Green bond paying 12% interest launches: is it too good to be true?
The bond has been issued by the Green Deal Finance Company Group (GDFC) to raise £5m for working capital for the business, which lends money to homeowners looking to make their properties more energy efficient.
The bond is available via Abundance, an ethical peer-to-peer platform.
The minimum investment amount is £5 and Abundance confirms investors will not have to pay any initial or ongoing fees as all of its costs are covered by GDFC.
Investors will get 70% of their interest twice yearly each year of the term, and the remaining 30% will be rolled up and earn interest itself over the three years. This part of the return will be paid to the investor, along with their original capital, at the end of the term.
The bond can be cashed in before the end of the term with no penalty, but investors will need to sell their holdings on Abundance’s ‘secondary market’, meaning they’ll need to find a buyer and agree on a sell price. If that happens to be less than the current value of the bond, they could lose out.
Abundance says investors are investing in GDFC as a company which has a range of projects it is undertaking to improve and re-invigorate the Green Deal scheme which lost government funding back in 2015.
The bond can be opened in three different ways:
- Via the Abundance Innovative Finance ISA (IFISA) platform, allowing savers to gain returns tax-free up to a maximum of £20,000. Previous tax-year ISA allowances can also be invested.
- Within the Abundance Self-Investing Personal Pension (SIPP) so it’s subject to the £40,000 annual pension allowance.
- Directly in the bond via Abundance, without the ISA tax wrapper so returns are subject to tax.
How safe is this product?
Given the depressed state of the savings market where savers are more akin to receive 1% on their money, and with inflation currently standing at 2.7%, a return of 12% sounds very attractive. But is it too good to be true?
Abundance says it has a mandatory ‘investor test’ that every prospective investor must pass before they can actually invest in any Abundance project. This test makes sure the person understands the various risks that are involved.
The platform is regulated by the Financial Conduct Authority (FCA). But whether your money is protected if something goes wrong is not clear cut.
If Abundance is found to be negligent or at fault, £50,000 of your money is protected under the Financial Services Compensation Scheme (FSCS)
However, if GDFC goes bust, you are not guaranteed to get your money back.
Anna Bowes, director of independent Savings Champion, says as the bond can be opened via an IFISA from peer-to-peer lender Abundance, the worry is investors may not fully understand what they’re signing up to and may end up taking on more risk than they realise.
“Peer-to peer is growing in popularity, and it is easy to see why, as savers have the opportunity to get much higher returns than they would in the traditional savings market, but there is a big catch. And something offering a return that is so much more than can be achieved elsewhere should set alarm bells ringing,” she says.
“The money paid in by investors is paid directly to borrowers, and while the loans are being repaid in full, everyone is winning. But when borrowers default on their loans, it could leave investors out of pocket – so it is vital that anyone considering this as an option, is not risking money they cannot afford to lose.”
Ben Yearsley, director at Shore Financial Planning, says the offering looks “pretty high risk” and the 12% return is higher than most would expect from equities. While he has invested in similar products, he says he wouldn’t invest in this product.
He says: “With such a high rate, my initial question is why are they paying so much? Most of the bonds I’ve invested in so far have paid 5-6% per annum.
“As far as I can tell this is an unsecured bond, so if the company you are lending money to got into financial difficulties then you would not be certain of getting your capital back.
“I wouldn’t caution investors against crowd bonds altogether, as I personally have invested in a large number. However the ones I have invested in are all asset backed with the money lent secured against property or cash flow of the business. The thing to be aware of is these crowd bonds are not homogenous. In other words, one bond can and will have a totally different risk to the next.”
Investors should be aware that the high yield bond market is yielding around half the 12% and it is itself considered a risky investment.
Adrian Lowcock, investment director at Architas, points out that investors may wrongly believe that the bond is protected by the state as the Green Deal scheme was once government-backed. The government is no longer involved and what GDFC is doing is essentially relaunching the whole Green Deal concept as a business in its own right.
Lowcock says: “This is a high yield in an environment where very little offers that sort of interest rate because you just don’t need to. A bond yielding twice the average high yield bond should be viewed very warily indeed.”
Lowcock says investors shouldn’t get sucked in by the headline rate, as the better the interest the greater the risks is a very simple maxim to consider when looking at such products.
“Consider how much risk you are willing to take as that has a direct impact on the return you should expect. Then look at how the bond is structured, what assets it is secured against and the financials of the business. If the information is lacking or missing then just walk away,” he says.