Listed & Rated Bonds
Not all Bonds are the Same and its important you know the difference.
One of the first things fixed income investors typically do, is determine the category and profile of a bond. Is it a Listed Bond? Does it sit on a major exchange? Is it registered with and sit on Euroclear/CREST? Or is it an unlisted minibond/loan note? Are there annual redemption options, or are you locked in until maturity? Different types of bonds are likely to appeal to different people. Risk and Liquidity play a major role in this.
Someone perhaps, who has a long investment time horizon to recoup any capital losses, might include high risk minibonds, loan notes or unlisted junk bonds in their diversified portfolio. Conversely, Listed Bonds and investment grade bonds may find favour with a more astute, experienced professional investor, who prioritises capital preservation as paramount.
One way investors can generally assess the risk profile of a bond is through its Rating; with much of the detailed research carried out by external credit rating agencies who assign different credit ratings, based on how much risk is attached to the repayment of capital and liquidity.
The dividing line being: bonds with high credit ratings of at least BBB– are classified as investment grade, while those below BBB– , are treated as junk (commonly referred to as junk or mini-bonds). Defaults rates tend to rate differ entirely; the average default rate of aaa-a Rated bonds being 0.4%, in stark contrast to mini-bonds and unlisted speculative bonds at 58% default rate.
The vast majority of aaa-a Rated Bonds are Senior Secure which meaning they are default and bankruptcy remote. A senior secured bond is one that is pre-backed by a segregated and ring fenced pool of security, by way of of collateral, cash and assets, specifically against the bond.
Both Listed and investment grade bonds are Publicly Listed and tradeable on major Regulated Exchanges & MTF’s where liquidity is freely transferable and/or early redemptions are available.
Such bonds are internationally recognized and internationally listed by way of its ISIN Number (International Securities Identification Number) and can only be purchased through Regulated Entities ie investment platforms such as Euroclear, Crest, Capital International Group, Credo Wealth etc.
An increasingly popular type of Listed Bond, commonly referred to as ‘Cash Reserve’ bonds, works whereby Investor Capital remains untouched, unencumbered and blocked off in a designated non-depletion Escrow account until maturity. The Designated Escrow account is routinely managed by FCA Trustees, The Bank itself and an Independant Collateral Guarantor, guaranteeing capital and coupons typically through government securities. The protected funds in escrow is used as Proof of Funds to obtain an Independant Line of Credit which is entered into Arbitrage Trade Programs and alike, securing returns.
Such Bonds are usually Listed on some of the largest european stock exchanges such as London, Vienna and Frankfurt. Capital and Coupons are typically further protected by AAA Moodys-Rated Capital Pledge Guarantees. Liquidity wise, some bonds are freely transferable whilst others tend to offer Annual Liquidity through Early Redemption. Listed ‘Cash Reserve’ Bonds can be purchased and settled through Regulated Platforms such as Crest, Euroclear, CIG, Credo Wealth, Swissquote etc and direct.
- Listed Publicly on Major Exchanges & Tradeable
- Liquidity- freely transferable (bond can be sold and early redemptions available)
- Global ISIN Number & Listing
- Investors are not locked in at any stage
- Purchase eligibility: ISA/ ISA Transfer/ SIPP / Regulated Investment Platform
- Credit Rated AAA-BBB (investment grade)
- Senior Secure (specific assets pre-set aside with charge against bond)
- Typically Publicly Audited
- Compliance with Regulated Exchange & Regulator
- Global ISIN Number
- Issuers; (1) Supranational Bodies (2) Local Government Authorities (3) Large Established Companies (4) Governments
- Buyers; Individual Investors, Pension Funds, Government Funds, Insurers, Hedge Funds
- Can only be purchased through a Regulated Entity
✗ No Early Redemption
✗ Investors are locked in until maturity
✗ No ISIN listing
✗ Ineligible for ISA/SIPP & Regulated Investment Platform typically
✗ Not usually Audited
✗ Little compliance to adhere to
✗ No ISIN Number
✗ Issuers tend to be small, illiquid and unestablished companies
✗ Buyers of minibonds/loan notes; unaware Individual Investors
✗ Otherwise known as Junk Bonds including BB-D rated bonds
✗ Can be purchased from any unregulated entit