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Eddie Stobart criticised for failing to protect investors Eddie Stobart criticised for failing to protect investors
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Transport and distribution firm Eddie Stobart has made a surprise entrance in the retail bond market with the launch of a product paying a fixed rate of 5.5% a year over six years. But the bond has been criticised by financial advisers for offering investors little protection should the haulage firm go bust.Transport and distribution firm Eddie Stobart has made a surprise entrance in the retail bond market with the launch of a product paying a fixed rate of 5.5% a year over six years. But the bond has been criticised by financial advisers for offering investors little protection should the haulage firm go bust.
Stobart hopes to raise £25m from the bonds, which will be offered through stockbrokers or wealth managers, requires a minimum investment of £2,000 and is available until 27 November.Stobart hopes to raise £25m from the bonds, which will be offered through stockbrokers or wealth managers, requires a minimum investment of £2,000 and is available until 27 November.
Eddie Stobart's chief financial officer Ben Whawell, said: "We enter the market on the back of significant expansion of the group, with developments in our air, biomass and estates divisions now delivering results and bringing benefits across the business."Eddie Stobart's chief financial officer Ben Whawell, said: "We enter the market on the back of significant expansion of the group, with developments in our air, biomass and estates divisions now delivering results and bringing benefits across the business."
But while the travails of the haulage business may make for interesting viewing (the docusoap Eddie Stobart: Trucks and Trailers is getting up to 1.2 million viewers on Channel 5), investors will be more concerned that, unlike cash bond deposits, retail bonds are not covered by the Financial Services Compensation Scheme (FSCS).But while the travails of the haulage business may make for interesting viewing (the docusoap Eddie Stobart: Trucks and Trailers is getting up to 1.2 million viewers on Channel 5), investors will be more concerned that, unlike cash bond deposits, retail bonds are not covered by the Financial Services Compensation Scheme (FSCS).
It means that if Eddie Stobart were to go bust at any time during the next six years, investors could lose some or all of their capital.It means that if Eddie Stobart were to go bust at any time during the next six years, investors could lose some or all of their capital.
Patrick Connolly of financial adviser AWD Chase de Vere, said: "Investing in a single company bond is a high-risk approach, especially if the investment represents a reasonable proportion of your overall savings. We have seen how even supposedly strong and secure companies, such as the high street banks, can get into financial difficulties.Patrick Connolly of financial adviser AWD Chase de Vere, said: "Investing in a single company bond is a high-risk approach, especially if the investment represents a reasonable proportion of your overall savings. We have seen how even supposedly strong and secure companies, such as the high street banks, can get into financial difficulties.
"Unlike with most savings accounts, investors in this bond cannot fall back on the FSCS if Stobart is unable to pay them interest or repay their capital," he added."Unlike with most savings accounts, investors in this bond cannot fall back on the FSCS if Stobart is unable to pay them interest or repay their capital," he added.
A growing number of companies are offering corporate bonds direct to the retail market, seeing it as a cheap form of finance at a time when investors are crying out for income and better returns. National Grid, Severn Trent and Tesco Bank have all raised money from private investors through the London Stock Exchange's retail bond market.A growing number of companies are offering corporate bonds direct to the retail market, seeing it as a cheap form of finance at a time when investors are crying out for income and better returns. National Grid, Severn Trent and Tesco Bank have all raised money from private investors through the London Stock Exchange's retail bond market.
Whawell is hoping that the Eddie Stobart name – the firm has a road haulage fleet of 2,500 trucks that have become increasingly easy to spot on Britain's motorways – will result in strong demand for the bonds.Whawell is hoping that the Eddie Stobart name – the firm has a road haulage fleet of 2,500 trucks that have become increasingly easy to spot on Britain's motorways – will result in strong demand for the bonds.
At 108p, the Eddie Stobart share price has fallen some way from its recent high of 155p in February 2011, but in its most recent annual results the firm announced revenue up 10% to £552m.At 108p, the Eddie Stobart share price has fallen some way from its recent high of 155p in February 2011, but in its most recent annual results the firm announced revenue up 10% to £552m.
The retail bond market
Corporate bonds are debt issued by companies to raise money, which pay a fixed rate of interest for a set period. It's never been easier for private investors to invest in them thanks to the London Stock Exchange launching a new trading platform entitled Order book for Retail Bonds (Orb) in February 2010. Orb reduced the minimum investment needed to invest in a corporate bond to £1,000, opening the market up to everyday consumers.
Since then, companies have been falling over themselves to offer the products to profit-hungry investors, with retail bonds launched by the likes of Lloyds, Tesco, Provident Financial, Severn Trent, Hotel Chocolat, John Lewis and National Grid. Even the Daily Mail's parent company has gone to private investors for funding.
Tesco raised £125m in 2011 with an eight-year bond paying 5.2% a year, while Hotel Chocolat raised £3.7m in 2010 with a bond that paid out interest in the form of deliveries of chocolate. Many firms have recently launched interest-linked retail bonds, such as Severn Trent's product paying 1.3% a year (after inflation) for 10 years until maturity in July 2022.
Retail corporate bonds involve a lot more risk than, say, a savings bond because they are not protected by the FSCS, which covers up to £85,000 of savers' money should a firm go bust. This means you stand to lose some or even all of your money if your retail bond provider goes bust, which is why potential investors need to carefully research the company issuing the bond.
Connolly adds: "If interest rates do rise in the coming years the terms of this bond could start to look like poor value and so, with the extra risks involved, most people are better suited to savings accounts within the FSCS compensation limits rather than buying individual corporate bonds."
But retail bonds are marginally less risky than trading shares because bond investors rank higher than shareholders in the queue of creditors, so retail bond investors would be entitled to any cash returned from the failing business before regular shareholders.
• Find out where you should invest your money from the experts taking part in this year's Observer Investment challenge. Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Andy Brough, a fund manager at investment firm Schroders will talk about portfolio construction and how to pick stocks on 20 November at 6.30pm at the Guardian, King's Place, London N1. Entrance is free but donations to Great Ormond Street gratefully accepted.