High-yield bond with an interest rate of 7.5% hits the market - is it worth investing in?
Revamped Article:
Here's the lowdown on a snazzy new retail bond dishing out a 7.5% coupon, outperforming top savings accounts' interests.
Top savings accounts are currently offering a 5% rate, having seen an increase after Chase boosted its easy-access rate for new customers. But this new care village operator Belong's 7.5% bond could be a tempting proposition for those fed up with plummeting interest rates and chasing regular income.
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A Closer Look at Retail Bonds
Retail bonds pay a predetermined rate of interest, often called the "coupon," for a set duration. They're issued by companies or charities trying to raise additional funds by borrowing from investors. However, remember that retail bonds are not the same as savings accounts. There's always a dash of risk involved. So let's delve into how the Belong bond functions and the potential drawbacks of retail bonds.
So How Does the Belong Retail Bond Work?
The Belong bond will shower investors with a 7.5% rate every six months until its maturity in 2030. The subscription period ends at 12pm on 30 June.
This is Belong's second bond issuance, following a £50 million raise in 2018. You can buy this bond through Hargreaves Lansdown, Interactive Investor, or AJ Bell, or via wealth advisers and brokers. The minimum initial subscription is £500, with a subsequent £100 increments. Interest will be paid on 7 January and 7 July every year, with the first payment due in January.
The newly minted bonds are expected to be listed on the London Stock Exchange's regulated market and through the electronic Order Book for Retail Bonds (ORB) on 8 July 2025.
Curious about Belong? The charity, a child of 1991, operates eight care villages in the North of England, with a ninth site scheduled to open next year. It caters to over a thousand older people, with over two-thirds of residents living with dementia. Belong positions its bond as an attractive choice for ethical investors, as the funds raised will contribute positively to society. In terms of its financial health, the charity claims it is rock-solid, boasting a 65% clientele who pay privately, an occupancy rate above the average of 96%, and almost doubling revenue over the last five years to £51 million.
Sam Benstead, Interactive Investor's fixed income whiz, points out, "With a 7.5% yield, it exceeds the 5.5% typically yielded by the safest sterling investment-grade bonds at the moment and the 4% offered by 5-year gilts. However, investors must conduct their own research on the bond issuer's creditworthiness, as a yield of 7.5% places it in the high-yield or "junk" bond category."
Interested? Dig deeper into the Belong bond and remember to familiarize yourself with the risks associated with retail bonds, which we elaborate on below.
The Nitty-Gritty of Retail Bonds' Risks
First, let's discuss the differences between savings accounts and retail bonds. Funds in UK savings accounts are safeguarded by the Financial Services Compensation Scheme (FSCS), with up to £85,000 per individual, per banking license, insured in the event of a collapse.
In contrast, retail bonds, being unfortified by the FSCS, carry no guarantee of repayment if the issuer tanks.
Laith Khalaf, AJ Bell's head of investment analysis, advises, "The outstanding interest rates on retail bonds may seem alluring, but remember that rewards tend to reflect increased risks. Investors should focus on recovering their capital, in addition to the returns on their investments. If a company you lend money to goes belly-up, you might lose some — or even all — of your capital, plus ongoing interest payments."
Khalaf stresses the importance of investigating the finances of the company (or charity) issuing the bond, which can be found in their financial statements, with a keen eye on the balance sheet. Khalaf further adds, "If your retail bond doesn't refund your capital in full, you won't have an FSCS safety net. Consumers must treat retail bonds as investments entailing capital risk rather than high-interest savings accounts, which carry minimal risk."
That being said, it's worth noting that despite the hazards associated with retail bonds such as the Belong one, they differ significantly from banned mini-bonds, prohibited by the Financial Conduct Authority.
Belong's retail bonds will trade on the London Stock Exchange (LSE), so investors can take solace in the fact that they meet the exchange's requirements.
Benstead suggests, "When considering bonds with sky-high yields, prudence demands outsourcing bond selection to a professional, like through an actively managed fund. A professional fund manager will possess a team of credit analysts and distribute risk across various sectors and timeframes."
What's the Deal with the Order Book for Retail Bonds (ORB)?
The LSE launched the Order Book for Retail Bonds (ORB) in February 2010, a specialized platform for bonds designed for individual investors.
Historically, bonds are traded in lots of £100,000, making it virtually impossible for average investors to construct a portfolio of their liking. However, on the ORB, the majority of issues can be traded in lots as low as £100.
Although the ORB has yet to revolutionize the market, a few companies still employ it. Recent ORB users include International Personal Finance (bond maturing on 12 December 2027 and paying 12% per annum) and LendInvest (paying 11.5% through 3 October 2026).
- The Belong retail bond, yielding a 7.5% rate, could be an attractive option for those looking for regular income and discontent with decreasing interest rates on personal savings accounts.
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- While retail bonds, like the Belong bond, pay a predetermined interest rate and can be issued by charities, they are not equivalent to savings accounts and carry a level of risk since they are not insured by the Financial Services Compensation Scheme (FSCS).
- Investors should be aware of the risks associated with retail bonds and carefully evaluate the financial health of the issuer before investing, as the funds are not protected by the FSCS in case the issuer fails.
