Retail corporate bonds have become increasingly viable for investors over the past three years after the London Stock Exchange opened up a new market to trade them. The result is that the trade in senior debt has prompted more companies to issue bonds direct to market, rather than via institutional fund managers. They are also proving to be an important income source for investors now that heavily subordinated permanent interest-bearing shares (Pibs) are increasingly subject to recall, or reset to less favourable interest rates. In order to make the best use of bonds in an individual savings account (Isa), it is wise to own a spread of bonds with different coupons and exposure to stable end markets. The following bonds are Isa eligible and offer a range of risk.
49. Alpha Plus Schools (XS0853358801)
Education has become a significant industry for the UK as wealthy foreigners send their offspring to elite UK private schools. Fees have increased by a whopping 68 per cent in a decade, well above the equivalent rate of inflation. Alpha Plus has come to the notice of investors after the education company, which specialises in smart London-based day schools, issued a successful retail bond. The bond gives its holders rights over a portfolio of Alpha Plus's physical assets, in return for a coupon of 5.75 per cent, which at current prices means a yield to maturity of over 5 per cent. Protected within an Isa wrapper this equates to a stable source of above-inflation income.
50. Paragon (Xs0891023086)
Specialist property lender Paragon recently launched a £60m bond with a 6 per cent coupon, maturing in December 2020. The bond was notable for the relatively generous coupon for a company of Paragon's size, which is a FTSE 250 company. Contrast that with bonds from notionally riskier property development companies, where coupons average around 5.5 per cent. Paragon intends to use the money raised to add to its general corporate funds. The firm's emphasis on a securitised lending and funding model will continue as normal.
51. Primary Health Properties (XS0795445823)
One of the main qualities to look for when investing in bonds is how a company's underlying business model reduces the risk of non-payment. Regular and predictable income is always a plus for bonds, which is why Primary Health Properties (PHP) has proved popular since its launch in June last year. The 5.375 per cent coupon benefits from the consistent rental stream generated by PHP's portfolio of healthcare orientated properties. The 4.95 per cent yield to maturity is slightly lower than other bonds, but the compensation lies in the solidity of the income, which comes almost exclusively from rent charged to the NHS.
52. Beazley (XS0827693663)
Natural disasters may have blighted 2012 for some insurers, but Beazley has tended to buck the trend, with its share price now at a 10-year high. This has all but wiped out the traditionally generous yields that the dividends attracted and has made the bonds a slightly more appealing option if you need stable income. Beazley's £75m retail bond has a redemption date of 2019, giving the 5.375 per cent coupon a yield to maturity of 4.84 per cent. That compares well with the 3.88 per cent yield you can currently get from the dividend on the shares.
53. CLS (XS0820711215)
Large exposure to mainland Europe property has done nothing for sentiment towards CLS. That may be unfair to a firm with a lot of property in the eurozone's best economy, Germany, but the result is that its 5.5 per cent bond carries no capital risk as it trades just below the 100p price at which the bond will be redeemed in Dec 2019. With the shares also at a 10-year high, there appears to be better value to be found in the group's fixed income instruments.
Isa-eligible bonds
| Company | Price (p) | Maturity | Coupon (%) | Running yield (%) | Yield to maturity (%) |
|---|---|---|---|---|---|
| Alpha Plus Schools | 103 | 19-Dec-19 | 5.75 | 5.58 | 5.21 |
| Beazley | 103 | 25-Sep-19 | 5.375 | 5.22 | 4.83 |
| CLS Holdings | 99 | 31-Dec-19 | 5.5 | 5.55 | 5.71 |
| Paragon | 101 | 05-Dec-20 | 6 | 5.94 | 5.82 |
| Primary Health Properties | 102 | 23-Jul-19 | 5.375 | 5.26 | 4.95 |
| Average: | 101.68 | 5.6 | 5.51 | 5.304 |
