What is a Loan Note investment?
- Loan Notes are IOU’s from a company to an investor.
- You are making a loan to the company and the company is agreeing to pay it back with a fixed amount of interest.
- Loan Notes can be secured or unsecured – with secured being the safer option.
- Loan Notes are a Financial Promotion under section 21 of the Financial Services and Markets Act 2000(FSMA). This means it has been approved for individual investors.
- Financial Promotions should have Section 21 sign-off by a company that is authorised and regulated by the FCA.
- A Loan Note investment is for a short term. e.g. two years
- The Loan Note investment term starts as soon as the Loan Note amount has been paid in full.
- Interest options are normally a bi-annual payment or deferred to the end of the investment term.
- At the end of the investment term your initial capital is returned in full, along with any interest owed.
Who can invest?
- Loan Note products are designed for investors that have enough knowledge and experience to make an evaluation of the product, including its risks, and merits.
- Self-certified Sophisticated Investor – majority of investors can meet the criteria. If you have invested in the past: property, student accommodation, stocks, shares (AIM) no matter how small – even if you don’t hold the investment.
- Self-certified High Net Worth Individual – for investors that earn £100,000 per annum or more or hold assets to the value of £250,000 or more.
One of our property experts will be able to talk you through the criteria to see if you qualify.
What is the Information Memorandum?
- The Information Memorandum document is fundamental for this type of investment. All investors are required to read this carefully before making a decision to invest.
- It is a document issued by the company and contains every detail about its Loan Note, including but not limited to:definitions, key information, executive summary, the investment opportunity, funds and security information, returns, risk factors, detail on the issuer (company).
- It’s reviewed (before public) by the chosen FCA authorised and regulated company and approved for purpose under Section 21 of the Financial Services and Markets Act 2000. This is an extra layer of due diligence for any Loan Note, as it’s an authorised financial promotion by an FCA regulated company and means it has been approved for individual investors.
How are the Loan Note monies used by the company?
It is dependent on the company you chose to subscribe with. Loan Notes are popular in the real estate development industry, as developers have valuable assets to secure the loans against.
We work with Godwin Developments via Godwin Capital and their investment funds are utilised to buy land and properties for development or conversion in the Midlands and North of England. For further information please refer to the Godwin website godwindevelopments.co.uk
What is the Security Trustee’s role in the process?
A security trustee is appointed to represent the interests of the Loan Note holders. A secured Loan Note will have a fixed first legal charge and this is held by the security trustee when land or buildings are purchased. Some companies will do a double layer of security such a mortgage debenture over the assets – the security trustee will hold this too, on behalf of the Loan Note holders.
What are the risks of investing in a Loan Note?
As Loan Note investment is a financial promotion, it is very transparent in the Information Memorandum what the risks are. Like with all investments it is crucial to evaluate the risks, along with the merits before making any decision to invest.
We have seen many Loan Note and Coupon products but only the company and product that passes our due diligence process will we recommend to you.
What is the Loan Note Application Process?
- Verbally confirm to your Property Expert you can Self-certify as a Sophisticated Investor or High Net Worth Individual
- Read through the information pack, particularly the Information Memorandum, and carry out your own due diligence and seek independent advise, if necessary
- Confirm to your Property Expert the Loan Note value you would like to subscribe for.
- Your Property Expert will complete an application form with your details, and this also includes the Self-Certify Investor Form to duly check and sign.
- Whether you are buying as an individual or through your company, specific AML (Anti-Money Laundering) documents must be supplied and an AML check is carried out within 48 hours.
- Upon a successful AML check, the Loan Note application is paid in full, directly to the company.
- Loan Note Certificate (in your name) is issued and sent direct to you after payment is received.
- Your investment term starts immediately
- Regular company updates are sent to you bi-monthly
Secured Vs Unsecured Loan Note
- Unsecured loans are not secured against the company’s assets. They potentially pose a higher risk, but often come with a higher return.
- Secured loans are secured against the assets of the company borrowing the money. While there is still a risk involved, the asset can be used to pay off debts in case the company defaults.
- The company’s assets or collection of assets are pledged by the borrower to give comfort to you (the lender) that the loan will be repaid.
- Typically, the security is a fixed charge of assets that are within the specific Loan Note that has been invested.
- With a secured Loan Note an independent security trustee will be appointed to represents the interests of the Loan Note holders