Hambledon Vineyard’s English Fizz Mini Bond

By AltFi on Monday 27 April 2015

Features

Welcome to the inaugural CrowdView column. Every week we’re planning to bring you our insights into a new crowd based investment opportunity or product. Our focus will mostly be on crowdfunding equity but the writers behind this column are an unorthodox bunch so we’ll happily stray over into mainstream P2P lending and even touch on mini bonds – in fact this article looks at the Hambledon Vineyard bond issue currently available on Crowdbnk.

OK, so what should you expect from these regular CrowdView pieces?

We’ll be honest, voice our fears and articulate our hopes. We won’t say buy or sell anything – any decision to invest in a risky sector like alternative finance needs to be strictly personal and based on your circumstances. What we will do though is tell you what to look out for, what to investigate and how to compare like with like.

Crucially we take the view that investing in crowd based finance needs to be an adult decision, with each opportunity treated in exactly the same way as you’d do if you were investing in say a stockmarket share or a fund. That means facts, followed by more facts, topped off by facts.  We worry that too many investors look at the whole alternative finance space and think much too emotionally about the opportunities, especially with start-ups.

Investing is a hard old business and you need to anticipate failure – the best investors learn from their mistakes and move on. You also need to make sure you are not blinded by headline rates and sexy pitches. As investment observers we at CrowdView take a dim view of most over-hyped things. In our long experience the most heavily marketed financial products are usually the least attractive in terms of pricing and ‘fair value’.

The reader might also at this point be wondering about the authors of the CrowdView column and why we’re anonymous. We’re not trying to hide our identity – we’re all writers at www.altfi.com and you can very quickly work out who the team is. But we want to liberate these columns from the ‘imprint’ of one author and encourage a team who will voice opinions and share insights.

Rest assured that members of the CrowdView team have invested both professionally and personally for more than two decades, have analysed and measured everything from obscure emerging market bonds through to complex derivatives – alternative finance by comparison is a walk in the park! Also rest assured that we’ll always fully disclose if we have any conflicts of interest – we’ll say up front for instance if we own any investment we talk about. And remember we’re not in the business of providing investment tips. We focus on discussion and insight – you make the decision.

So, without any further ado let’s kick off with Hambledon Vineyard’s new English Fizz Mini Bond, run through the Crowdbnk platform. In recent months we’ve noticed a blurring of the line between crowd funding equity and P2P lending – mini bonds sit somewhere in the middle of this fast evolving landscape and share many of the characteristics of SME borrowing but with some new features including the ability to convert into equity at some point.

Our overall view is that this mini bond is an interesting idea, with many excellent features although there are some aspects of the bond we’re not too keen on. We’ll get those negatives out the way first. The key concern for us is that your interest rate – rolled up into one payment at the end of the five year term – is a bit under whelming at 8% per annum. Being honest we think that a more sensible return on lending to what is still a fairly early stage business should be at least 10% per annum. We also don’t like the idea of rolling up the interest payment towards the end although we understand why the business would want to delay payment until it’s solidly profitable. Another disadvantage – common to many of these bonds – is that it’s non-transferable which means you can’t sell this to another investor.

But we also think that there are some big plusses that help to outweigh these disadvantages. The biggest plus is that Hambledon is potentially a great wine brand, giving those French champagne masters a real run for their money. This south coast brand is building an international reputation for producing excellent fizzy white wines.

At the operational level the revenues are steadily progressing and the business should be cash flow positive by 2018/9. This 5 year, 8% mini structure should enable the business to significantly boost its growth capital and if it raises £3m in funds, it hopes to be able to turn that into £21m in (expensive) wine. We also liked two other features of the mini-bond. The first is that you are being offered some possible involvement in the upside of the business. One of our core concerns about many crowd funded mini bonds is that you getting a sub par yield for taking what we call equity style risk i.e you might not get the cash back at the end ! If the business does survive and prosper, it’s the equity investors who get all the upside, while the bond holders make do with their (small) yield.

The Hambledon issue goes a little way towards dealing with this issue. It has a convertible element that kicks into equity in 2020 (at the end of the bond) based on a 25% discount of the director expectation of the value in the business in…2020! It’s not exactly the level of equity kicker we’d ideally like but it’s better than nothing and the business maintains that it should be hitting £5m pa in BITDA profits five years after the conversion in 2020. Hambledon reckons that this conversion opportunity will be the last route into getting some equity in the business.

The bond also is secured, with only £1.5m of senior debt sitting above you, which matures in three years’ time (and pays less in terms of interest).  Again we’d have preferred a first charge on a specified asset of some sort and less senior bond exposure but to be fair there is something to get your hands on, namely the free hold land, the brand and all that lovely wine. Net asset value post the bond should be not far off £5m.

Perhaps the biggest plus is that investors get some ‘fizz rewards’ depending on how much they put in. This idea of free wine is an excellent one and reminds us that sometimes investing can also feature both fun AND rewards. There’s nothing wrong with shareholder perks and other wine businesses like Naked Wines have also offered similar rewards via their mini bond schemes. We think that the rewards could have been more generous for those with just a few thousand pounds but if nothing else you should get some very decent booze at the end of the investment!

Bottom Line? The Hambledon Fizzy Bond is interesting, innovative offer from a brand trying to do the right thing by their investors through a convertible structure and giving security over some assets – all with an 8% yield, rolled up at the end. We’d have preferred a higher coupon, and more generous shareholder perks but one to watch before it closes in late May. Also be aware that this is absolutely not without risk, not least that this earlier stage business could go bust – remember it’s not profitable yet unlike many more mainstream corporate issuers who issue their bonds on the stockmarket.  

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