cashflow to repay the bond.

 

How does the 8% coupon compare to the returns of other products with similar risk profile available in the AltFi space? 

  • Funding Circle’s A band loans currently have a gross interest rate of 9.4% with a 1% platform fee. Netting an 8.4% return before bad debts. Funding Circle band A companies appear to be generally comparable to Grind in terms of size, age and leverage, perhaps slightly better. Funding Circle predict a 1.5% annual bad debt rate for their band A loans, however Funding Circle’s loans are readily transferable through its active secondary market and the minimum loan size is £20, allowing greater diversification.
  • Looking at secured loans, LendInvest currently have a bridge loan in the market at 75% LTV with an 8.5% annualized return and £1,000 minimum investment. LendInvest have thus far had no losses from loans that they have made and expect 0% losses for 2014 loans.

 

In summary: the terms look OK, the interest rate is in the right ballpark, I couldn’t find any nasty surprises in the documentation. If you like the Grind story and its coffee, it’s worth a closer look.

 

This is not investment advice, be aware that investing in minibonds carries the risk of losing capital, please read all the small print of the offer documents before investing.

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