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Alpha Plus top of the class

Education provider Alpha Plus brings the first secured bond to the London retail market
December 6, 2012

Affluent folk educating their children privately in central London will ruefully attest to the non-cyclical nature of school fees. These seem to rise faster than inflation year on year no matter what the underlying economic conditions, with the sons and daughters of wealthy foreigners coming to the UK for their education the most likely cause. The cachet of an English-style education appeals to those who have never had to endure one, but building a good reputation requires stable long-term funding and a private schools company, Alpha Plus, is issuing a secured bond to retail investors to do just that.

IC TIP: Buy at 10000p
Tip style
Value
Risk rating
Low
Timescale
Long Term
Bull points
  • Bond secured against assets
  • Solid underlying business
  • Price should rise in trading
Bear points
  • No credit rating
  • Dependent on foreign students

Alpha Plus aims to raise £40m-£55m from the issue, which will be used to restructure its debt. The company owns 19 institutions from nurseries to sixth-form colleges, including several prime sites in central London. The main shareholder is an investment fund based in the British Virgin Islands called DV4, with Sir John Ritblat's Delancey property company involved as an adviser. The novel investment feature of the bond is that it is secured against a number of the company's properties, which makes it the first secured bond to be offered to the UK's private investors.

In return for the cash, Alpha Plus offers bondholders claims on seven of its properties. These, together with the value of the underlying operating businesses, are valued at £80m at current prices. This puts the loan-to-value at 50 per cent, but it is necessary to take account of how a change of use would affect valuations. The company calculates that converting a school into a residential property, for instance, could hit valuations by 50 per cent, slashing the value of Alpha's £130m property portfolio. This is why the bonds are twice covered by assets, valuations are carried out annually and, in the event of a liquidation, bondholders get first claim on any cash.

The underlying business generated revenues of £57.8m in the year to end August, which fed through to pre-tax profits of £2.6m (from £1.22m in 2011). Management expects cash profits (£8.17m in 2011-12) to cover the interest cost by at least three times. The schools business has grown quickly, with pupil numbers rising by 29 per cent over the past five years.

The Alpha bonds offer a generous yield compared with the yield on several bonds that are not secured against property (and are, therefore, theoretically riskier). For example, CLS 5.5 per cent 2019 (CLS1) and Primary Health Properties 5.375 per cent 2019 (PHP1) both offer a yield of around 5.5 per cent. This suggests the price of the Alpha bonds could rise to, say, £108 in trading (to give a yield of 5.3 per cent).

ALPHA PLUS 5.75% (ISIN: XS0853358801)

Price:£100Yield:5.75%
Maturity:December 2019Minimum subscription£2,000
Coupon:5.75%Minimum trade:£100
Payment:Semi-annualIssue size:£40m-£55m