How to Invest in Convertible Loan Notes | Complete Guide 2024

how to invest in convertible loan notes

How to invest in Convertible loan notes? Loan Notes are a unique form of financing that allows investors to lend money to a company while retaining the option to convert the loan into equity at a later date. For investors, they can provide high returns, security, and potential upside if the company succeeds. Here’s what you need to know about investing in convertible loan notes.

What are Loan Notes?

A loan note is a debt investment where an investor lends money to a company in exchange for a promise of repayment with interest by a fixed maturity date. The company issues a loan note certificate as a legal IOU to the investor.

Loan notes are useful for raising capital and can offer companies flexibility in structuring the debt agreement. Investors in loan notes are creditors entitled to scheduled interest payments and principal repayment.

Are Loan Notes a Good Investment?

For investors, loan notes can provide relatively high yields from interest payments that may exceed rates from traditional fixed-income products. This income can be predictable when notes have set interest payment schedules.

Loan notes also carry lower risk than equities since they have seniority over stock ownership in the case of default. The company must repay loan note holders before common shareholders.

Furthermore, notes are often secured by company assets, which provides recourse for investors if the company fails to repay the loan. This security offers downside protection compared to stocks.

Property Loan Note Lifecycle

For property developments, loan notes help raise the initial capital needed to fund projects before construction loans or revenues materialise.

The typical lifecycle is:

  • Company identifies development site and seeks initial capital
  • Loan notes issued to accredited investors
  • Interest payments commence per agreed terms
  • Detailed planning permission obtained
  • Land purchased and construction begins
  • Property completed and sold or refinanced
  • Original capital repaid to loan note holders

Local Council Planning Permission

Before issuing loan notes, most property developers will already have outline planning permission from local councils. This initial approval helps reduce risk for investors.

Detailed planning permission is later finalised for the specific project. Delays in obtaining permissions can impact timelines to repay investors.

Loan Note Funding and Promotion

Loan notes are only available to high net worth and sophisticated investors. Regulations prohibit promoting them to average retail investors.

Companies appoint authorised representatives to promote opportunities to accredited investors. This helps validate the offering.

Returns on Convertible Loan Notes

Convertible loan notes can provide high yields through interest payments, often 8-15% annually. Investors also gain potential upside through equity conversion.

Conversion allows exchanging the loan balance for shares in the company, usually at a discounted rate. This benefits if the company gains substantial value.

Downside protection remains since investors can still get principal and interest repaid at maturity if unpaid.

Alternatives for Fixed-Income Investors

Beyond conventional bond funds and CDs, fixed-income investors can also consider:

Real estate loans

Collateralised opportunities on individual properties

Peer-to-peer lending

Invest in diversified consumer or business loans

Structured settlements

Cash flow Streams from lawsuit settlements

Royalties

Invest in future revenue streams from patents, resources, or copyrights

Alternative Investment Specialists

New Capital Link works closely with experienced professionals to source unique loan note opportunities in high-growth sectors. Their expertise provides access to potentially lucrative deals.

Learn more about New Capital Link’s investment offerings and connect with an introducer to explore customised solutions.

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Rachel Buscall

Co-Founder & Managing Director at New Capital Link.

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New Capital Link

Alternative investment specialists offering structured opportunities across the UK & Overseas.

New Capital Link is a boutique London-based introducer that offers unique UK & global investment opportunities worldwide.

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