What is a burrito bond?

Chilango – a hip metropolitan Mexican restaurant chain – hit upon an unusual way of raising funds to pay for its growth and expansion plans – they launched a mini-bond scheme. 


Creditors need a strong stomach after Burrito Bonds go bad

Chilango

 

 

 

 

 

The “Burrito Bond” was a big hit with the first tranche of bonds raising more than £2m.  The second round called the “Burrito Bond 2” launched in October 2018 and raised a further £3.7m. 

 

However, their parent company, Mucho Mas, made a loss of £1.4m in the year to March 2018 and a further loss of £3.2m the previous year. This has prompted them to launch a company voluntary arrangement (CVA) to secure their future.

 

Co-founders Eric Partaker and Dan Houghton said: “Chilango remains profitable at the restaurant-level, however in recent years the market in which we operate has changed significantly. 

 

“This proposal allows us to make important changes so we can support our stakeholders and continue serving our loyal guests. We’re proud of the strong brand and passionate following our teams have created and look forward to the future.”

 

Under the CVA proposals, bondholders will be offered a choice to transfer their investments into shares in the company or to cash out at a reduced rate of 10p in the pound. 

 

The CVA also seeks to let the company vacate four leases at dormant sites and to reduce rents by 40% at three of its remaining 12 restaurants. 

 

Creditors have until January 3rd 2020 to vote on the proposals and if rejected will see the company enter administration. Existing shareholders will also be asked to vote on proposals to issue preferential shares to bondholders. 

 

This will give them a higher standing for any future dividends paid out. Unlike a bond, this payment is entirely dependent on the future success of the company. 

 

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Retail and mini-bonds are a relatively new way for companies to borrow money directly from private investors. As with a traditional bond, holders received an attractive rate of interest, up to 8% in some cases, until the bond reaches maturation when they should be repaid the full value of their investment.

 

Unlike traditional bonds, mini bonds are not listed on any stock exchange and they are not protected by the Financial Services Compensation Scheme (FSCS). 

 

They’re seen as relatively high risk and last month the Financial Conduct Authority (FCA) issued a 12-month  promotional ban on them from January 1st 2020 while it considers its response.

 

Andrew Bailey, chief executive of the FCA (and newly announced governor of the Bank of England), said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who don’t have the experience to assess and manage the risks involved.”

 

So far the ban will only apply to complex mini bonds where the money raised will be lent to a third party to invest in other companies or buy properties. Companies will still be able to market mini bonds that raise funds for their own activities or to fund single UK property investment. 

 

The Mini-bonds can still be promoted to “sophisticated” investors with sufficient knowledge and understanding of the risks and high net worth individuals who earn more than £100,000 or with net assets of over £250,000. 

 

The FCA estimates that the average investment in these securities is over £25,000 so a total loss of funds could have a significant negative impact on individual consumers.  

 

The action follows the insolvency of London Capital and Finance (LCF) earlier this year which had issued mini-bonds to more than 11,000 totalling £237m.

 

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We like spicy food as much as the next person but we also know to stop when the heat gets too much. 

 

If your company is concerned about its funding options and requirements for expansion then get in touch with us

 

We help businesses restructure and get back on their feet but we can help businesses looking to expand and grow sustainably too – without getting burned! 

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