'Green' bond offers 18% interest upfront

This three-year retail bond from A Shade Greener pays 6% a year interest, but you get all 18% upfront. But what are the risks?

Savers and investors are being tempted to invest in a £10 million 'green' bond paying yearly interest of 6% for three years, with this 18% return paid upfront.

Someone investing the minimum of £1,000 in this bond would receive £180 of (untaxed, but taxable) interest upfront. Then, after three years - if all goes to plan - they get their £1,000 back in full.

Given that this 6% yearly return is around three times the 2% a year paid by table-topping easy-access savings accounts, savers and investors may be tempted to rush in. However, as with all retail bonds, this investment comes with strings attached.

The Greener Bond

A Shade Greener, an installer of domestic solar-panel systems, has launched its first retail bond aimed at small savers and investors.

Interested individuals with £1,000 or more to invest can buy into this three-year bond paying yearly interest of 6%. As a bonus, this three-year return is paid within 30 days of their investment, giving investors a handsome return of 18% after a single month.

A Shade Greener aims to raise £10 million through this fixed-term bond to fund its future expansion. The firm will use this cash to buy solar-panel systems that are already installed and operational, using the income generated from these systems to fund the return of bondholders' cash.

In addition, the renewables firm will use some of the bond proceeds to install 'everlasting' boilers in homes. Up to £1 million of the £10 million raised may be used to purchase commercial biomass systems (producing heat from plant matter).

By buying up-and-running systems, A Shade Greener doesn't expose bondholders' money to construction problems and delays. What's more, the company already has a reserve account with £1.8 million in it, which will be used to pay out all of the upfront interest. So it seems highly unlikely that the group will fail to pay out the initial 18% return promised to investors.

The closing date for this bond offer is 30th November, so you have a few weeks to make up your mind about whether to jump on board.

What is A Shade Greener?

A Shade Greener has carved out a niche in the environmental sector by supplying and installing solar panels for UK households, completely free of charge. To date, the company has raised more than £250 million from institutional investors and installed more than 25,000 free solar systems on homes across the UK.

With 250 installations a week and 700 employees, A Shade Greener estimates that it has a quarter (25% market share) of the UK solar industry. While its customers enjoy free renewable electricity, A Shade Greener makes its money from Government-guaranteed Feed-In Tariffs.

Stewart Davies, chairman, said, "A Shade Greener has made free solar-panel installations available to the public and now we're opening up the opportunity for everyone to invest profitably in green energy and contribute to the fight against climate change.

"The panels are fully insured and the income stream is guaranteed by Government. The return is attractive, given the security of income and the current low interest rates available on cash deposits. The decision to pay the interest upfront demonstrates our confidence and makes the investment even more attractive."

So far, the Greener Bond sounds great. But what are the catches?

The real risks of retail bonds

A retail bond is a corporate IOU issued by a business to raise funds for itself. Investors in such bonds typically receive regular coupons (interest on their investment). Their initial investment is then returned to them on maturity, usually after a fixed period such as three, five or 10 years.

Some retail bonds are listed on the London Stock Exchange, which means that they can be bought and sold during market hours, similar to shares. However, the Greener Bond is unlisted, non-transferable and non-convertible, making it a highly illiquid investment. In other words, once you've invested in the Greener Bond, your money is locked in for the next three years, come what may.

While most retail bonds pay half-yearly or yearly coupons, the Greener Bond pays the first three years of interest in advance. While this is highly unusual for a retail bond, this gimmick also makes the return mouth-wateringly attractive to income-seeking investors. After three years, investors can choose to withdraw their money or leave it, earning yearly interest of 6% in arrears.

One consideration if you're thinking about investing in this particular bond is that A Shade Greener's business model relies heavily on Feed-In Tariffs. If the Government alters Feed-In Tariffs, then the company's profitability could suffer, though current FITs for solar panels offer a guaranteed, index-linked return for 20 years.

Also, banking an upfront return of 18% could push investors into a higher Income Tax bracket, exposing them to a hefty bill from HM Revenue & Customs.

WARNING: No savings safety net

UK savings accounts are protected by a Government-backed safety-net known as the Financial Services Compensation Scheme (FSCS). This covers 100% of the first £85,000 on deposit per account holder per savings institution. However, in common with all retail bonds, the Greener Bond is not covered by the FSCS. So in theory, you could lose every penny you invest in this or other retail bonds.

With no approved safety net, investors in bonds risk losing everything, because they are buying a company's debt. If that business were to go bust, investors might get back nothing. So bond investors are exposed to credit risk: the danger that a bond issuer will 'default' by failing to pay its coupons and/or final repayments.

Would I buy this bond?

The oldest rule in the world of investment is: the higher the return, the greater the risk. With the base rate stuck at 0.5% a year since March 2009, this bond's 6% yearly return looks very tempting to savers struggling with record-low rates.

However, in the worst-case scenario, investors in this and other retail bonds could lose a large proportion of their investment (or even all of it) if issuers run into trouble. For example, investors in Co-operative Bank bonds face losing more than half (60%) of their money after this supposedly boring and reliable bank lost hundreds of millions on dodgy commercial property loans.

For these and other reasons, I would never want to put too much money into a bond like this. By chasing high returns, you could end up with high losses.

What do you think? Would you be tempted by this bond? Let us know your thoughts in the Comments box below.

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