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Intermediate Capital bond a higher risk

Mezzanine finance providers have grown in importance as banks have left the funding market but the business is still a risky one
December 7, 2011

Hot on the heels of the recent index-linked issue from Tesco Bank, mezzanine finance company Intermediate Capital Group (ICG) has rolled out a new retail issue offering a 7 per cent bond with a seven-year maturity. ICG specialises in providing niche finance for mid-sized companies, split between directly providing loans and the management of external funds in the same sphere. The loans are arranged by private placements and the bulk of the borrowers are in Europe and the UK.

IC TIP: Hold at 100p

Following the path established over the last few months, the bond will be available for subscription – in this case between 1 and 16 of December – as a new issue with a number of stockbrokers and private investor platforms. The 7 per cent yield to maturity is certainly tempting as the average yield on retail bonds of similar maturity is just 5 per cent. However, ICG's business is not without its hazards – some of its investments include the perennially troubled BAA – and it made its first loss in 20 years in 2009. That said, ICG has been in this business for over two decades and runs a diversified portfolio with an emphasis on recovery of assets. Additionally, the company's gearing, which stands at around 100 per cent, is a small fraction of that which might be employed by a bank.

Relative value is more tricky to assess as there are few direct comparables. As a manager of external funds, the valuations on fund manager debt might be a useful comparison; both Fidelity and Henderson have medium-dated sterling bonds outstanding, yielding 6.6 per cent and 6.2 per cent respectively. However, fund managers do not generally use their own balance sheets, so perhaps another yardstick might be a high-yield bond fund; the euro-denominated iShares Markit iBoxx High Yield Bond ETF (IHYG) has a yield to maturity of 9.6 per cent. Another factor to consider is ICG's high dividend yield, currently 7.8 per cent, which investors might prefer to fixed income.

More details on the bond can be found on the company's website here.

Intermediate Capital Group 7% 21 Dec 2018 ISIN: XS0716336325

Price:100pYield:7%
Maturity:21 December 2018Piece:£2,000
Coupon:7%Credit rating:BBB-
Payment:Semi-annualIssue size:£50m

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