Who buys bonds without transparency?

You’re the CEO of a relatively young brand. You believe in it, and despite everyone telling you it was impossible to do so, you have grown it since the early nineties from a small concern into something that could take on the world. You need cash for expansion and global marketing, but traditional lines of credit have dried up. Banks won’t touch you. So what to do?

Why, issue bonds, of course, and hope to God the market believes in you and your promise to be able to pay back the money and the interest when the time comes.

Sound familiar? There’s no reason it shouldn’t – it’s happening today at an unprecedented rate. Brands and companies of all sizes all over the world are going down the bonds route. Even Dubai has issued bonds - $10bn so far, with another $10bn to come.

But is it a good idea to buy bonds today? That depends. Transparency, as it is in all financial situations, is all important.

I use a brand of shaving gel called, modestly, King of Shaves. The company was established in 1993 on £40,000. Back then, founder Will King filled 10,000 bottles with gel made in his own home, and now his company has a turnover of £20m. I use it because I find the minty tang of the menthol variety pleasing in the mornings. I’m also a sucker for the packaging. Thousands of other men are obviously likeminded.

King sees no reason why the worst global economic conditions in living memory should thwart his plans for properly muscling in alongside big boys Gillette and Wilkinson in a global shaving market worth $10bn. After all, beards don’t stop growing because banks don’t want to lend. And so he wants £5m to market his company aggressively.

In July he took out full page adverts in major newspapers to offer his public the chance to buy bonds in his company. It’s a sign of the times.

He says: “It’s an opportunity for you to shave and save… Yes, we’re offering a 6% per annum, 3-year non-transferable, non-convertible savings bond. That’s a massive twelve times the current Bank of England interest rate. You simply won’t get that from most High Street banks, or the Back Street ones either.”

Punters are allowed to buy up to five of the £1000 bonds. Per £1000, the bonds will yield £191 in interest over three years, if the company prospers. On £5000, it’s a total of £955 in interest. Not bad, but hardly magnificent.

King is keen to tell potential bond buyers that he will not fritter their money away on frivolities: “You have my word as a non-politician that the proceeds of the Shaving Bond will be used solely for marketing… It will not be used to buy my fellow directors or I any form of luxury transportation, nor will it fund any helipad maintenance or lavish pension schemes.”

They’re funny things, corporate bonds. In this case, because banks won’t lend to it, at least not at rates King thinks are equitable, King of Shaves finds itself offering to perform the role that traditionally would have fallen to those banks, namely, looking after members of the public’s money to the tune of six percent.

Did you invest? I was tempted. Everyone loves an underdog. But the thing was, I couldn’t find out enough about the King of Shaves. There didn’t seem to be much information.

What is the company actually worth - what level of leverage would a £5m bond issue represent? And what is the company’s current level of debt, if it has any?

This is important, because in order to give King £1000 now, I need to believe he can meet an interest bill, in July 2012, of £1m to bond holders alone. There is a strong possibility liquidity and economic conditions between now and then could worsen severely. And should the company go bust before I get my £191 interest payment? Well, I suspect my place in the queue with the other debtors would be a long way back.

I rang the company and said I was thinking of investing, and then asked what it was worth and how much debt it had.

“No comment,” came the answer. “As Kings of Shaves is a private company, we can’t give you any details,” said a communications wonk.

So I found out for myself, by getting hold of accounts registered with Company House in London. In 2008, King of Shaves made a loss of £114,000, despite total sales of over £22m. In that light, taking on £5m of debt seems an enormous step – no wonder no bank could offer terms attractive to Will King. The company accounts show that total current liabilities stand at over £11m.

Then I rang a friend who runs a private equity firm in London, and asked what he thought of the bond scheme. This is what he said: “This is one of the biggest rip-offs I have seen in a while – 6 percent is peanuts for taking all the risk in the business. It is one of those key examples of not balancing risk and return. Six percent is a crap return if the risk is you lose your money. It really annoys me as it is preying on people’s ignorance of financial risk, and playing on their desire for a return.”

The communications wonk, who asked not to be named, sees it differently: “Will King wanted to come up with a novel idea to raise £5million for a marketing “war chest” by directly involving his legions of loyal customers. By issuing the Shaving Bonds, King achieves both - his customers buy into a (small) part of the company in an interesting way and will see a cash return on their commitment, while King raises investment towards the continuing marketing campaign for the recently launched and highly successful Azor razor. The point is that they buy into the company because they trust the brand.”

I hope King of Shaves is still around in July 2012, and that it is thriving. Like I say, I like the minty shaving gel. But at a six percent return, and reluctance to open its books to potential investors properly, it will have to do so without my financial support. Buyer beware.

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READERS' COMMENTS

Thorough insight
Posted by Frank, Dubai, UAE on Thursday 20 August 2009 at 08:47 UAE time


Thank you Damian for your thorough insight regarding the bonds and buying bonds.

Shaving Bond comment
Posted by Will King, London, UK on Wednesday 19 August 2009 at 20:25 UAE time


Dear Damian,

I read your blog post with interest, and am glad you're a fan of our shaving gel. Our 'shaving bond' initiative has been both hugely praised and pilloried in equal amounts - some people 'get it', others don't. The £5m was a maximum amount, the minimum was £500,000. Whilst we didn't raise the £5m, we did get well past the minimum, and I have many happy bondholders who are delighted they took the opportunity to invest. KMI (the company which owned King of Shaves until June 2009) was founded by me in 1993, and total retail sales of the company's brands (including KoS) were c£61m in 2008. I don't know where you are getting your 'King of Shaves' loss figure from. Re the SB issue, BDO would never have signed off on it if there was anything remotely 'dodgy' about it, and across the UK, and internationally it has been seen as a great initiative. Indeed, it's already been imitated by a small UK power company. You say you called, but I took many calls from journalists and interested private individuals, and have no record of your call. King of Shaves continues to grow strongly, I have every faith that we can (of course) meet the interim interest payments as well as repaying the bond in full on its maturity, otherwise, simply put, I would never have considered it. My biggest shortcoming was not giving it a coupon of 007% - the names' Bond, Shaving Bond. You can follow our progress at my blog http://www.brandroyalty.com, the brand blog at http://shave.com/blogs/king, and even, if you wish, buy my book "How to build a great brand in tough times - the King of Shaves story" from September 3rd. Shaving Bond holders get one free... If you wish to speak to me more, do call the office and ask for me, or alternatively, feel free to email. Here's to more smart, clever, forward thinking initiatives like this, rather than relying on 'expert' bankers or 'private equity gurus' to proffer their advice. It's about a year now since Lehman went down, despite it's AAA rating... Sincerely, Will King

Thumbs up Damian!
Posted by Raja on Wednesday 19 August 2009 at 16:33 UAE time


Good one, for Dubai????????

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