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March 2011 Commentary

When is a savings bond not a savings bond? 7th March 2011

Piggy Bank The short answer is when it is a John Lewis Partnership bond. This bond opens today and is described in the press release as "a new five-year savings product", but reading the details shows that it is not what most people would think of as a savings product. The headline details look good, 6.5% interest over five years, paid partly in cash (4.5%) and partly in vouchers (2%), so what is the catch?


Well it is not a savings bond at all. When I first read the press release, I thought it was a corporate bond, but it's not a corporate bond either. Corporate bonds are listed and tradeable but this retail bond is an unlisted security. Once you have taken it out you cannot change your mind and cancel it or get your money back before the end of the fixed term and you cannot sell it on to someone else.


The headline rates are annual rates, with interest paid to investors each year and so there is no compounding. There is no interest paid on cash invested between the date of investment and the Issue Date, which can be up to 10 days after the Closing Date of 11th April 2011. This means that there could be no interest for up to 46 days, which reduces the gross rate from 6.5% to 6.31%.

Default Risk

Because it is an unlisted security and not a savings product, there is no protection under the Financial Services Compensation Scheme (FSCS). This means that if John Lewis defaults, there is no FSCS safety net to protect investors. There is some protection for investors because the bond is written under a trust deed and the trustees have a custodial duty to the investors.

So what is the likelihood that John Lewis will default on its obligations? This is very difficult to assess partly because John Lewis is not rated by the rating agencies. The Invitation document states that the partnership aims to maintain a capital structure which is consistent with an investment grade credit rating, which can mean anything from BBB upwards.

There is a lot of detail in the Invitation document about risk. Thirteen risks are identified as being risks that John Lewis is subject to and may mean that the company may not be able to meet its obligations under the bond. This is followed by a section on Facts which are material for the purposes of assessing investment risk associated with the bond. These include: having sufficient knowledge and experience to make an assessment of the offer, analysis of the impact on the investor's overall portfolio of investing in these bonds, having financial resources and liquidity to bear the risk, understanding the terms and conditions and being able to evaluate the economic, interest rate and other scenarios. The document then goes on to identify a further seven risks that are related to the structure of the bond. That's a lot of risks to consider in coming to an assessment of the financial strength of the counterparty.


It is being offered as a retail product but is only available to qualifying individuals, who are Partnership Card holders, Account Card holders and current Partners (employees). This air of exclusivity may mean people think the offer is better than it actually is.


This bond is being aimed squarely at the retail customer, with investments from £1,000 to £10,000. But it is not a simple product for a retail customer to understand. Each investor will need to consider whether it is suitable for them, whether they are able to understand the product and risks involved and whether they are able to bear those risks. Most investors would normally rely on a Financial Adviser for advice on this type of illiquid security but there is no commission payable to advisers for providing advice.

Finally, John Lewis raised £275m via a ten year corporate bond issue in 2009 and paid a coupon of 8.375% on it. This bond is offering a rate about 2% lower over a five year term.

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