Midlands together open

Worthstone Product Review Financial Planner Summary & Analysis August 2013

Midlands Together Community Interest Company ____________________________________________ 2013 Bond Issue

Important Information The information and opinions expressed and contained in this document are proprietary to Worthstone Limited and are not intended to represent investment advice or a recommendation to buy or sell any product.

considering the suitability of the bond for any specific client.

In preparing this report we have reviewed Midlands Together’s Investment Memorandum and had discussions with the CEO. We have also met with representatives of Triodos Bank.

This review is for the information of professional financial advisers only and should not be used as part of the advice process or in any other way with any retail investors. It is provided for information purposes only.

This is a high-risk investment and firms MUST ensure that they have appropriate and sufficient PII in place prior to advising clients as to its possible suitability for them.

This document does not contain or constitute an offer to sell or purchase, or a solicitation of an offer to sell or purchase, any securities, investments or financial instruments described in it.

Although every care has been taken to ensure the accuracy of this report, Worthstone Limited, its employees, directors and agents accept no responsibility for any damages or losses arising from any use of this information.

Advisers should study the Midlands Together CIC Investment Memorandum before

1

Midlands Together Community Interest Company / 2013 Bond Issue

Contents

Executive Summary

3

The investment term

3

Ideal Client Profile

4

Impact Analysis

5

Investment Analysis

6

Summary of the Parties Involved

7

Risk Analysis

8

Technical details

10

Frequently Asked Questions

11

Worthstone’s View

13

2

Midlands Together Community Interest Company / 2013 Bond Issue

Executive Summary The Midlands Together CIC 2013 Bond Issue is an opportunity for retail investors to support the provision of training and employment experience in the construction industry for ex-offenders in the West Midlands.

This Bond offers a relatively low-risk return of principal plus annual interest of 4% p.a. gross (Series A) or 6% p.a. gross (Series B) over a 5 year investment term (repayment is due on 31 October 2018). Midlands Together is seeking to raise £3 million through this offer. The minimum required to launch is £2.2 million (including a minimum of £250,000 from the Series B offer which has already been raised.)

Interest payments will be facilitated through the profit arising from the sale of renovated properties.

The Series B offer is designed to attract Community Interest Tax Relief.

Midlands Together is based in large part on the already successful ‘Bristol Together’ model.

The Series B offer has now been fully subscribed – the detail is retained in this report for information only.

These bonds are, in essence, broadly similar to corporate bonds and charity bonds.

Partly in response to a reduction in the availability of grant funding, and partly because of the cost and difficulty in obtaining bank lending, charities and similar groups such as CICs are utilising bond issues more widely than ever before.

The investment term The bonds have a 5 year term (repayment in full is due on 31 October 2018) and will pay a coupon of 4% pa (6% pa for the Series B offer).

3

Midlands Together Community Interest Company / 2013 Bond Issue

Ideal Client Profile This investment is not suitable for a first time investor or an investor seeking maximum financial gain.

It should only be considered by Financial Planners where their client is interested in social returns and already has investment experience.

We would not expect this investment when aggregated with other social impact investments to form more than 10% to 15% of a client’s overall investment portfolio. In general we would anticipate clients considering investment in any social impact investment plan to have already made provision for their own ongoing financial needs. Although the return offered under the bond may seem relatively attractive in its own right the risk adjusted return is low.

Investor Profiles The ideal potential investor for the Midlands Together bond would have the following main attributes:

ü They have investment experience and understand the concept of ‘Social Impact Investing’

ü They prioritise positive social outcomes over financial returns in respect of the part of their portfolio under consideration

ü They have sufficient other assets that the bond investment (aggregated with other Social Impact Investments) would form no more than 10% to 15% of their overall portfolio

ü They have a high capacity for loss in respect of this investment as the possibility does exist that they could lose 100% of it, although Midlands Together has introduced measures to mitigate the risk of this (see ‘Risk Analysis’ below)

ü They are able to commit monies for the medium term with higher risk/lower returns than could be available from mainstream investments

ü They understand, and are comfortable with, Midlands Together’s plans to repay the capital and maintain the coupon

ü They have an interest in the targeted social outcomes (provision of training and employment experience for ex-offenders in the West Midlands) They accept that there is no promise of liquidity during the bond’s life

4

Midlands Together Community Interest Company / 2013 Bond Issue

Impact Analysis The bond has a straightforward mandate to raise funds to provide the capital required to launch the Midlands Together project. Midlands Together will work with exoffenders and assist with their rehabilitation through the provision of training and work experience in the construction industry.

The Memorandum provides a range of statistics that show the huge impact which providing ex-offenders with employment can have on reoffending rates. Such significant reductions in reoffending rates have an enormous impact on costs to the nation as well as on the ex-offenders, their families and society in general.

The Midlands Together business plan is based on raising £3 million.

Impact Reporting Midlands Together is providing a facility that will enable the partner Social Enterprises to fulfil their own remits.

There are clear objectives and these will be reported on annually. As with the Bristol Together scheme (which has already shown the success of the methods to be employed by Midlands Together), there are targets for the number of ex-offenders to be employed each year and for re-offending rates. There are also targets for gaining qualifications and improved employability.

5

Midlands Together Community Interest Company / 2013 Bond Issue

Investment Analysis Midlands Together believes that a 4% interest cost is financially sustainable.

The business model is straightforward. Midlands Together will purchase empty properties in need of renovation. Working with local Social Enterprises (see Partners below) ex-offenders will be employed to work on the refurbishment of those properties. The refurbished properties will then be sold and the proceeds re-invested in the business for the purchase of further properties.

Deadlines and subscription limits Minimum investment = £20,000 There is no maximum investment.

The first close date will be 30th August. The final close will be no later than 30th October 2013.

Taxation Income will be taxed as interest in the hands of bondholders. There will be no capital gains as repayment of the capital invested is the maximum target. Any losses MAY be able to be offset against taxable gains at maturity depending on rules at that time.

Costs The precise costs of the offer will not be known until after the close and some of them have been covered by a grant received by Midlands Together CIC from the Investment Contract and Readiness Fund, which is administered on behalf of the Office of Civil Society by the Social Investment Business.

The aggregate costs of the offer, mainly legal fees and a success fee payable to Triodos Bank are not expected to exceed 2.5% of the maximum subscription.

6

Midlands Together Community Interest Company / 2013 Bond Issue

Summary of the Parties Involved Midlands Together Midlands Together is a Community Interest Company1 which has been formed following the success of an existing business – Bristol Together CIC – which has the same objectives.

It is a wholly owned subsidiary of The Together Social Business Group CIC (known as The Together Group), which has been newly formed to facilitate the operation of Bristol Together CIC (which will also become a wholly owned subsidiary of the group) and Midlands Together CIC. We assume that the Together Group will also be utilised for any further ‘Together’ CICs. As a Community Interest Company, Midlands Together is able to make a profit but it has an asset lock written into its constitution, which means the majority of the company’s assets must be used in ways that benefit the community.

The Midlands Together management team consists of: Paul Harrod (Non Executive Director and CEO of the Together Group) Richard Nicol (CEO) Nick Bacon (Chairman) Neville Morrell (Construction Manager) Christopher Rands (Construction Manager) Roger Moors (to be appointed as Non Executive Director following launch) Details of the considerable experience of these individuals can be found in Section 8 of the Memorandum.

Legal Advisers Veale Wasbrough Vizards

Arranger and Receiving Agent Triodos Bank is the Arranger and receiving agent for Midlands Together CIC. Triodos Bank is incorporated under the laws of the Netherlands with limited liability and is registered in England and Wales (BR3012). It is authorised by the Dutch Central Bank and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority.

Partnering Social Enterprises The Jericho Foundation P3 (People, Potential, Possibilities) The Vine Trust Group Rural Experience These groups, their experience and expertise and their relevance to the Midlands Together project are described in detail in Section 4 of the Memorandum.

7

Midlands Together Community Interest Company / 2013 Bond Issue

Risk Analysis The Investment Memorandum issued by Midlands Together highlights the risks to this investment (Section 9). It is, of course, important that these are fully explained to any prospective client.

In particular, we would highlight: This is an investment in unquoted, unsecured, illiquid debt instruments. The coupon, while attractive in the current low interest environment, does not fully reflect the additional investment risks. This investment is therefore only suited to investors who are also concerned with the social impact being targeted.

Although there are measures in place to protect capital, capital does remain at risk. The bond should only be recommended to High Net Worth Investors who have sufficient knowledge and experience to understand the risks involved.

Neither the capital nor the income payment is guaranteed. Both depend on the accuracy of the financial forecasting.

There is no guarantee that the investor will receive back the whole, or indeed any, of their investment capital.

The bonds are only repayable at maturity so there is no liquidity during the investment term and no guarantee that any secondary market will exist.

It is intended that refurbishment work will be scaled down during 2018 to allow the company to accrue sufficient liquidity to repay the bonds. An alternative of refinancing will be considered if appropriate at the time.

The bonds are transferable but are not listed on a recognised stock exchange.

Gearing is permitted (with no restriction on the amount of gearing) subject to agreement by at least 75% of bond holders. No gearing is anticipated beyond this offer and possible exit funding at the end of the investment term.

The FSCS will not apply to the investment itself.

Security The Company will give security for repayment of the Bonds by way of a first charge debenture (comprising various legal charges) over all of the Company’s assets, including its property portfolio. The Series A Bondholders will have one form of debenture (the Series A Debenture).

All Series A Bondholders will rank equally. Series A Bonds rank ahead of Series B

8

Midlands Together Community Interest Company / 2013 Bond Issue

Bonds for security. All Bondholders may rank behind commercial lenders who make interim additional secured funding available to the Company, however, this would require the express permission of at least 75% of all groups of Bondholders (see ‘Risk Analysis’ above). The Board does not anticipate the need for external commercial finance during the term of the Bond. Full repayment of the Bonds is not guaranteed and is dependent on the success of the company’s business model.

This is a strong risk mitigation measure but clients should only consider investing in the Bonds if they can afford for the investment not to be repaid.

Legal framework This is an offer of secured, fixed payment debt made by Midlands Together.

9

Midlands Together Community Interest Company / 2013 Bond Issue

Technical details Bond Detail

Series A Bonds

Series B Bonds

Issuer

Midlands Together CIC

Midlands Together CIC

Instrument

4% fixed rate secured bond

6% fixed rate secured bond

Interest

4% pa payable bi-annually in arrears

6% pa payable bi-annually in arrears

Tax Reliefs

None

Eligible for CITR

Yield (including tax relief)

4% pa fixed

6% pa fixed plus 5% pa CITR

Maximum subscription

£2.5 million

£0.5 million

Repayment date

31 October 2018

31 October 2018

Security

All assets debenture ranking ahead of Series B Bonds

All assets debenture ranking behind Series A Bonds

Minimum subscription per investor

£20,000

£20,000

Minimum increments for additional investments

£5,000

£5,000

Use of proceeds

Purchase and refurbishment of properties and payment of business overheads

Wages, training, mentoring and support costs of employing ex-offenders for renovation works

10

Midlands Together Community Interest Company / 2013 Bond Issue

Frequently Asked Questions Why should my client invest in this Bond?

In the first place, they should only consider investment in such a bond if they meet the profile given above. The ability to use capital to help generate positive social outcomes while not relinquishing the capital and generating an income within a relatively low risk and straightforward structure will be attractive to many social investors. Obviously the specific Midlands Together bond will be of most suitability to investors who have a specific interest in supporting the rehabilitation of ex-offenders.

What compensation arrangements are there in place?

The Financial Services Compensation Scheme does not cover these Bonds.

However, risk mitigation measures – specifically the all assets debenture – are in place which should offer a real degree of comfort.

What is a Community Interest Company (CIC)?

CICs are companies formed under the Companies Act 2006 and are subject to that Act and company law generally. These are companies which can carry on any trade but which must have an element of public benefit to what they do - they must:

• pass a "community interest test" i.e. the activities must be carried on for the benefit of the community or a section of the community, and • submit, annually, a "community interest report" which must include: • a fair and accurate description of the manner in which the company’s activities during the financial year have benefited the community; and • a description of the steps, if any, which the company has taken during the financial year to consult persons affected by the company’s activities, and the outcome of any such consultation.

There is also an asset lock which means that the majority of the company’s assets are used for the benefit of the community it was established to serve.

There is a regulator for CICs.

11

Midlands Together Community Interest Company / 2013 Bond Issue

The best place to look for detailed guidance is the regulator's website: www.bis.gov.uk/cicregulator/

The regulations concerning these companies can be found at: www.legislation.gov.uk/uksi/2005/1788/contents/made How will investors be kept updated?

Investors will receive annual statements from Midlands Together CIC. This will provide details of the social outcomes achieved as well as a financial summary.

Why is this a five year investment?

The term provides the opportunity for a meaningful period within which to provide the requisite training and work experience and measure outcomes. A longer term would obviously provide greater stability for Midlands Together but research shows that retail investors would be likely to find a 5 year term more attractive.

Is my client’s capital guaranteed to be returned after five years?

No. The financial modelling shows that there is a strong likelihood of repayment and there is a choice of ‘exit’ measures available to Midlands Together. There can, however, be no guarantee that assumptions made will be fulfilled.

We would consider the capital repayment to be moderately secure.

Are the positive social outcomes guaranteed?

No, there can be no guarantee that suitable properties will be found, or that trainees will not reoffend.

However, the evidence shown in the Memorandum would suggest that the Together Group processes – tried and tested – are likely to continue to be successful.

Is this a Non Mainstream pooled Investment?

No. Thus the Bond can be recommended to ‘Ordinary Retail Investors’ provided that they have an appropriate attitude to risk, capacity for loss, need for liquidity, investment objectives etc. It may be appropriate to treat the bond in the same way as a Structured Investment Product.

12

Midlands Together Community Interest Company / 2013 Bond Issue

Worthstone’s View Quick reference chart The bond will raise money to support a specific social outcome in a specific geographical area, so its appeal is likely to be relatively restricted.

Entry 01

Entry 02

We have met the Midlands Together CEO (Richard Nicol) and established that he has a banking background in Property and Construction finance as well as experience as a Property Developer in Birmingham. In addition he has 20 years experience running social enterprises working with the targeted groups for this initiative.

Entry 03

Entry 04

As with any Social Impact Investment, it is important that the investor has already made adequate provision for their own financial requirements before considering this Bond. The investor should also, of course, have an interest in the social objectives addressed.

These Bonds, indeed all Social Investments, are relatively new to the UK financial planning market so it is understandable and correct that financial planners will approach them with caution.

The bond has been structured in such a way as to provide some comfort for retail investors that their initial capital should be repaid to them at the end of the five year term.

13

Midlands Together has non-executive board representation from Bristol Together CEO so sharing first hand the experience of the Bristol Together management team.

However, the Midlands Together bond may well be worth considering for clients who have shown an interest in making a dierence with their investments and are not focused solely on financial returns.

Midlands Together Community Interest Company / 2013 Bond Issue

14

Midlands Together Community Interest Company / 2013 Bond Issue

15