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What security can Property Bonds / Loan Notes provide for investors

by Nikki Dale -

As property bonds and 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 deciding to invest.

Secured versus unsecured property bond or loan note

With an unsecured bond or loan note it is not secured against the company’s assets. They potentially pose a higher risk, however often come with a higher return.

Secured loans are secured against the company’s assets who is 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 the lender (you) that the loan will be repaid.

Typically, the security is a fixed charge of assets that are within the specific property bond or loan note that has been invested in.

With a secured product, often an independent security trustee will be appointed to represents the interests of the bond/loan note holders.

READ MORE: What are the pro’s and con’s of a property bond and how are investors funds used? 

What is a charge on a property?

When a legal charge is applied to a property bond it brings with it a great deal of security. It protects that the investors’ capital will be repaid even if there is a default and the development company cannot fulfil their obligations, as expected. This is done by securing the loan against assets that will be sold to return the investors’ capital, in the event of the worst-case scenario.

When there is a legal charge within the bond, investors can feel more comfortable investing their money, given this degree of security provided.

Usually, the firm that issues the bond will have the right to seize the development, or whatever assets have been pledged as collateral to ensure the investors’ capital is safe.

Essentially, this type of charge is similar and works in the same way to what you might have come to expect when taking out a mortgage on a house, for example.

What is a Security Trustee’s role?

When a security trustee is appointed to represent the interests of the bond/loan note holders, a secured product 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 bond/loan note holders.

What if the development company becomes insolvent?

Any property bond or loan note product worth investing in will structure the asset-to-liability ratio so that the debt is covered. Therefore, in the event of a default from the development company, the investors’ capital will be repaid via sale of assets that were used as security.

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 deciding to invest. It is a document issued by the company and contains every detail about the product, 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).

READ MORE: Best fixed rate property bonds

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