Investors are being offered an inflation-busting 12pc annual interest if they lend money to a finance company for five years via a “retail bond”.
The fixed-rate bond, which will be traded on the London stock market like a share, is being offered by International Personal Finance, a listed “subprime” lender that operates largely in eastern Europe.
The 12pc interest rate is the highest ever offered on a retail bond by a wide margin. Previously, the most savers had been offered was 7.5pc from a bond issued in 2011 by Provident Financial, another subprime lender, according to Michael Dyson of Bond Advisor, a consultancy. That bond matured in 2016.
Although the 12pc rate is likely to appeal to many savers and investors – it is much higher than current best-buy savings rates of about 4.7pc – there are key differences between savings accounts and retail bonds that make the latter much more risky. In particular, there would be no recourse to the Financial Services Compensation Scheme if International Personal Finance was to go bust.
Although retail bonds are considered safer than “mini-bonds”, on which savers lost millions of pounds through high-profile scandals such as London Capital & Finance, they are far from risk free. Holders of a bond issued by Wasps, the rugby club, are still waiting for their capital to be returned after the bonds reached their scheduled maturity date in May.
Unlike mini-bonds, retail bonds can be traded on the stock market so investors have a route to reclaiming some money before the bond maturity. However, there is no guarantee they would get back their initial stake.
Interest on the International Personal Finance bonds will be paid at six-monthly intervals, on June 12 and December 12 every year. The first payment is due on June 12 next year.
Holders of the company’s existing 7.75pc retail bonds due to be repaid in December next year are also being offered the chance to switch to the new 12pc bonds.
The offer closes on December 6. Several stockbrokers, including Hargreaves Lansdown, AJ Bell and Interactive Investor, are taking part in the offer.
The new bonds mark a return to life for the retail bond market, where there had been only one new issue since 2018. An attempt last year by Aston Martin’s racing team to issue a 7pc bond collapsed.