Structured Investments

What is a Structured Investment?

Property remains one of the most popular forms of investing for consumers, given the returns available in the UK market – and Loan Notes, or Property Bonds, are one of the most attractive options for gaining access, quickly and easily, to that sector without requiring any expert knowledge of construction or land development.

A Loan Note is an extended form of a generic I Owe You (IOU) document from one party to another, with interest paid over a predetermined timescale. At the end of the loan term, the original loan is returned plus any interest accrued. It enables a payee (borrower) to receive payments from a lender, possibly with an interest rate attached, over a set period of time and ending on the date at which the entire loan is to be repaid. Loan Notes are usually provided in lieu of cash at the payee’s request.

A Loan Note denotes a type of contract that typically outlines the legal obligations of the lender and the borrower. A proper Loan Note will include a set of contractual penalties, including the right to sue or seek arbitration, if either party to the contract fails to meet or otherwise defaults on financial obligations. Source: Investopedia – Alan Farley Apr 14, 2019

Loan Notes, therefore, represent a new and exciting way for investors to generate attractive returns from development projects. They do so by allowing individuals to offer their capital in the form of a loan to a property development company in return for a fixed rate of interest over a fixed period of time. At the end of the fixed period, the investor’s original capital is returned in full – the developer will typically have obtained the proceeds for repayment by refinancing the borrowing or through the sale of some or all of the property units.

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Some of the benefits include:

• Fixed-term property investment - 2 years (24 months)

• Consistent high fixed returns

• Compounding income or regular income options

• No stamp duty is payable

• No hidden fees or charges

• A far simpler and hassle-free process

Property Bonds can potentially offer the best of both worlds: attractive fixed returns with the security of ‘bricks and mortar’. Generally, Property Bonds are issued by individual developers and investors’ returns are linked to the sole capabilities, and the projects undertaken by, that specific developer. A Loan Note is therefore a legally binding contract between a lender (the investor) and a borrower (the property developer) that details specific terms as to how the investment can be used, how much interest is paid to the investor and when, how the investor’s capital is secured, and when the initial investment is paid back. The precise terms of each bond will, of course, differ somewhat depending on the borrower.

Property Bonds / Loan Notes are highly speculative and illiquid investments. Whilst they do offer a fixed rate of return, such returns are not guaranteed and investors could lose all of their original investment. Hunter Jones Group predominantly promotes within the UK, Middle East and Asia working with a range of investors including private individuals as well as family houses and IFAs. There are two types of investors we work with, High Net Worth Investors and Sophisticated Investors.

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Due to the fact that Property Bonds are considered speculative, illiquid, and high-risk investments, we can only introduce our investment opportunities to experienced and knowledgeable Sophisticated Investors in this field. Sophisticated Investors are deemed to have the requisite knowledge and experience of the investments we offer. As part of our procedures, you are required to declare the type of investor you are and confirm your knowledge and experience. This is to assess whether the investment opportunities we introduce to you are appropriate for you and your financial circumstances. Registering does not commit you to any decision. You must declare your investor status before we can discuss any investment opportunities with you. In some circumstances, we may also need you to provide us with some evidence.

Loan Note Structure

All of the Loan Note opportunities we introduce are structured as follows:

Interest is paid on the original lump sum investment. This interest can be paid periodically as ‘income’ and is dependent on the terms of the Loan Note. There are three options: quarterly, six-monthly, and annual payments. Alternatively, the interest is compounded over the term of the loan and repaid on the maturity date as ‘growth’. Throughout the term of the loan, the Loan Notes are secured by a charge over the assets of the Product Provider. The Product Provider is the owner of the property development to which Hunter Jones Group has introduced the Investor.

Traditionally, property developers and construction companies funded property developments with loans from banks. However, after the 2008 recession, banks changed the way they lend money. Heightened caution amongst lenders caused them to de-risk their lending criteria, meaning that developers have had to seek alternative methods for raising funds. Hence, the evolution of property bonds and Loan Notes. The gap in the development financing market has been fulfilled in part by developers issuing Loan Notes, which allow them to raise the necessary funding required. However, Loan Notes and property bonds are issued and structured by the property development company, which in most cases is not a listed company on an exchange. Such investments are therefore classified as high-risk investments and are much riskier than a savings account.

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What is a Security Trustee?

A Security Trustee is normally appointed by a Loan Note issuer for the benefit of Loan Noteholders to safeguard the interests of Loan Noteholders. A Security Trustee is independent of the issuer and normally has the ability, if required, to take control of the issuer’s underlying assets on behalf of the Loan Noteholders. This might occur if the issuer defaults on payments due and payable under the Loan Note Instrument. This structure avoids granting security separately to all creditors which would be costly and impractical.

A Security Trustee is not a guarantor of the obligations of the issuer under the Loan Note Instrument.

A Security Trustee is reliant on the issuer to provide it with the relevant information or on Loan Noteholders to notify it of default. If a Security Trustee is not aware of a default event, then they will not be in a position to enforce the provisions in a Security Trustee Agreement. If a Security Trustee is required to exercise its powers under a debenture or a charge, it will appoint a receiver who will then liquidate the issuer’s underlying assets to repay creditors. Fees are likely to be applied if this course of action is taken. Loan Noteholders are classed as secured creditors, but certain creditors may take priority over secured creditors e.g. HMRC, Security Trustee, Receiver Fees or VAT liabilities.

Please note that the existence of a Security Trustee does not guarantee the success of the issuer, getting your interest paid or recovering the initial amount invested. A Security Trustee merely holds a charge over the issuer’s assets in trust for Loan Noteholders and can appoint a Receiver, Administrator or Liquidator in the event of default, to recover part of all the monies invested.