Savers have struggled to generate decent returns from their spare cash for years now, which is why many take risks to boost their income by buying company IOUs, known as bonds.
To take advantage of this rising demand for high-income bonds, lots of companies have started issuing retail mini-bonds aimed squarely at private investors. However, these bonds would be more popular if companies would offer nervous investors more security, both for their capital and income.
Now, one business has done just that by launching a 'secured' mini-bond which produces a high yearly income of 6.5% by investing in solar power. Unlike other bonds, these 'green' bonds are secured against all of the assets, cash and income of the company, making them safer.
A secured mini-bond
In what is only the second secured retail mini-bond to be issued in the UK, global energy business CBD Energy Limited (CBD) has created a wholly-owned UK subsidiary, Secured Energy Bonds, to offer these Energy Bonds to investors. CBD plans to use the funds raised by this bond issue to "fund the development of a well-diversified portfolio of rooftop solar sites".
In addition, a Financial Conduct Authority-regulated company has been appointed to sit on its board to act in investors' interest as a 'security trustee'. In effect, this means that bondholders have their own representative on the company's bond to defend their interests. To add another degree of protection, the parent firm CBD is offering a corporate guarantee to Secured Energy Bonds.
As a result of this set-up, parent company CBD states that SEB-issued bonds "will enjoy a level of security not previously associated with the mini-bond market", claiming this represents a significant step forward for bond buyers.
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How the Energy Bond works
SEB's Energy Bonds will pay an annual coupon (similar to the yearly interest rate paid by a savings account) of 6.5%, paid quarterly. In other words, investors will receive an income of 1.625% every three months, which appears very attractive when compared to the tiddly rates you might earn from cash deposits.
The minimum investment into this Energy Bond is £2,000, which would produce a yearly income of £130. Subject to multiples of £1,000, there is no maximum investment. In addition, investors applying before 28th October are rewarded with six weeks' interest for being 'early birds'.
These SEB Energy Bonds have a three-year fixed term. All being well, investors will get back their initial investments in late 2016. Unlike many other retail bonds, these Energy Bonds are not listed on ORB, the Order Retail Book of the London Stock Exchange. This means that that they are unlisted, non-transferrable bonds that must be held to maturity in late 2016. As investments go, these are highly illiquid.
Unfortunately, these bonds cannot be held inside an ISA to make their income tax-free. However, investors can shelter their bond income from tax inside a SIPP or SSAS (Small Self-Administered Scheme) pension. Outside of these tax shelters, the bond income is paid untaxed, but is taxable at your marginal rate.
Applications for the Energy Bonds must be received by 5pm on 9th December. Payment can be made by debit card, but not by credit card. You can apply online here.
Where your money goes
SEB aims to raise between £7.5 million and £15 million from these bonds on a first come, first served basis. Once the firm has raised sufficient capital from bond investors, it will invest these funds in the "design, development, installation and management of UK solar projects".
In a nutshell, SEB will install solar panels for chosen UK businesses at no cost to these firms. Instead, SEB's income comes from the guaranteed Feed-In Tariffs (FITs) paid by the Government to green-electricity generators.
SEB claims that these installations reduce local businesses' energy bills, as well as improving the environment.
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Worth a flutter?
Before investing in any corporate bond, the very first thing you must understand is that your money is at risk from day one. Cash deposits up to £85,000 are protected by the Government-backed Financial Services Compensation Scheme (FSCS), but there is no safety-net for bonds. So if a company defaults on its bond coupons or repayments, then you could lose up to 100% of your investment.
In effect, when you invest in a bond, you are given a company IOU with interest, to be repaid at a future date. If the company's finances become shaky further down the line, then so too does your bond. By investing in SEB Energy Bonds, you are tying up your money for three whole years - no matter what happens to you or the business in the interim.
Personally, I am attracted to the SEB Energy Bond, thanks to its tempting combination of a high income and solid security. Then again, I would urge investors not to go overboard by investing too much in this illiquid investment, despite its ethical and sustainable pedigree. In short, don't invest more than, say 1% to 2% of your personal wealth into this 'breakthrough' green bond.
What do you think? Would you be tempted to put your money into Energy Bonds? Have you looked to alternative outlets for a return on your money? Let us know your thoughts in the comment box below.