General Electric Co., Duke Energy Corp., and Ford Motor Co. are enticing a growing number of individuals to buy their debt through investments pitched as higher-yield alternatives to checking accounts and money funds.
These and other companies that sell the debt, called floating-rate demand notes, are exploiting frustration with money-market funds paying an average 0.03 percent as of May 29 and bank savings accounts at 0.13 percent. The notes, which usually require a minimum deposit such as $500 or $1,000 and offer checks to access the money, are paying 1 percent to 1.6 percent.
The notes help companies diversify their funding, which is skewed to securities such as commercial paper and bonds bought mainly by institutions. For retail investors, they provide less protection than an insured bank account or a money fund that holds debt from many issuers. The notes aren't secured.
"It looks like these programs are a much better deal for the company than they are for the individual investor," said David Sekera, corporate bond strategist at Chicago-based research firm Morningstar Inc. "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."
Issuers generally can change payout rates weekly. Duke Energy, a Charlotte, North Carolina-based utility, and Ford Credit, the company's finance unit, promise to pay at least 0.25 percent more than the average money fund rate. Fairfield-based GE doesn't guarantee a minimum.
"Looking for CD or Money Market Rates? You can do better," according to the marketing on GE's Interest Plus website. The notes are issued by GE Capital, the finance unit of the industrial and financial-services company. GE has been offering the notes to individuals since 1992. It had $8.7 billion outstanding as of March 31, compared with $5.6 billion at the end of 2008.
"The real benefit of this product is flexibility," Russell Wilkerson, a spokesman for GE Capital, said. "It allows customers to come in without a sales fee and exit at any time without a penalty. That supreme flexibility and an attractive yield is the strength of the offering."
If a corporation selling these notes defaulted, investors' money would probably be tied up in bankruptcy court, and they may lose a significant portion of their investment, Sekera said.
"I like to call them a bond with a checkbook," said John Heffernan, director of the PremierNotes program at Duke Energy. "The unique thing about this is we're selling them directly to the investors."
Duke Energy started offering floating-rate notes to individuals about a year ago, marketing them first to employees and through billing inserts to customers before advertising in newspapers, Heffernan said. The amount of debt outstanding through the program increased 59 percent to $126 million as of March 31.
While the investments let investors write checks against them and access the money daily, they aren't insured by the Federal Deposit Insurance Corp. against losses and there are restrictions. The notes, unlike traditional bonds, don't have stated maturity dates and aren't tradable in a secondary market.
People "tend to use it like a savings account or a money-market account," Brad Reynolds, chief investment officer for LJPR LLC, said of Ford Credit's Interest Advantage notes. Investors who are also employees of the companies may be inadequately diversified if there are credit problems with the issuers, said Troy, Michigan-based Reynolds.
Duke Energy and GE Capital both said they are transparent about how the products work and that it's the responsibility of individuals to determine what investments are right for them.
Ford Credit, a unit of the Dearborn, Michigan-based automaker, prominently discloses how its notes differ from bank accounts or other guaranteed products, said spokeswoman Margaret Mellott. The company had about $4.7 billion outstanding in its demand notes at the end of 2011.
Duke Energy and GE Capital have internal committees that can reset the rates paid on the accounts weekly. Ford Credit updates the rates weekly to reflect money-market rates plus 25 basis points and may pay greater than that "at its sole discretion," according to the notes' prospectus.
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.