Ecotricity wins - but do investors?

Direct offers to retail investors are part of a trend in the UK for financing. It can be done because the retail investor is getting no yield from lending money to banks, while at the same time is worried about how risky that is. But the alternatives, particularly that provided by Dale Vince of Ecotricity, have risks perhaps greater than investors might realise and they need to be wary.

Ecotricity say that the bond offers investors a way to support renewable energy in the UK, through the development of wind farms. It is a repeat of the previous ‘ecobond’ which easily raised its £10 million target, and was used in a variety of projects such as a solar and wind farm hybrid and a windmill for a Ford factory.

The bond is in effect with Ecotricity Group Ltd. The financial accounts at 30th April 2011 reveal that the company has net assets of £54.9m, with profit before tax of £1.6m and so on the face of it raising a further £10m should not present a problem. But what are Ecotricity not telling you in their offer document?

There is a lack of evident corporate governance

Ecotricity Group Ltd is owned by Dale Vince. He and his wife Kate are the only Directors on the Board of Ecotricity Group Ltd registered at Companies House. There are no non executive Directors to question Dale's decisions and assume responsibility with him for those decisions. There is no doubting the success Dale has achieved and he should be applauded for it, but investors need to appreciate that this is not a public limited company with all the protections that this affords.

1). On 10th August 2010, prior to the launch of its first ecobond, it was revealed that Ecotricity purchased a 71% shareholding in football club (Forest Green Rovers) at a cost of £695,000. Ecotricity is based near to the football club and is an investment into the local community, which Ecotricity say add brand value, but it feels to me more like a personal interest, than a company one. Dale, the company's main Director and only shareholder, is now Chairman of the football club.

2). In the year to 30th April 2011 Ecotricity also made Directors' loans of £496,719 at 0% interest. The company's cost of capital as evidenced by the ecobond one launch is 7 to 7.5%. Thus while Ecotricity Group Limited have not declared a dividend, and whilst there is no correlation between the loan and ecobond, there has been signficant advantage to Dale and Kate Vince from the company this year over and above their Director's emoluments of £148,875.

While we are not suggesting that the proceeds from Ecobond one (launched October 2010) and Ecobond two will be used for anything other than the purpose outlined in their offer documents, nor are they being used to fund the football club (which was purchased prior to the ecobond offers), it is possible to say that out of the company's free cashflow available in year to 30th April 2011, Dale and his wife have borrowed £496,000 in Director's loan and allowed Ecotricity Group Ltd to purchase the local football club for £695k. Ecotricity say that the loan will repaid to it as soon as practically possible.

Our concern is that after ecobond two Ecotricity will have borrowed £20m direct from the public. Banks are very able to look after themselves in any lending relationship and would have in place covenants to protect themselves in the event that a company's positions deteriorates. Investors in the ecobond two are not in such a position.

This bond offer is allowed in the current legal framework and Ecotricity Group Ltd is able to market directly to the man on the street, as have King of Shaves (2009 - £5m), Hotel Chocolat (£3.7m in 2010) and John Lewis (£50m in 2011). At Worldwise Investor we feel that when a company raises money from the public directly it should be evident at Board level that there are sufficient checks and balances in place to help protect the interests of the bond holder. The Ecotricity Group Ltd offer raises concerns in this area. 

Ecobond two terms are stacked in favour of Ecotricity

i). The offer document makes clear that an investor cannot sell the ecobond on to a third party. Why is this an issue? Well if things turn sour, retail investors are a passive group of stakeholders to deal with. Allow bond holders to sell their stake to a third party and Ecotricity might find themselves dealing with a professional person, such as a hedge fund manager with the legal resources to fight Ecotricity in court. By stopping investors selling their interest on, Ecotricity will only have to deal with lots of small investors (the minimum investment is £500), who are unlikly to want to spend money fighting their corner in a distressed debt situation.

ii). This is an unsecured bond, which means that as a creditor you are well down the pecking order in the event of a liqudation, just above trade creditors and shareholders. There are no conditions in the offer document placed on Ecotricity as to how much more finance Ecotricity can raise. Any future loans raised with banks will come with conditions and would be usually underwritten by physical assets and reduce any security there is for investors in the ecobond. Thus Ecotricity bond holders are potentially faced with a rising level of risk in the future and no ability to manage this with Ecotricity.  

The above points do not arise out of any desire from Ecotricity Group Ltd to disadvantage investors from outset, but out of their desire to keep the costs of raising finance to a minimum. By taking this route they avoid Financial Services Regulation and the costs involved in meeting it. Regulation is thus driving a worse deal for investors.

Accounting Practice in the year to April 2011

In the year to 2011 Ecotricity made an profit on ordinary activities before tax of £1.67m, but a loss after deferred taxation of £672k. This is a fall in profits before tax from £3.8m the year before. Dale Vince explains that this is in part due to the mild spring which saw lower usage of electricty and the fact that the wind did not blow as much. It does demonstrate the volatility of wind as an energy source.

The profit & loss account in the balance sheet rose partly as a result of a revaluation of assets. A revalution of course does not provide physical cash. It is a bit like revaluing your house for the mortgage company. It provides lenders with a greater sense of security. Ecotricity's assets rose in value by £7.36m, which KPMG signed off. The football club was revalued independently, but the wind assets were revalued by internal management, using a methodology for this valuation approved by KPMG, the accounting firm. This might seem odd to an investor, but Ecotricity are not required to have an independent valuation every year.

So why invest?

Ecotricity are pitching to an investor base who want to help renewables and so just like the first ecobond launch this offer is likely to fill. 2010 has been recognised as a poor year for wind and even with revenues down and overheads up profit before interest and tax still was 1.6 times interest due. Thus Ecotricity seems well placed currently to meet future interest payments.

However, investors are well advised to take note of the contract being offered by Ecotricity and the lack of evident corporate governance. It is these issues which make it difficult for Worldwise Investor to stand behind this offering, because if things go wrong with Ecotricity Group Ltd in the future, the ecobond investors do not have much protection, or anyone looking after their interests. Individuals need to consider these issues in evaluating whether or not to invest in this issue and how much risk it is worth taking for a 6% to 6.5% return.