Are corporate bonds the better lending alternative to P2P?

All product markets are generally sensitive to changes in the economy but large corporates, especially those with market leading positions tend to already have diversity in their revenue streams and of course many are in defensive industries.

SMEs are highly vulnerable to the economy and default rates are much higher than for large corporates. Plus most SME lending is unsecured where there is little incentive to recover money (see the Funding Circle forum). In the corporate market lenders work with lawyers and restructuring teams to ensure their is continuity in business and there is a greater chance of recovery over the medium term.

Individuals aren't immune either as many have borrowed to the hilt but the diversity of the lending pool and a focus on prime or near prime consumers will fare better for those lenders focused there.

If you want to make an apples for apples comparison however and this is probably the most pertinent argument.

There are numerous corporate bond issuers whose business is lending - they have a much greater diversity in their lending operations and financial strength than the largest P2P lenders. For example New Day which is a large credit card provider to near-prime consumers could be compared to a Top 4 P2P consumer lender. Its profitability/cashflow is probably still 50-100x or more than the biggest consumer P2P lender and they have millions of borrowers so a greater borrower pool. As a corporate bond provider you are also secured on the company itself which P2P lenders don't have security over.    

So bottom line is even if you like lending to risker SMEs and individuals and are a die hard P2P lender their are numerous corporate bond opportunities in more creditworthy and financially strong lending platforms than P2P. 

Obviously this also means that investing in corporate bonds allows you to build a portfolio of both financial/lending corporates and corporates in lots of other industries so again there is industry diversification. 

And if you take into account that:

- corporate bonds (both investment grade and high yield) have generated higher returns than P2P over a much longer 20 year period (see the report) 
- there is greater oversight and transparency in the corporate bond market - regular results, detailed presentations, greater corporate governance and more sophisticated lenders doing deep dive due diligence 
- there are generally greater refinancing opportunities, restructuring alternatives, investor protection, professional legal documentation 

it is clear to see why corporate bonds are the superior asset class in general. 

Paul, to your question - I thought it was worth getting more educational material ready for investors/lenders to help them become more knowledgeable before re-engaging on the forum. That is why we brought the Sunday Times piece and why we have built learn.wisealpha.com/ an online bond academy with an independent instructor that we are releasing fully in the New Year. This will help people understand bonds better as well as put them in a better position to understand the risks of lending in general versus other asset classes - whether you are a P2P lender, stocks and shares investor etc. 

I have been tied up getting the business ready for high volume in 2020 and it looked like there was enough chatter amongst a few lenders to keep the discussion going.

Also since more P2P platforms are having difficulties I think its sensible to make sure that lenders feel there are other lending alternatives to diversify into so they don't get disillusioned with lending as investment form and leave the market. I would hope P2P independent forum and DD central members would appreciate that.



 


      

The report shows that investing in corporate bonds was a good thing to do 20 years ago. Wisealpha (WA) then extrapolate this to claim that investing in their products is a good thing to do now. It might be a good thing to do, I have no idea, but anyone doing so should consider:-
1. 20 years ago 10 year gilt yields were about 5.5%, they are now about 0.5%. They might very well go negative (several European ones have), or they might not.
2. Similarly inflation has been falling and then absent for about 25 years, deflation might come along, or inflation might return.
3. Are the company bonds of now, the same as those of 20 years ago? Many of the current issuing companies are very highly leveraged.
4. One attraction of corporate bonds is that the market is liquid. It is interesting that WA are considering listing their products, but how liquid are they going to be when you actually want to sell?
5. Do you want to add another platform risk to your portfolio.

If you fancy adding corporate bonds or junk bonds to your portfolio it might be a very good thing to do, but most retail investors should do some research and then buy an appropriate fund or two. It is hard to imagine that retail investors will be able to get the required diversification using WA.

When I last looked at Wisealpha a few years ago they seemed to mainly selling household names (Debenhams, Pizza Express, Virgin Media), but that were really highly leveraged PE plays, hardly suitable for most investors.

Hi Bigfoot, 

The returns are an average per annum over the last 20 years. This statistic shows the resilience of returns over an extended period of time.

You can see from the coupons that bond issuers pay on our market that generating high single digit returns is realistic.

It's important to note that returns aren't smooth every year - you can see more detail on the stats over time here: www.wisealpha.com/statistics . Some years can generate double digit returns (for example if you were brave enough to invest on WiseAlpha around Brexit nervousness at the end of 2018/Q1 2019 you could have made double digit returns demolishing returns this year in the P2P space). So picking up on market dips can also give people an opportunity to outperform the long-term average 

Re 1) The corporate bond market, particularly at the high yield end continues to price generously as it has done in the past. It's a totally different market to gilts which has suffered from tightening in pricing as macro smoothing and central bank inflation targeting policies came into place as well as a shift in mentality in government bond markets to viewing these as a flight for quality in uncertain times (esp after 2008) and a need to park cash somewhere. Most people invest on a long-term basis in any case if they are happy with the coupon for the risk. 

Re 2) The corporate bond market adjusts in a dynamic way to inflation and interest rates so while existing bonds might get flatfooted by a sudden spike in central bank rates and prices might fall, new bond issuance will adjust for that. That's part of the game. In any case it looks as though central bank rates are going to continue their depressed levels for a long time given a) the macro weakness, trade war volatility and b) the desire of governments to avoid a recession which is now co-ordinated (most experienced central bank policy members I think are generally smart enough to realise that individuals can't adjust to large shocks in interest rates very quickly and so policy makers will raise rates gradually if they to ensure expectations have time to adjust).

Re 3) Individuals can choose between investment grade (low risk) or high yield (higher risk but lower risk than P2P) and the number of corporates issuing has expanded greatly over the last 20 years so that most listed FTSE 350 corporates have bonds or debt of some kind.
4) We know liquidity is important to people so we are working on ensuring super fast liquidity in the future (to be fair everyone who has wanted liquidity so far has got it) but super liquidity which is better than the institutional market is what we are working on.
5) Because we have a stronger level of corporate governance than P2P platforms (largest trustees and custodians in the world) we are highly focused on minimising platform risk. We have spent a lot of time ensuring that assets would continue to be serviced without us - which is why we have the fourth largest investor services firm in the world as trustee, administrator and fiscal agent who would step in to continue interest and capital repayments.


On the diversification side - individuals can use our Robowise portfolios which will help spread you over 50-100 companies similar to a fund except you have the benefit of a) seeing what is going on b) having full control and tweaking your portfolio whenever you want c) having greater visibility on cash payments rather than an opaque pooled share vehicle.

At WiseAlpha we are gradually covering the whole market from investment grade, senior secured, high yield and perpetual bonds and this will continue to increase. When we see value in a listing we add it.

The report in the Sunday Times should help people to understand that corporate bonds are an asset class that is misunderstood but has performed better and with lower risk than equities and P2P lending - if that doesn't mean its suitable for everyone I don't know what does! If it helps people knowing this I started my career in the No.1 debt finance bank in Europe, Deutsche Bank and have invested across every major asset class both public and private and so great thought went into considering which was the best asset class to focus on.

I hope that helps demistify things a bit more.

Why, were they foggy ? 

If it is a viable ALTERNATIVE to p2p, then I assume we all agree it ISN'T p2p, so why is it being touted on a p2p forum, rather than one of the general finance forums?? What next, a bitcoin board? Tulip bulbs? All probably better bets than LY or Collateral, but still not p2p.

Ok, fair point - to be more precise those who pass our on-boarding test to show they understand at least a bit about bonds and understand these are investments with risk. We do have people who fail believe it or not!

Our aim is to democratise the asset class for everyone and ultimately if you can invest in a riskier stock, one day in 2020 we'll bring bonds in line with the way that stocks are treated in a traditional stocks and shares ISA.