Some Societies choose to issue Loan Stocks, often to raise money from supporters who are not qualified to become members or where individuals want to invest more than the legal maximum shareholding of £100,000. Examples are worker co-operatives raising money from their customers, suppliers and other supporters and housing co-operatives needing to raise larger sums from each member to purchase property.
Loan Stocks can also be issued by Companies Ltd by Guarantee which are unable, by definition, to issue shares, and of course by Companies Ltd by Shares. However when Loan Stocks from a Company are offered to the public the issue is always subject to regulation under the Financial Services and Markets Act (FSMA) by the FCA. Such issues are usually therefore underwritten by a bank or other large financial institution at considerable cost, are not generally considered to be Community Shares, and aren’t featured here. That doesn’t make them a bad thing – for instance the Welsh water industry has been transformed by the not for profit company Glas Cymru which raised over £9billion through public bond issues, see:- www.dwrcymru.com
Debentures/Bonds/Loan Notes/Promissory Notes/Loan Stock
All are basically the same thing, but loan stock is usually used as the generic term for them all, and Bonds and Debentures are usually longer term (over 10 years). However the term Loan Stock is a little misleading as technically they are not stocks (equity) but loans.
They are all basically a form of certificate identifying a loan to the Society or Company. The loans are normally for a fixed term, and must be repaid in full at the end of the period. Failure to pay on time entitles the holder to petition for bankruptcy of the Society and get at least part of their money straightaway, whereas the repayment of shares in the Society can be delayed by the Society if they have insufficient resources available at the time.
The various names (Debentures/Bonds/Loan Notes/Promissory Notes/Loan Stock) are used by the so called experts loosely and interchangeably, thus creating an aura of complexity. In reality the variations between them come not from the name used, but are in the individual loan agreement, which is in law a contract between the lender and the borrower.
Loan Stocks can be sold by the holder to any other person unless the agreement specifically states otherwise, which it must do if a Society has issued them using its exemption from the FSMA. They are normally listed and recorded by the issuing Society so it knows who it owes money to, and transfers are agreed and recorded by them. The transfer usually involves issuing a new certificate with the new owners name on it. The Society has a duty to ensure that a market is not developed in its Loan Stock if it used the exemption from the FSMA when issuing them, so it will limit who Loan Stock can be transferred to and at what price.
They can be issued at face value, or at a discount. If enough are bought and sold to identify a market price and this market price rises to be higher than the face value, the difference is known as the bond premium. Whilst this market price exists for many bond issues from Companies and Governements, there is no market in loan stocks for Societies and thus no market price. People who buy them treat them like Community Shares, as a long term investment in something that does good things, and wait patiently until the end of the loan period.
They can be fixed interest, stepped interest or variable interest, usually following one of the various bank rates or measures of inflation plus a small %age. The interest paid is often referred to as the coupon. This is because bonds used to have, and occasionally still do, have a detachable coupon the bond holder had to send in to collect their annual interest payment.
Loan Stocks are normally unsecured, but can be secured against specific assets. Again this will be identified in the agreement.
They have no voting rights as they are not shares, although sometimes arrangements are made for bondholders to meet and be consulted. The holders are regarded as creditors, and in the case of bankruptcy they will be paid before shareholders. Thus they are more secure than shareholdings. When described as a debenture they usually offer some additional service or right. The commonest form is the rugby, cricket or tennis club debenture which gives privileged access to seats.
In some cases loan stocks are convertible – i.e. can be converted to shares at some future time. Upon bankruptcy, convertible loan stocks will be paid out only after other loan stocks because of their right to convert to shares.
Bearer Bonds do not have the holder recorded by the issuer and do not have the holders name on the certificate. The paper certificate is the only proof of ownership, and like banknotes needs to be forgery proof. They are not very common nowadays, and cannot be issued by Societies (unless they choose to comply with the requirements of the FSMA with all its attendant costs).
Where a Society is offering Loan Stock rather than shares on this website, we will identify them as such.