Bonds Advice

Questor: we have £11,000 to invest in bonds. This is why we are choosing Halifax’s


There is some uninvested cash in this portfolio that we need to find a home for. The money came from the sale of our Premier Oil retail bonds and comes to £11,313.

It will be reinvested in bonds of some description. We see our decision to invest a substantial part of the portfolio in bonds as vindicated by what has happened since, in particular the coronavirus crisis.

While share prices have been hit hard, our remaining bonds have held up well. More importantly, the income from all of them has been unaffected, while we have suffered plenty of dividend suspensions and reductions among our stock holdings.

All we have to do is decide which bonds to buy. We are not helped by the fact that issuance of new retail bonds has all but dried up, although plenty remain available on the market. We can also choose from among the many bonds that are not technically retail bonds but still available for ordinary savers to buy.

Halifax 9.375pc bond

Ideally we would like to diversify our bond holdings, just as we have our share holdings. We currently have bonds (or permanent interest-bearing shares, which are similar) issued by Tesco, Bank of Ireland, Ladbrokes, LendInvest, Newcastle Building Society and Paragon Banking Group. Apart from Tesco and Ladbrokes, all are involved in finance.

We enlisted the help of Mark Taber, a bond expert who has campaigned on behalf of investors when various institutions have wanted to change bond terms to savers’ detriment, not least when Lloyds Banking Group bought back at par value some “enhanced capital notes” that had been trading at much higher prices.

In that campaign he was supported by this newspaper so it is ironic that, at Mr Taber’s suggestion, the replacement for our Premier Oil holding is a bond issued by Halifax, now part of Lloyds.

Halifax bonds key facts

Mr Taber acknowledged our wish for a bond not issued by a financial institution but said there were virtually none available that yielded 5pc or more. We will therefore invest the Premier Oil proceeds in this bond, whose full description is Halifax 9.375pc perpetual subordinated bond.

Now, bonds come with all sorts of complexities, so we’ll have a look at how this one works. First, and perhaps obviously, the 9.375pc is not the annual rate of interest we will receive; instead, it is what an investor who bought at par value when the bonds were issued would get.

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Bonds, like shares, trade in the market and their price varies all the time. These Halifax bonds currently change hands for £148, so they actually yield 6.3pc – still a decent figure.

“Subordinated” means that other debts incurred by the issuer must be repaid before anything is paid to holders of these bonds in the event of insolvency.

A further complication is that even some “perpetual” bonds can be repaid early if the terms and conditions include what is called a “call” date. This gives the issuer the right, but not the obligation, to repay the bonds on a certain date. If there is a maturity date, by contrast, the bonds have to be repaid then.

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Savers often prefer bonds that have no call date because it gives them more certainty. If the bonds pay a good rate of interest, you will probably want them to remain in issue indefinitely. These Halifax bonds have no call date.

They are also “cumulative”. This means that if Halifax suspends payment of the interest (or “coupon”), it has to make up the missed payments later. Such suspensions are allowed if the bank needs to preserve cash to maintain financial strength, but only if it has first suspended dividends on its ordinary and preference shares.

The big banks have indeed suspended their ordinary dividends at present, as a result of the coronavirus crisis, but have not suspended dividends on preference shares. Hence the bond interest does not seem under threat.

Mr Taber said: “As a leading highly regulated bank, I prefer Lloyds to the typically much smaller, unregulated companies operating in cyclical sectors such as oil and property which issue many of the listed retail bonds.”

Although the Halifax bonds are not formally retail bonds, they are available via investment shops such as Hargreaves Lansdown.

Questor says: buy

Ticker: HALP

Bond price at close: £148

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.


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