Duke Energy's PremierNotes Are An Inappropriate Place to Stash Cash
Author : Ari Socolow
Duke Energy has begun to advertise an unsecured commercial paper program. While the company is offering yields that are as high as 1.51%, these notes are uninsured, and hence represent an inappropriate place to stash cash for most.
No matter what the environment, most people have some amount of money that they cannot afford to lose. And, in order not to lose the money, they refrain from investing it in riskier assets and accept a so-called risk-free rate. Risk-free rates are historically savings accounts, CD rates and the 10-year US Treasury. Today, the US Treasury curve is very compressed, causing many to argue that treasuries and even short-term CDs involve a risk to principal should rates rise. Hence, the only real risk free asset at the moment are cash accounts (savings or money market accounts) and those are only risk free when amounts over $250,000 per individual per insitution are spread across multiple banks or credit unions.
Against this backdrop, Duke Energy has sought to introduce something new for investors to stash cash. PremierNotes program are according to the Duke Energy website:
"... direct investments in new debt obligations of Duke Energy. Under the program, Duke Energy borrows directly from investors by issuing notes. In return, investors receive a competitive floating rate of interest that is very favorable compared to other cash alternatives like bank accounts, short term CDs and money market mutual funds."
Companies offering notes directly to investors is nothing new. Duke is currently offering 1.51% on balances over $50,000 in its PremierNotes program. Longer term, it commits to return 25 basis points above average money market fund rates.
Even though the rate on deposits over $50,000 is above any current savings or money market rate, most depositors will find that the slight increase in yield does not justify the risk involved in foregoing FDIC or NCUA insurance and relying entirely on Duke Energy’s ability to pay. Duke’s junior unsubordinated debt is rated BBB-/Baa3 and its commercial paper rating is A-2/P-2.
Duke Energy, of course, is a great company. It is the energy producer and distributor in the fastest growing region in the US. Its equity is yielding 4.20% and while expensive on a historical P/E basis, it can be hedged in a manner in which you would receive about the same premium for your exposure to the company and still get all the upside. For most, that is a far better way to play Duke.
 The idea of a place to stash cash that outranks savings and money market accounts and is secured by the credit rating of a major conglomerate, and not by the FDIC or NCUA is not all together new. Companies such as GE, Ford and GM have occasionally targeted depositors and investors for their cash accounts with commercial paper programs. Most companies discontinued these programs. GE still offers a program, called GE Capital Invest Direct or GE Capital Interest Plus, that today offers depositors 1.11% on deposits over $50,000; it is virtually unknown and should be completely avoided as depositors can get rates that are higher or as high from several FDIC and NCUA-insured institutions