Chilango Burrito Bonds: Mexican restaurant offers crowdfunding mini-bonds paying 8%

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Burrito

You could earn a tasty interest rate by helping the Chilango restaurant chain expand.

If you're an investor with a diversified portfolio and a taste for spicy food, then you might fancy taking a bite of restaurant chain Chilango's Burrito Bonds. Not only do these new bonds pay generous interest of 8% a year, but they also entitle investors to free Mexican meals!

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What is Chilango?

Chilango was founded in 2007 by Eric Partaker and Dan Houghton, two former Skype executives.
Starting out with one restaurant in Islington, north London, this Mexican restaurant chain has grown to span seven busy eateries around central London. Chilango is Mexican slang for someone who is from Mexico City.

The founders say they sell "vibrant Mexican street food made with high quality, fresh ingredients" and are proud of their "freshly prepared burritos full of authentic, zingy flavours and colourful ingredients". Already, Chilango has won a host of awards for its authentic-tasting food.

Having thrived during the recession of 2008-10, Chilango is eager to keep growing. To that end, the firm aims to raise £1 million to accelerate the planned opening of three more restaurants in London this year.

Burrito Bonds

In what's described as Britain's 'first crowd-funded mini-bond', Chilango aims to sell £1 million of its Burrito Bonds to its customer base and the wider public. In return for lending their money to Chilango for four years, investors earn 8% interest a year, which comes to a 32% return over four years.

As well as their yearly coupons (interest payments), investors in Burrito Bonds also get spicy treats on top. Every investor gets two free burrito vouchers, plus the first 100 bondholders get invited to a VIP bondholder party. Those who choose to invest £10,000 or more get a Chilango Black Card, entitling them to a free burrito every week throughout the four-year life of their bond.

Here are more details of these unusual Burrito Bonds:

Name

Burrito Bonds

Launch date

Tuesday 10th June

Close date

Friday 8th August

Minimum investment

£500

Maximum investment

None

(in multiples of £500)

Term

Four years

Interest paid

Twice-yearly

Interest taxable?

Yes, at your highest marginal rate

Basic-rate tax of 20% deducted at source

Can be held in an ISA?

No

Can be held in a SIPP?

Yes




Although Chilango aims to raise £1 million, its Burrito Bonds will be on offer until the earlier of the closing date or the company raising £3 million. Each new Chilango outlet needs around £500,000 of cash to open, so the restaurant chain could use £3 million to open up to six new sites.

How safe is a mini-bond?

Given that the 'best' savings accounts currently pay interest of around 2% a year, this mini-bond offering interest four times that looks pretty tempting. So what is a mini-bond and what are the risks?

A mini-bond is simply a corporate bond: a company IOU issued by a business to raise funds. In effect, by buying a Burrito Bond, you are lending money to Chilango. In return for this unsecured loan, the group pays you interest at a fixed rate for four years. After four years, Chilango repays your loan by giving you back your original investment.

Given that mini-bonds are unsecured debts, there is a risk that the borrower will default on the loan by not redeeming its bonds on maturity, or by not paying interest coupons when due. Therefore, if Chilango got into financial difficulty or became insolvent, bondholders could lose every penny of their investment.

Another risk is that these bonds are very illiquid, which means that they are difficult to sell. In fact, Burrito Bonds are unlisted, non transferable and non convertible. Unlike listed bonds and shares, these bonds cannot be traded on any recognised exchange, so you're stuck with them for four years once purchased.

Lastly, one big problem with mini-bonds is that they are not protected by the Financial Services Compensation Scheme (FSCS) in the way UK savings accounts are. This Government-backed safety net covers 100% of the first £85,000 on deposit per account holder per savings institution. Without the protection of this safety net, bondholders can (and occasionally do) lose 100% of their investment.

Despite these risks, more and more British businesses have raised money by offering mini-bonds to the investing public. Firms successfully raising money of late through mini-bonds include John Lewis, the Jockey Club, Hotel Chocolat, Ecotricity and Good Energy.

From total bonds issued of under £90 million in 2012, Capita Registrars estimates that the value of the mini-bond industry will rise to £8 billion by 2017. So mini-bonds are all set to play a much bigger role in British investors' portfolios.

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How to buy Burrito Bonds

The only way to buy Chilango's Burrito Bonds is to sign up and purchase online via crowd-funding website Crowdcube. This is the first mini-bond to be issued through Crowdcube, which is better known for equity crowd-funding (companies selling shares to raise money). Since February 2011, more than 73,000 investors have registered with Crowdcube, helping to raise almost £26 million of equity finance for over 120 British business pitches.

By raising money via Crowdcube, Chilango has avoided hefty bills from financial advisers, lawyers, tax and compliance advisers, marketing partners and so on. As I write, 110 investors have pledged £420,500 to help fund Chilango, so the firm is over two-fifths (42.5%) of its way to the million-pound mark.

You can read Chilango's bond prospectus here.

Are Burrito Bonds for you?

If you're a sophisticated or well-off investor with a broad-based portfolio, then you probably already understand the risks of investing in corporate and mini-bonds. For me, Chilango's Burrito Bonds look one of the best on offer to date, thanks to their high rate of interest, free food and lack of silly gimmicks.

That said, Chilango has not yet made a profit in seven years of trading, recording a loss of almost £271,000 on turnover nearing £4.2 million in the year to end-September 2013. Then again, the group is growing fast, with sales up 54% in the year to end-March 2014.

In summary, these Burrito Bonds are aimed squarely at experienced investors, plus Chilango fans willing to spend £500+ to get free Mexican food. While I may not invest in Chilango's Burrito Bonds this time around, I am very keen to try a taste of its tasty treats!

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