Note: Bond now fully subscribed - 18 March 2011.
After Tesco recently raised £125 million through a successful direct to public corporate bond issue, John Lewis is now trying something fairly similar in the hope of raising £50 million.
The John Lewis Partnership Bond is set to pay 4.5% interest plus 2% in store gift vouchers each year for the next five years. It's available to John Lewis Partnership employees and Partnership or Account card holders as at 12 February 2011. Investments of between £1,000 and £10,000 are allowed, in £1,000 increments. The offer closes on 11 April 2011.
Now, first things first, this is a corporate bond and not a savings account. If John Lewis can't afford to pay the annual interest or return your money at maturity then tough - your losses won't be covered by the Financial Services Compensation Scheme (FSCS).
However, it's a bit different to a conventional corporate bond too...and generally for the worse. The main difference is that the bond can't be transferred to anyone else. This means it can't be traded on the stockmarket or held within an ISA, both potentially big disadvantages. So there's no way to get your money back for five years.
It's also quite unusual that some of the interest is paid via gift vouchers, to be spent in John Lewis or Waitrose. If you'd spend the money in-store anyway this won't be a problem, but the arrangement favours John Lewis more than investors given the actual cost to John Lewis is less than 2% (it effectively includes their store mark-up).
Basic rate tax of 20% is automatically deducted from the annual 6.5% return, but taken in full from interest payments. So, suppose you're due to receive £450 of interest and £200 of gift vouchers (from a £10,000 investment), you'll receive the £200 of vouchers while £130 of tax (£650 x 20%) will be deducted from the interest you receive. Again, this arrangement favours John Lewis over investors, especially as the bonds can't be held tax-free within an ISA.
When buying corporate bonds it's vital to take a view on the financial health of the company issuing the bond to gauge the likelihood they'll repay you in full. The greater the risk they might default the more interest you'd want to make the risk worthwhile.
I doubt John Lewis will go bust within the next five years, so I'd view this investment as fairly safe. Nevertheless, there are potential issues to be aware of. The John Lewis Partnership still offers a final salary pension to employees and the scheme had a £490 million deficit as at 29 January 2011. The Partnership also has net debts of £548 million. Profits over the last year were a healthy £368 million before partnership bonuses and tax, but if we head back into recession both profits and the pension deficit could suffer.
Looking at conventional corporate bonds the yield, including the gift vouchers, looks quite generous - M&S December 2019 corporate bonds have a 5.66% redemption yield (at the time of writing). But the appeal for taxpayers is greatly diminished by not being able to hold the John Lewis Partnership Bond within an ISA. The 6.5% interest falls to 5.2% for basic rate taxpayers and 3.9% for higher rate - with 2% of the after tax return being paid via vouchers in both cases.
Unless you're a non-taxpayer I'd be more tempted by a cash ISA, where rates of up to 5% fixed for five years are available - less risk and no messing with vouchers. Or perhaps consider conventional corporate bonds which can be held, tax-free, within stocks & shares ISAs.
The John Lewis Partnership Bond isn't a bad deal and I think the chances of the company defaulting are slim. But not being able to hold the bond within an ISA or sell it are big potential drawbacks. As is receiving some of the interest via gift vouchers if you're not a regular John Lewis or Waitrose shopper.