All companies that attempt to raise funding via the Crowdcube mini-bond structure will henceforth carry the Probability of Default (POD) tag. This metric, provided by Moody’s Analytics private company risk model (RiskCalc), is designed to allow Crowdcube’s individual investors the chance to better analyse the mini-bonds as an investment opportunity.
The first two companies to attempt a mini-bond raise in the era of Moody’s oversight are Square Pie and Vanarama. The first is a leading brand in the gourmet pie space. The second is the van-leasing arm of Autorama – which is one of the top independent car-leasing brokers in the UK. Square Pie is looking for £750k in exchange for 8% per annum over a 4 year term. Vanarama wants £1.5m, again at 8% p.a., and again on a 4 year repayment plan.
The campaigns carry all the usual appliances: descriptions of the businesses and of the teams, financial documentation, delineations of the key risks, pitch videos, and so on. But they now also come equipped with a prominent Probability of Default estimate.
Square Pie has been assigned a 0.7% POD by Moody’s Analytics, based on historic accounts. Vanarama carries a 0.5% POD. These stack up against an average 3.3% POD for the mini-bonds that have been listed on the Crowdcube platform to date. Crowdcube’s past mini-bonds have attracted roughly £10m in funding over the past year, with money flowing into Eden Project, River Cottage, Pocket Living and Chilango. According to Crowdcube, investors have received around £300k in returns from this selection of mini-bonds during 2015. Mini-bond repayments are typically made bi-annually.
Crowdcube has sensibly stressed that POD is not a risk rating, but rather “an approximate measure of the credit-worthiness of the issuer”. The platform also labours the point that the POD percentage should stand as only one factor in an investor’s assessment process.
We’ve had our doubts about the mini-bond structure in the past. But tying up with the highly reputable Moody’s is a clear step in the right direction for the Crowdcube platform. It would also appear that the balance of risk and return attached to the investment opportunities is becoming more attractive. If Crowdcube’s average POD on mini-bond offerings is 3.3%, then we must assume that the Square Pie and Vanarama offerings are amongst its least risky to date. Interestingly, however, these products pay out the same coupon (8% p.a.) as the platform’s first mini-bond, the “Burrito Bond”, and it’s fairly safe to assume that Chilango carried a POD that was above the 0.5-0.7% range.
Leading P2P platform Funding Circle provides an interesting point of pricing comparison. Funding Circle has assigned its A+ loans with an “estimated annual bad debt” of 0.6%. Recent average gross interest rates for those A+ loans are 8.7% – equating to a 7.7% average gross interest rate net of fees. Now, Funding Circle’s estimated annual bad debt isn’t the perfect comparable for Crowdcube’s outsourced POD. But nonetheless, Crowdcube’s latest mini-bonds appear to occupy a similar risk of default range as Funding Circle’s A+ loans. And they offer investors a similar return, at 8% and 7.7% p.a. respectively.
Whichever way you slice it, Moody’s Analytics is a welcome addition to Crowdcube's mini-bond product offering. The platform will be updating its average mini-bond POD on an ongoing basis. We’ll be intrigued to see if the current 3.3% POD falls, as we assume it must have after the listing of the Square Pie and Vanamara campaigns.