Wave of bond issuances relying on longship processes

Bond issuance exploded as government debt offices and corporate treasurers ran to sure up their cash piles. The wave of issuance is frequently relying on longboat style technology. There are newer “boat” styles and manual rowing can be replaced with technology, plus a wider range of funders, by allowing retail investors to have a bite of the bonds being issued.

The process of issuing bonds is unbelievably slow and largely manual. we understand that is can take an average 30 stages with human intervention between multiple parties and intermediaries to issue a bond. The use of PDF and paper-based processes in issuance that are then carried into trading and settlement need to be improved. technology has improved the trading of currency and equities but the bond market appears to be in the dark ages.

The opportunity of digitalisation, fractionation to retail customers and automated workflow should be the way to ride the bond waves, not longboats. It does need Viking hardiness though as its not a simple task to undertake and a journey we’ve been on for many years.

30 year paper technology still central to bond markets

The Portable Document Format (PDF) was created in the early 1990s by Adobe Systems, introduced at the Windows and OS|2 Conference in January 1993. This 30 years old technology remains central in a paper-based ecosystem of bond issuing, trading and settling. With cash piles burning rapidly for governments and corporations a more effective borrowing method is needed for this capital market instrument and a wider investor base to support corporate borrowing. 

COVID19 has increased needs for cash for business and government. Companies are short of cash. We want to replace the offline PDF-based approach to lending, trading, offering, register and cashflows management for borrowers and lenders. Chiefly reduce friction and pain for financial institutions and grow the number of participants that can join a borrowing. 

With companies and treasury departments rushing to issue bonds a technology that opens a similar digital method and also widens the pool of funders should be attractive. Bondsmart is trying to simplify and open wholesale borrowing markets and bond activity. 

The humble PDF started off on the dream of a paperless office, as the pet project of one of Adobe’s founders, John Warnock in a project called Camelot. Initially, it was an internal project at Adobe to create a file format so documents could be spread throughout the company and displayed on any computer using any operating system.

Nowadays the PDF is central to many operations of financial services. In Japan, for example, the clearance and settlement system appears to have limited interest in corporate bonds, because it was a decentralized, paper-based system. The United Kingdom’s paper-based system which has only recently been modernized. PDFs are the predominant model of paper-based
disclosure regimes that have underpinned the development of many European disclosure requirements (e.g. the provision of KIDs in PRIIPs and KIIDs in UCITS). 

Bondsmart are delivering an architecture to replace offline PDF based lending, trading, offering, register and cashflows for corporate borrowers and financial institutions when doing lending. Increase financial inclusion too with the admission of retail customers to be involved in lending too.

The need:
• Financial inclusion. Current market the preserve of the super wealthy
• Investors want to know the return on their investment
• Unique instrument that fits a financial need – income and security
• To fill a market gap
• Improve operation from a PDF and paper-based ecosystem to more electronic.

Current options for consumers:
• Options for an investor today:
o Need $200,000 to buy a single bond
o Mutual funds do not meet all the requirements of investors
o No control of bond, no known income level, no known maturity, etc

Amongst leaders in the Int’l Fund & Product Awards

News in brief following a pleasant notification into our mailbox.

The shortlist for International Investment’s 19th Annual International Fund & Product Awards 2018, has been announced following a record number of entries. These awards cover the world of international products and investments.

Bondsmart are amongst local, international, new and old groups plus innovators as Best International Platform.

Nominations are listed below.

Best International Platform
Ardan International Wealth Platform
Capital International Platform, by Capital International Group
Sharing Alpha
Wealth Interactive, by Old Mutual International

Bridging the wholesale – retail divide

Most industries have a supply chain from the distributor to the wholesaler to the retailer to the consumer. At each stage the minimum quantity gets less until at the consumer end they can buy a single item.

The problem with financial services is that sometimes the consumer does not actually get the same product as the wholesaler sells.

The retailer often repackages it in a different format and gives the consumer something else. In the case of direct bonds, the consumer most frequently ends up with a mutual fund and no way to get a bond.

Improving the structure of bond markets for smaller investors is our primary goal. Retail investors suffer because they pay much higher prices than institutions do and rarely have access to the same securities. This differs from equity markets where every investor, large or small, can buy a share of Apple Inc at the same price at the same time. By “retailing” through co-ownership wholesale corporate bonds, which tend to have minimum subscriptions of £100,000 that’s obviously a deterrent to private investors, we are opening the market to more investors.

Even for wealthier investors the onerous capital outlay to buy a single wholesale bond results in a lack of ability to diversify. Subscribing for smaller lots allows retail investors to enjoy the benefits of yield/return certainty that comes with investing directly in corporate bonds yet still enjoy the diversification benefits too.

Musings from Dubai

A greying society isn’t a local problem, it is happening across the world. The world’s population has never been older.

We were in Dubai in February as the local private investors are large buyers of fixed income assets.

Bonds and Sukuk (a certificate of ownership to cashflows from an underlying asset) are very popular instruments for investors in Dubai and across the Middle East.

With no state pension, local residents need their investments to pay out, to provide an income and to feel secure in it is not going to dry up. There are a number of large well-known enterprises that issue bonds and sukuk. The stream of future cash flows is more beneficial for older investors than selling units from a growth asset where the price of the asset may be higher or lower when a sale is executed to receive the cash.

Some popular names in the local market include DP World and Emaar Properties. DP World is one of the largest port operators in the world and owns UK ports in Southampton and London Gateway. Emaar Properties is a well know local property developer and owner of landmarks across Dubai.

We are working with a local regulated partner and met with financial institutions with client banks interested in buying local wholesale bonds. The minimum order size for middle east bonds is two hundred thousand US Dollars or more. Below are a couple examples fixed income instruments.

Our lesson from a few days with some major financial service providers is they are looking at ways to work with their clients more digitally and an opportunity to offer clients’ an existing asset well understand at a lower investment minimum will be advantageous to both client and provider. Additionally, a simpler way to present these securities helps the adviser and client in the advice journey.

‘Charles Darwin’ £10 note retiring a third poorer

The retirement of a coin of the realm can help us realise what happens in the life of money and what investment planning we should be making.

We all retire after a long life of work. ‘Charles Darwin’ has seen 18 years on the face on the British ten-pound note. In that time the value of that ten-pound note has fallen by a third. Inflation has eroded the purchasing power. These days more people need to generate more income from their money but it is not always easy.

The ‘Charles Darwin’ image sits alongside a compass, boat on a calm sea and hummingbird gazing at flowers. All of these calm pictures are a counter to the topsy-turvy would he retires from. The old £10 note will cease to be legal tender at the end of 1 March 2018. Now polymer has replaced paper which is expected to have a life of twice the old paper note. Times have changed.

With more people needing an income and fewer places available as a decent and secure home then technology can be a way to simplify investment decision making. We want to simplify the way that people earn an income from their investments, make it easier to see that cashflow and make informed financial decisions.

Bonds in the industrial revolution and technology revolution

Modern finance engineer’s solution that are more complex and therefore harder to understand. Let’s look at the humble bond, where did it come from and how does it fit in today’s complex investment world?

Two hundred years ago, before today’s technology revolution, we were in the midst of the industrial revolution.

Railways are a great example of what a bond is and offers.

Building railroads is expensive. They have long lives to generate an income but are costly to build.

The builders of railroad’s wanted to avoid selling too much equity and needed more money than they could raise by selling shares alone, so they borrowed. In return for loans, companies bonded themselves to investors and promised to repay borrowed money at future dates. Companies documented their promises with bond certificates.

Bond coupon rates varied among companies and varied through time. Like today, investors demand higher interest rates from riskier companies.

According to a historical bond database in the past 185 years, railroad companies have issued bonds in denominations ranging from $2 to well over $1,000,000.

Bond issuers realised two things over this time.

One, it is easier to deal with a small number of large denomination bonds; however

Two, the average investor prefers small-denomination bonds.

Railroads decided $1,000 bonds were the best balance of sales and operating problems. Nowadays, institutions are the gatekeepers for large number of investors so as a result truth one trumps truth two. Therefore, the minimum in the market is $100,000 or even $200,000. The mega-wealthy rule in bond markets. This we hope to change.

In the past a private investor could buy a railway bond and earn the coupon but not anymore. Financial services have developed middlemen, barriers to entry and dealing rules that prevent private investors lending to big business.

Not a Budget for bold savers

The Chancellor’s Autumn Budget was a lacklustre affair. There was nothing for those looking to protect their money against the long-term ravages of inflation. Trailed as being a non-budget, it certainly lived up to its expectations for savers. The Chancellor’s ploughing a different field to us.

Aside from some positive upward tinkering with the personal allowance, and a small increase to the lifetime allowance on pensions, there was very little to help you make the most of your money over the long term.

With growth forecast to be lower for longer, many are expecting the same to be the case for interest rates on cash, despite the recent 0.25% hike by the Bank of England.

Necessity has always been the mother of invention: this continued low growth, low rate world is exactly why we are building bondsmart.

We will aim to give people access to better returns than cash from household brands, without the rollercoaster ride of shares, nor the fog of peer-to-peer lending.

We’re busy finetuning our widgets and wiring our systems to plug this growing savings gap.

All the best to you, and your hard-earned.

The Team @ bondsmart

Contributory podcast to Malaysia based IFN Magazine

This week we contributed to a superb publication based in Malaysia and recommend a subscription to their great news updates and platform. A brief extract from IFN is below…

This week, IFN spoke to Lawrie Chandler, the director and investment unit head of UK-based Edale Group, to discuss the concept behind the new BondSmart Sukuk platform, an online fintech venture designed to provide mass affluent investors with a steady fixed income stream through Shariah compliant channels.

“We have been investing into Sukuk for 10 years and I’ve always noticed how it seems to be an asset class of the elite and the mega wealthy,” said Chandler. “If I am a priority banking client or an average everyday investor, unless I’ve got US$200,000 to spare it is very difficult for me to participate in Sukuk. This is a way to bring about an opportunity for investors to access that.

“The attraction is of course the underlying asset – big companies, paying a big profit rate, and getting security of capital, which generally other asset classes don’t offer.”

The firm has used the principles of crowdfunding to build a co-investing concept where investors can effectively buy a slice of beneficial ownership in a Sukuk facility and receive the equivalent return. Unlike mutual funds or equity investment, where the value can go up and down and the volatility can be off-putting for those seeking a steady return, Sukuk offer a fixed income stream that Chandler suggests could become increasingly valuable – especially as global demographics develop.

“Essentially, we have simply added a crowdfunding front-end onto a traditional institutional investment process allowing people to pick and choose the type of bonds they want access to,” he explained. “A lot of people will be retiring over the next decade and will be faced with the challenge of moving from wealth accumulation to expenditure. We see a big demographic demand from older investors who will need access to income. And there are a lot of client groups who want access to this asset class and can’t get there. So far, the only way for the everyday investor to access Sukuk has been through mutual funds, but the problem there is that you don’t necessarily know what your yield will be.”

So what is the difference with the new retail platform?

“We effectively give people a key to get into a penthouse apartment, where the Sukuk are laid out on the table,” said Chandler. “They can buy a seat at the table rather than paying for the whole meal.”

The firm is currently speaking with a range of financial institutions in the Middle East and Malaysia to discuss white-labeling the platform and rolling it out directly to Shariah-conscious customers.

“We want to give people the opportunity to buy cash flows from big businesses and known brands, and get a better return than they would from cash in the bank but through a less scary route than the stock market – essentially, a halfway house,” explained Chandler. “We are hoping to have a couple of those channels live within the next few months.”

This is an excerpt from an interview with Lawrie Chandler, the director of Edale Group, discussing the new BondSmart retail Sukuk investment platform. To learn more or to listen to the full conversation, log on to www.islamicfinancenews.com/podcasts.