The “Asset Backed Bonds”

Over the last 2-4 years, I kept bumping into the “asset backed bonds” or “tangible assets backed bonds” that kept being promoted to retail, high and ultra-high net worth individuals living in the UAE and not only.

Every time, the name of two particular companies was being heard: one that has a name similar to an automotive famous crash test and one that has a very similar name to a famous British bank.

I have been asked already a few times, what do I think of them, so here are my thoughts:

1. A bond is a lending instrument issued by a government or corporate and in case of default of the issuer (see the Lebanese Government or the Chinese Evergrande real estate developer or... oh well... whatever) , the bond holders are the first ones being paid out upon liquidation of assets.

2. Bonds can be with fixed maturity date or perpetual.

3. Bonds are daily priced and traded, i.e. LIQUID, according to their market price, which might move up or down depending on demand vs offer and indicated coupon.

4. Bonds are sold in regulated markets, by regulated brokers and offer huge level of transparency on the issuer (total debt level, maturity dates of other bonds issued by the same issuer, payment history, credit rating etc).

Looking into the product that these companies actually offer, the only thing I find in common is the name BOND (and no, that is not a James Bond trying to sell you a bond) as they are nothing but:

1. Private lending contracts between individuals and an entity domiciled in the British Overseas Territories (in one case at least).

In case of a default on the promised payment, the creditor will have to take action in court, from thousands of miles away. Good luck with that and when you win, if you win, good luck recuperating the money.

2. These lending agreements go for fixed period but the coupon (the fixed income) can be either paid out on particular dates or, kept till maturity (and for the later, you are being lured with a higher “return”). That is not a feature that a bond has as the coupon is always being paid out (exclusion from this statement being the 0 coupon bonds which are always issued at a discount to par).

3. Your capital “invested” (the amount) doesn’t ever pick up in value but, if you want to cash out before the agreed date, they say it’s possible however, capital might be at risk (you get back less than what you paid).

4. Most likely these are UNREGULATED products offered by UNREGULATED brokers/promoters. The point of doing investment business with regulated entities, is to be protected as an investor; regulated brokers must meet a minimum criteria in the control functions (key people within the business) processes and procedures, types of products promoted to types of clients, transparency, reporting, financial audit reviewed by the regulator, qualifications and education of the individuals within the business and the list could go on and on. When you decide to do business with unregulated entities, don’t expect any corporate governance, any processes in place to offer client protection against wrong doing, nor protection against default. If you want to find out if a firm is regulated, you just need to search the following registers, as there is absolutely 0 chance for it not to be listed, if it is a regulated business: SCA, Insurance Authority, DFSA and ADGM in the UAE, FCA in the UK and SEC in the US.

5. Vague information on their websites about the “portfolio” where they “invest” in, no word on their regulator (as there is a very slight chance for them to have any) while on LinkedIn, it makes you laugh what you find out about them (this picture is an actual screenshot from one of those two companies profiles on LinkedIn).

One of the two companies however, goes further and describes how the business is placed: you give your money to a FCA regulated trustee, which grabs assets from the developers and then pays them your investment and upon returning of all agreed amounts, they release back the assets. Did a bit of research and based on the FCA regulated trustee used indicated by them (the company that brings you this amazing opportunity being "them"), FCA has this to say:

A retail client is a person with a total net worth (excluding their main residence) of lower than 1 million USD and with investment experience in less than 2 asset classes. If you feel you qualify as professional client (as in, having more than 1 million USD excluding your main residence and a vast investment experience), then such solution might be suitable once your due diligence tells you it is legitimate.

I got to meet one of the “key individuals” in one of these businesses and I must say, business must be very good; flashy watches, super cars, race cars, insane personal promotion type of events, fancy travels, high quality video editing to document any day of his life, paid PR in the national press and the list of “new money habits” could go on and on and on.

It’s not my place to judge how one spends his money however, experience in dealing with proper UHNWIs, watching on Netflix the Tinder Swindler, as well as plenty of real life experiences, are just telling me that something is not right. Statistically speaking, those who spend it easily, they made it easily either by selling overpriced things or, by just taking "lollipops from children's hands".

In most of these cases, only time will tell the true story, if they are genuine savings schemes or Ponzi schemes but my common sense, is making me ask: if they are legitimate, why are they not regulated, why are they not transparent, why they use “bond” instead of “loan” (as they only want a loan from you) and the list could go on and on and on.

This article is intended to caution investors on doing business with unregulated entities. Financial investments always carry volatility risk but when you add the lack of liquidity, regulatory oversight and/or experience on the investor's side, things can get very tricky.

Final point: if you do want to invest into a diversified real estate portfolio, just invest into a REIT as if it is regulated, at least you get visibility at where the money are actually going and there is a science behind pricing the units.

Always choose wisely who you're investing with when investing and stay safe while doing so.