Fixed Income

03/05/2022

Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity. Fixed-income securities can be contrasted with equity securities, often referred to as stocks and shares, that create no obligation to pay dividends or any other form of income.

In order for a company to grow its business, it often must raise money, for example, to finance an acquisition; to buy equipment or land; or to invest in new product development. The terms on which investors will finance the company will depend on the risk profile of the company. The company can give up equity by issuing stock or can promise to pay regular interest and repay the principal on the loan (bonds or bank loans). Fixed-income securities also trade differently than equities. Whereas equities, such as common stock, trade on exchanges or other established trading venues, many fixed-income securities trades over the counter on a principal basis.

The term "fixed" in "fixed income" refers to both the schedule of obligatory payments and the amount. "Fixed income securities" can be distinguished from inflation-indexed bonds, variable-interest rate notes, and the like. If an issuer misses a payment on a fixed income security, the issuer is in default, and depending on the relevant law and the structure of the security, the payees may be able to force the issuer into bankruptcy. In contrast, if a company misses a quarterly dividend to stock (non-fixed income) shareholders, there is no violation of any payment covenant, and no default.

Investors in fixed-income securities are typically looking for a constant and secure return on their investment. For example, a retired person might like to receive a regular dependable payment to live on like gratuity, but not consume principal. This person can buy a bond with their money and use the coupon payment (the interest) as that regular dependable payment. When the bond matures, or is refinanced, the person will have their money returned to them.

Borrowers

Governments issue government bonds in their own currency and sovereign bonds in foreign currencies. State and local governments issue municipal bonds to finance projects or other major spending initiatives. Debt issued by government-backed agencies is called an agency bond. Companies can issue a corporate bond or obtain money from a bank through a corporate loan. Preferred stocks share some of the characteristics of fixed interest bonds.

Securitised bank lending (e.g., credit card debt, car loans or mortgages) can be structured into other types of fixed income products such as ABS - asset-backed securities which can be traded on exchanges just like corporate and government bonds.

How Does Fixed Income Work?

The term fixed income refers to the interest payments that an investor receives, which are based on the creditworthiness of the borrower and current interest rates. Generally speaking, fixed income securities such as bonds pay a higher interest, known as the coupon.

The borrower is willing to pay more interest in return for being able to borrow the money for a longer period of time. At the end of the security's term or maturity, the borrower returns the borrowed money, known as the principal.

Examples of Fixed Income

1. Bonds

The topic of bonds is, by itself, a whole area of financial or investing study. In general terms, they can be defined as loans made by investors to an issuer, with the promise of repayment of the principal amount at the established maturity date, as well as regular coupon payments (generally occurring every six months), which represent the interest paid on the loan. The purpose of such loans ranges widely. Bonds are typically issued by governments or corporations that are looking for ways to finance projects or operations.

2. Treasury Bills

Considered the safest short-term debt instrument, Treasury bills are issued by the US federal government. With maturities ranging from one to 12 months, these securities most commonly involve 28, 91, and 182- day (one month, three months, and six months) maturities. These instruments offer no regular coupon, or interest payments.

Instead, they are sold at a discount to their face value, with the difference between their market price and face value representing the interest rate they offer investors. As a simple example, if a Treasury bill with a face value, or par value, of $100 sells for $90, then it is offering roughly 10% interest.

3. Money Market Instruments

Money market instruments include securities such as commercial paper, banker's acceptances, certificates of deposit (CD), and repurchase agreements ("repo"). Treasury bills are technically included in this category, but due to the fact that they are traded in such high volume, they have their own category here.

4. Asset-Backed Securities (ABS)

Asset-backed Securities (ABS) are fixed income securities backed by financial assets that have been "securitised," such as credit card receivables, auto loans, or home-equity loans. ABS represent a collection of such assets that have been packaged together in the form of a single fixed-income security. For investors, asset-backed securities are usually an alternative to investing in corporate debt.

What is Loan Note Financing?

expatwealthatwork has, over the last 28 years, built strong and trusted relationships with a few select corporations to raise money for the funding of their business projects. We work closely with the corporation to create an asset backed and 100% secured Loan Note for high net worth and sophisticated expat investors.

This Loan note can be from 12 - 24 months with either semi-annually or deferred coupon payments at 8-12%. The capital raised through the Loan Note is used to fund the building of commercial assets, that have already been either leased or sold before the project even commences.

The corporations we work with have a business strategy of 'start with the exit in mind', meaning that before any building work on the land commences the commercial properties have either been sold (often to institutions or pension funds) or leased to global brand names such as MacDonald's and Starbucks.

This corporation has an unblemished track record, paying both coupon and principal on time and in full.

What makes a good Loan Note?

Significant due diligence is a critical aspect to a successful Loan Note. Having a due diligence process is essential to making sure the Loan Notes are a solid and secure investment.

To date Loan Notes have a chequered history, there are many issuers of Loan Notes that have done little or no due diligence before offering this to investors.

At expatwealthatwork we only back corporations that can demonstrate the following:

  • 10-year track record (minimum)
  • $1Billion of assets under management
  • Regulated Security Trustee from a tier 1 jurisdiction
  • 100% unblemished performance for their clients (principal and coupon payments made on time and in full)
  • UK Onshore banking presence
  • A Board of Directors with hundreds of combined years of experience in both the corporate and entrepreneurial world

Our Due Diligence in more detail

One of the reasons why expatwealthatwork will look for Loan Note providers who have a minimum of 10 years track record, is that we are back testing their business model and want to establish that they have been through at least one economic cycle. Typically, property cycles are 7 years in the UK and therefore a provider that has over a decade of experience and is still successfully in business, has traded through the boom and bust. They have demonstrated they can weather the storm.

Track record is the most important part of due diligence, past performance over a 10-year period demonstrates that the corporation has achieved these results previously. The results for a loan note come in 2 guises.

  • The coupon payment has been paid as agreed, on time and with no late delivery
  • The principal capital has been returned on time and in full

expatwealthatwork also insists on seeing this evidenced in the form of an official signed off document by the Directors of the corporation, stating that they have never defaulted on any Loan Note obligations.

As with all due diligence we always insist upon all documents and statements to be signed, dated, stamped and validated.

At expatwealthatwork, all our Loan Note providers have long standing relationships with us, are well renowned and respected business professionals in their field and have a strong reputation in their industry.

Our providers have a highly experienced and diverse board of directors and investment committee process with corporate values that have stood the test of time. The board will have hundreds of years of combined experience, both in corporate and entrepreneurial worlds.

The jurisdiction where the investment is both held, in terms of banking, and the underlying asset is of importance. The standards of corporate governance are critical to where we invest and engage in business. Onshore banking presence is also a key factor in our due diligence process, corporations must have a mainland bank account with solid history and standing. Regulation in these jurisdictions provide additional security for our investors.

We like simple businesses where it is very easy to understand what they do, the business model, plan and projects they require capital for. It is transparent and logical how they can justify the coupon payments based on the margins their model and strategy create.

Security is the final due diligence required to be in place. If we are not secured by legal charges, debentures and contractual obligations, all of which are administered by a regulated security trustee, all of the above due diligence will have no meaning or value.

If you have questions about international pensions, savings, insurance, investment or you want to preserve, grow and transmit your assets/wealth or you are unhappy with the level of service/ advice and the performance you have been receiving from your banker/financial advisor, please contact us without any commitment - info@expatwealthatwork.com - to discuss your options.