6 days ago
New bond paying 7.5pc interest launched – should you buy it?
Investors can beat top savings interest rates thanks to a new 'retail bond', which pays the equivalent of an annual rate of 7.5pc until its maturity in July 2030.
The rate far exceeds the current best five-year bond listed on The Telegraph's best buy list – currently Raisin UK's 4.26pc offer.
So, what's the catch – and should you buy?
The fixed-rate bond, which will be traded on the London Stock Exchange like a share, is being offered by Belong, a care home operator with a special focus on dementia patients. Belong, a charity established in 1991, currently has eight villages in north England, with a ninth site due to open next year.
While the 7.5pc interest, paid twice a year, is likely to appeal to savers and investors alike, there are key differences between savings accounts and so-called retail bonds.
Cash held in savings accounts in the UK is protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per institution. Belong's retail bonds, however, are not covered by the scheme – if the charity were to go bust, there would be no guarantee that investors would receive their money back.
While these bonds have risks, they are not 'mini-bonds', the advertising of which has been banned by the Financial Conduct Authority (FCA). The most well-known mini-bond scandal was that of London Capital & Finance, which has been described as Britain's biggest Ponzi scheme.
Belong's retail bonds, however, will be traded publicly on the London Stock Exchange, so investors have the reassurance that the stock exchange's requirements have been met. When it begins trading on July 8, the bond will be available via stockbrokers AJ Bell, Hargreaves Lansdown and Interactive Investor.
By being listed on the stock exchange, the bond also offers itself up to scrutiny by the market, which can signal its collective opinion via its price. If the price of the bond falls, for example, holders may be alerted to concerns over Belong's financial health and could have the opportunity to exit, albeit at a probable loss.
Nonetheless, retail bonds are far from risk-free. Holders of a retail bond issued by Wasps, the rugby club, received just £7.4m back out of a total £35.2m when their bonds matured in 2022, after the club went into administration.
Proceeds of Belong's new 7.5pc bonds will be initially used to cover a tender offer for holders of the existing 4.5pc bonds, which are due to mature next year, in order to ease its refinancing risk. Any remaining capital raised has been earmarked for 'charitable objectives', including the development of new care villages.
If Belong goes bust, the bonds may remain listed on the stock exchange, which means investors could still sell their bonds – but again, this would almost certainly be for much less than they paid.
Value investors may be tempted to scoop up the bonds at a discount if they believed they would be repaid through the sale of Belong's assets. There is no guarantee that Belong's bonds would remain listed in the event that it went bust – this would be up to the London Stock Exchange.
Retail investors hoping to purchase the bonds have until June 30 to do so, with a minimum initial subscription amount of £500 and increments of £100 thereafter. Interest payments will be made on January 7 and July 7 each year, with the first due in January 2026.
Rachel Springall, of consumer finance website Moneyfacts, said: 'Investing puts any capital at risk, so this option will not be suitable for every saver. Seeking advice to go over all the options out there while also considering someone's appetite for risk is essential.
'Those who prefer a more traditional savings account will find the top access accounts and fixed rate bonds pay above 4pc, and they can earn over 5pc on some regular savings accounts.'
