To borrow a rather over-used cliche, there is more than one way to skin a cat. Investors adopting the same philosophy when looking to profit from an opportunity will find that there are several ways of tapping the cashflows of some of the businesses that comprise the FTSE 250 index, the second tier of the most valuable companies trading on the London Stock Exchange’s (LSE) Main Market.

One way is to buy the equity of these companies with the intention of benefiting from any appreciation the stock generates and the potential dividends that the board approves. But those looking to receive regular cash returns should look for a company that has issued a bond. Each year such companies pay their bond-holders a percentage of the investment they made in its paper. This usually proves higher than the yield offered to those holding a company’s equity and provides the added benefit of putting cash in an investor’s pocket and not theoretical wealth on a share certificate.

Such opportunities are offered by 12 of the FTSE 250 companies who have issued 17 dedicated bonds that trade in the secondary market of the LSE’s Order Book for Retail Bonds (ORB). These companies account for some £1.5 billion of the £3.8 billion raised by companies turning to retail investors via ORB in the past four years.

Safe Haven

The high-yielding bonds offered to retail investors have proved popular while interest rates have been anchored at 0.5%. This has limited the amount savers’ can make from sticking their cash in the bank. And for those investors looking to sleep a little easier at night, knowing you hold paper issued by some of the largest listed companies in the country can provide peace of mind. But the yields offered by those trading on the ORB have proved so attractive that opportunities in the secondary market are limited.

Indeed, no bonds issued by FTSE 250 companies trade below par. There are a few such bonds that come close and which investors should keep an eye on. Exploration and development company Premier Oil 5.00% 2020 (PMO1:ORB) is trading at £100.40 and still has seven earning years remaining. Then there are International Personal Finance 6.125% 2020 (IPF1:ORB), trading at £100.30 and Paragon Group of Companies 6.125% 30 (PAG2:ORB) trading at £100.30.

With all of these companies the risks are high and investors need to factor them into their decision to hand over their cash. Premier Oil has assets, but its equity has suffered as it has struggled to meet its production targets, while International Personal Finance and Paragon could be hit by a lack of new funds to lend if the economy takes another dive.

Opportunity could be created were interest rates to rise prompting investors to dump their bonds to put their cash on deposit, where Government guarantees savings of up to £85,000. Until then there could be good news for investors as new issuances will provide opportunity. The yield on 10-year Gilts has fallen to 2.71% from 3% in the past month, which should keep the coupons offered by new companies looking relatively attractive.

Members of the FTSE 250 could provide investors with a greater sense of security, but inclusion in the second-tier index does not mean its paper is risk free. Investors should investigate each opportunity to make sure that it will be stable enough over the term of the bond to pay its bills and that the reward offered adequately compensates for the risks taken.

(Click on table to enlarge)