Like a CD, But With A Twist of Risk

American blue chips are marketing floating-rate notes to individuals | “These programs are a much better deal for the company”

Margaret Collins and Elizabeth Ody


“Looking for CD or Money Market Rates? You can do better.” That’s the pitch that greets visitors to General Electric’s Interest Plus website. GE, Duke Energy, Ford Motor, and Caterpillar, are among companies enticing a growing number of individuals to buy their debt through investments sometimes billed as higher-yield alternatives to checking accounts and money market funds.

Corporations that sell what are known as floating-rate demand notes are tapping into consumers’ frustration with the puny interest rates on money market funds, which averaged 0.03 percent as of May 29, and bank savings accounts, which averaged 0.13 percent. The notes, which usually require a minimum deposit of $500 or $1,000, are paying 1 percent to 1.6 percent.

The comparisons with more run-of-the-mill savings products may be confusing some investors into thinking their money is secure. But bank savings and certificates of deposit are insured by the Federal Deposit Insurance Corp.; floating-rate notes are not. “It looks like these programs are a much better deal for the company than they are for the individual investors,” says David Sekera, corporate bond strategist at research firm Morningstar.

GE and others sell notes directly to investors through their own websites. Buyers can write checks against them and can cash out at any time. Unlike traditional bonds, the notes don’t have stated maturity dates and aren’t tradable in a secondary market. Issuers generally can change payout rates weekly.

“The unique thing about this is we’re selling them directly to the investors,” says John Heffernan, director of the PremierNotes program at Duke Energy. The power utility started offering the floating-rate notes to individuals about a year ago, marketing them first to employees and through billing inserts to customers before advertising in newspapers. The amount of debt outstanding through the program totaled $126 million as of March 31, a 59 percent increase from the end of 2011.

The notes help companies diversify their funding, which is skewed to commercial paper and bonds — securities that are purchased mainly by institutions, not retail investors. GE Capital, the conglomerate’s financial arm, has been offering the notes to individuals since 1992 and had $8.7 billion outstanding as of March 31, up from $5.6 billion at the end of 2008. “It allows customers to come in without a sales fee and exit at any time without a penalty,” says Russell Wilkerson, a spokesman for GE Capital.

Duke Energy currently pays investors 1.2 percent for accounts less than $10,000 and as much as 1.6 percent for those with more than $50,000. GE Capital and Ford Credit paid a rate of 1 percent for investments of less than $15,000 and as much as 1.1 percent on amounts greater than $50,000, as of June 4. Income from the notes is treated as interest and taxed at ordinary income rates.

Companies selling these notes to individual investors are taking advantage of the fact that many consumers recognize their brand, says Peter Crane, president of Crane Data, which tracks money markets. The downside is that if the corporation defaults, investors’ money will likely be tied up in bankruptcy court and they might lose a significant portion of their investment. “These programs don’t appear to pay enough extra spread over money market funds to compensate the investors for the credit risk and lack of diversification,” says Morningstar’s Sekera.

Duke Energy and GE Capital both say their marketing materials are clear about how the products work and that it’s the responsibility of individuals to determine what investments are right for them. The small type at the bottom of the landing page of the GE Interest Plus website states: “It is possible to lose money if GE Capital is unable to pay its debts.”

Despite such disclosures, investors may still confuse the products with money markets or guaranteed accounts because of the features they offer, says Brad Reynolds, chief investment officer of LJPR, a wealth management firm. Says Reynolds, who works with clients that invest in the notes: “It looks like a duck, quacks like a duck and swims like a duck.”

The bottom line General Electric, Duke Energy, and others have sold billions in floating-rate notes to individuals hungry for higher-yielding investments.


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