The High Street Group and its unregulated loan notes have been on our radar for some time now since being cold-called by an unscrupulous unregulated introducer.
This scheme has reached such magnitude now that we are seriously concerned about the vast number of retail investors who are likely to lose all of their capital following the almost inevitable credit event which is drawing very close, more so given the reported delay of interest (let alone principal) payments.
There are several structural issues with these ‘loan notes’, and some of the financially illiterate promoters of the scheme, such as Stuart Lees, and ‘Louis’ on the paired thread.
Firstly, the commission structure of the notes is obscene and crippling to the issuer (High Street Group). A 35% commission is paid to the network of ‘introducers’, drawn from the loan proceeds. In addition, investors also receive interest of between 12% and 18%. For a one-year product, this equates to an interest cost of between 47%-53%. Gary Forrest must double his capital to return just the principal to this form of capital provider.
Retail investors are not aware of these costs, and some unregulated introducers have made significant amounts of commission whilst no doubt making false promises and telling outright lies to investors whom they should not be able to reach. Self-certification provides another loophole, encouraging investors to identify themselves as ‘sophisticated’, ‘professional’, or ‘HNW’ when they actually may be far from it.
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What makes us most concerned is the reference to ‘the cost of raising the equity’ in the words of Stuart Lees. Clearly, capital drawn from the loan notes is presented as equity capital to the institutional providers of development finance, such as Topland Jupiter. However, this is not equity, rather very expensive short-term debt. Further, claims that the institutional development loans can refinance the short-term debt are illogical, given that development loan proceeds are not drawn clean in the account of the borrower, rather paid directly to contractors on presentation of QS certificates.
Secondly, claims that the High Street Group has made profits in the double-digit millions are quite frankly false. This is classic accounting fraud. To revalue investments up to GBP 41m, while carrying a loss of GBP 290k in the P&L reserve is a simple, elementary and pathetic attempt at cooking the books. The accountant assisting in the accounts prep should be penalized for allowing such malpractice to occur. Booking future profits that have not yet materialized may be an effective method of raising funds through further loan notes but will simply defer and magnify an inevitable credit event.
Thirdly, how the FCA can allow unregulated brokers to distribute what is clearly a financial instrument, a ‘loan note’, is unfathomable. A bilateral loan paired with a debenture (which I doubt will be even registered as security) is clearly a financial product. The distribution method is unlawful and should be stopped as soon as possible.
If action is not taken soon, without doubt, we will have a second London Capital & Finance situation in our hands. Gross proceeds raised now through these loan notes have reportedly hit GBP 100m, not far from the 237m of LCF.
Account to SkepticFiles Report
High Street Commercial Finance, which has issued a series of bonds paying typical rates of 12% per year to the public via unregulated introducers, has finally filed its accounts for December 2017, nine months overdue.
High Street Commercial Finance Limited is the arm of the High Street Group which borrows money from investors.
The company was so tardy with its 2017 accounts that it will be overdue again in a mere three months, the 2018 accounting period having closed six months ago.
High Street Group took advantage of small company exemptions and did not have the accounts audited or file a profit and loss account.
The accounts show net assets of £13.5 million, comprising £57.3 million of assets and £43.8 million of liabilities. £37.5 million of those liabilities represented loan investors, with the remainder comprising trade creditors, loans from other High Street Group companies and “other”.
The assets include £19.8 million of money loaned to other High Street Group companies and £34.2 million of subsidiaries, associated and jointly controlled entities, valued at “fair value”.
As the accounts were unaudited, the valuation of High Street Group’s assets is the word of the directors.
Over the past year, investors in High Street Group have reported that the company has for certain investors exercised a right to delay repayment for six months, and for others offered to swap the debt for shares. A debt-equity swap means High Street Group is no longer responsible for returning investors’ money and they have to find a buyer for their shares to realize their investment.
While the company withheld their profit and loss account, it is clear from what they have filed that the company was loss-making in 2017. The “profit and loss account” on the balance sheet sank from an already negative balance of minus £8.9 million to minus £20.6 million.
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To put it another way, over 2017 High Street Group borrowed an additional £22.1 million (£16.3 million from loan investors and £4.5 million from other High Street Group companies) but net assets increased by only £1.0 million.
These heavy losses do not mean that High Street Group is insolvent; at the time of writing it continues to trade and its 2017 accounts state that it had sufficient assets to pay all liabilities. This however depends on the unaudited valuations of its subsidiary companies and loans to other group companies being accurate.
High Street Group is currently reported to be offering bonds paying 12% per year, with additional bonuses for investing for longer than 1 year. To successfully repay investors with an interest of over 12% per year, along with meeting the costs of paying commission to unregulated introducers (which are not specifically disclosed in the accounts), it will clearly have to find a way to reverse its heavy losses at some point.
According to charges filed with Companies House in March 2019, High Street Group has recently borrowed money from bridging loan provider Fortwell Capital and the Bank of London and the Middle East, with fixed charges.
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