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Brewdog back for More




By Ryan Weeks on 4th September 2015


The latest opportunity to chuck money at Brewdog looks pretty appealing, but for perhaps the wrong set of reasons.

 

In May 2015, the “Equity for Punks” campaign returned with a view to raising £25m through the issuance of 526,316 shares. Rather than raising the capital via an equity crowdfunding platform, the craft beer brewery hosted the fundraise on its own site. It was the 4th time that Brewdog had raised money in this way.

 

Brewdog has raised just over £14m in equity money to date. The company has now turned to Crowdcube to keep the cash flowing in. £114,095 in equity has been invested by 205 “punks” through the Crowdcube platform thus far. And there’s 42 days left to invest.

 

But running concurrently with Crowdcube’s contribution to the “Equity for Punks” campaign is the newly forged “Brewdog Bond”. This latest mini-bond campaign intends to raise up to £6m, and pays out a 6.5% fixed rate per annum. A couple of weeks ago, Crowdcube tied up with Moody’s Analytics in order to attach a “Probability of Default” (POD) score to every mini-bond campaign that lists on the site. At the launch of this programme, the average POD for Crowdcube mini-bonds was 3.3%. Moody’s has awarded the Brewdog Bond a 0.3% POD. That metric is described as indicating: “The Probability that BrewDog will default on any existing credit obligations (not including this mini-bond) in the 12 month period from their last financial accounts.”

 

So what should investors make of this opportunity? Let’s look at the core facts.

 

The mini-bond is unsecured, and non-transferrable. Interest repayments will be made bi-annually. The mini-bond will follow the standard bullet repayment schedule, with principal returned to investors at maturity. The term (though difficult to discern) appears to be 4 years. The minimum investment amount is £500, and investments may only be made in multiples of £500. Mini-bond holders will rank pari-passu with other unsecured Brewdog creditors.

 

We have cast aspersions on the mini-bond structure before. Our primary concern, with earlier campaigns, was that mini-bond investors were getting all the risks of equity, but without the chance of reward in the form of capital appreciation. The companies that were raising money via the mini-bond structure were, in our opinion, better suited to equity funding. 

 

But Brewdog is different. This is not a startup. This is a company that has grown by an average of 138% a year since 2007, and which is becoming an increasingly well-known brand in the UK. What’s more, as mentioned, the company has recently raised £14m in equity money – and that money continues to pour in from all over the country. Whilst 4 years is a lengthy horizon for tying up a chunk of principal, it’s fair to say that Brewdog is pretty unlikely to go belly-up in that time.  

 

That is not to say, however, that the company’s “Equity for Punks” campaign is a sound investment opportunity. As Rupert Taylor wrote in an article for AltFi Investor, the share based fundraise features a questionable valuation, and this over-valuation means that the equity offers little to no upside. The equity would also be wiped out first in the event of a default. Furthermore, the round suffers from poor disclosure, and offers its investors “B Shares” – which carry significant dilution risk.

 

But the vast amounts of money that have been pumped into Equity for Punks acts as a strong risk mitigator for the company’s mini-bond issue. The over-valuation that is attached to the “Equity for Punks” ironically provides a hefty buffer to the mini-bond investors. To summarise, Brewdog Bond investors may well enjoy steady returns, whilst the Equity for Punks investors suffer, despite the fact that both groups have money tied up in the same company.   

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