The Mexican food chain which has branches across central London is planning to offer a bond paying 8% to its customers. It is aiming raise up to £3m to fund the expansion of its chain.
According to M&G’s James Tomlins there are two big concerns with ‘burrito bonds’ that can also apply to other mini bonds marketed directly to retail investors. First, the leverage for the bonds is high. M&G estimates that based on approximations of Chilango cash flows the company could be at around six times net debt to EBITDA in 2015, which would place it at the risky end of the high yield spectrum.
The second worry is that the company has made no commitment on how much it will raise and it could be significantly higher than the £1m – £3m initially targeted, which would raise leverage further. M&G said that in its view the bonds would get a CCC rating at best, placing them right at the bottom end of the credit rating spectrum.
Tomlins also notes that the amount and quality of information disclosure related to ‘burrito bonds’ versus a typical bond pitched to institutions is starkly different. A leaflet of 33 pages has been produced by Chilango whereas documentation running inches thick is typical with high yield bonds.
The Chilango bond comes with the gimmick of a ‘free’ burrito once a week for anyone investing £10,000 or more however this is scant compensation for a rate of 8% which in M&G’s view does not reflect the risk of the bonds fairly and compares poorly to the average for recent examples of mini retail bonds of 10%.
Furthermore Tomlins said that even if the company benefits from the new capital and becomes more successful as hoped, this is not necessarily good for buyers of the burrito bonds. In that scenario the company could be tempted to raise additional money at more favourable rates and subordinate the burrito bond buyers in the process.
