How does an 9.25% rate of interest on your savings sound? Highly attractive?
Well today, I want to tell you about one bank that is paying exactly that. Before you get too excited, I must tell you that this rate of return is only available if you have a spare £750,000. But stay with me. Because there is a very interesting investment opportunity here for penny share investors – a story that could have radical implications for the British banking system over the next few years.
Here is the deal…
You lend your money to 1PM (AIM: OPM), the Bath-based provider of finance to small business. 1PM will then lend your money to some carefully chosen borrowers. The security is provided by a specific pool of lease agreements. 1PM will then repay your capital plus interest of 8% or more over 36 equal monthly instalments. That, at least, is the general gist. You can find out more on their website.
Any private individual offered a rate of interest that is so far in excess of normal market rates should usually walk around the block until the temptation subsides. But times are not normal. Let us just step back a bit and consider the big picture.
The banks only know one way
I speak to many directors of small companies in this country and many of them have a good old moan about the banks. They just won’t lend any money, even for low risk propositions such as working capital for confirmed orders.
The government talks a good game here and its recent initiative to encourage mortgage lending has had some effect. But its efforts to persuade the banks to lend to businesses have made little impression. The banks have other priorities. They are under pressure to comply with a welter of new regulations, and to repair devastated balance sheets.
They only know one way. Raise lending rates as high as they can, drop deposit rates as low as they can, make a fat margin between the two and desist from any new lending that might cause fresh damage.
An era of ‘democratic funding’
This has left a huge gap in funding, and others are moving to fill it. While the banks need wide lending margins to pay for the sins of their past, newcomers have no such historical burdens and can offer keener rates to borrowers and lenders alike. Martin Wheatley, chief executive of the new Financial Conduct Authority says that it will be “open to approving new business models to serve smaller firms and customers”.
“We have licensed our first crowd funding platform”, he said, “and are in discussion with a number of people who are offering very different forms of providing financing to SMEs (small and medium sized enterprises)”.
Crowd funding permits small enterprises to raise money directly from lenders. Funding Circle and Crowdfunder are two such sites, and Danae Ringelman, co-founder of another, Indiegogo, argues that they are “democratising funding. In a world where everybody is funding everything”, she continues, “the role of gatekeeper will become obsolete”.
Filling the huge void in banking
I doubt that it will go that far because most depositors would like a specialist to make the lending decisions. That is the role played by 1PM, as it is by Private & Commercial Finance (PCF), another small business lender that recently raised £4.6m through an issue of convertible loan notes paying a 6% yield. These yields are highly attractive and have been made possible by the banks’ reluctance to lend.
With bank rates so low investors are desperate for yield and corporate bonds are a good place to find it. Another recent issuer is the London Stock Exchange (LSE) which offered 4.75% nine-year Sterling Fixed Rate Bonds. It raised £300m, the largest corporate bond yet to be issued through the LSE’s own order book for retail bonds.
Such has been the flurry of corporate bond issue recently that some now see it as a bubble which can expect a future implosion of value. But I do not see too much to worry about.
For sure there is a bubble in government bonds. But while it may be crazy to lend money to the indebted UK government for nine years in return for a puny 1.6% yield, I don’t see too much wrong in lending to an established, financially sound, near monopoly provider such as the LSE for nine years at 4.75%. And, reverting to those 8% or even 9.25% yields I referred to at the top of this article, I don’t see too much wrong with filling the gap left by our hapless banks.