Barclays and Synchrony 5 Year CDs Offer Attractive Early Termination Terms

Barclays and Synchrony 5 Year CDs Offer Attractive Early Termination Terms

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Early termination fees of only 6 months simple interest on the 5 year CDs offered by Barclays and Synchrony make these products more attractive than short term CDs and allow you to approach them as having the option to continue to earn 2.25% APY for as long as US interest rates rates remain low.

Author's Note: In late 2017, Synchrony changed the earlier termination fee on its newly issued and renewed 5-year CDs to 1 year simple interest from 6 months.

It is beginning to look like interest rates in the US may never rise.  Yield markets are no longer pricing in a move by the Federal Reserve in the summer of 2015, and most believe that any move to raise interest rates is going to be very slow and deliberate and will not bring interest rates near historical norms for the foreseeable future.  Low energy prices and global easing have removed any inflationary pressure.  Yellen is very dovish.

Against this backdrop, depositors need to look for ways to earn more than the rates that online banks are currently paying (see the best rates here).  Barclays Bank and Synchrony Bank both offer 2.25% APY online certificate of deposit (CD) products.  As both CD products offer early termination fees of only 6 months simple interest, they essentially give a depositor the option to terminate the CD with very acceptable consequences when and if rates begin to rise.

Let's illustrate this with some numbers.  Assume you put $100,000 into one of these 5 year CDs.  Suppose that in one year's time rates have risen to a point where you are able to get a higher interest rate on a savings account or a short term CD than 2.25%.  You would have earned $2,250 in interest on your CD, but in order to release yourself from the obligation to hold the CD for four more years until maturity, you would be responsible for paying $1,125, half of your interest, as an early termination penalty.  The 1.125% that you will have effectively earned over the one year that you held the CD will outperform current online savings rates, and is just slightly less than the best one year CD rates (see these rates here).

And, if rates still haven't risen in one year, you continue to hold the CD until they do rise.  And, if the US is the new Japan and rates never rise, you will earn more than twice as much interest on your cash over than next five years than you would earn by staying put in even the highest yielding online savings accounts.

Note: You may be able to earn a higher rate on a 5 year CD than those rates mentioned.  Compare all five year CD rates here.  Also, you may wish to check with other banks as some banks may offer still less onerous early termination fees.

Editor's Note: As of the middle of 2016, both Barclays and Synchrony were offering 5-year CD rates below those mentioned in this article.  Additionally, Synchrony has now changed their teams and conditions so that 5-year CDs now have a 1-year early termination fee.


Solar Bonds Pay Up to 5.75%. What's the Risk?

Solar Bonds Pay Up to 5.75%. What's the Risk?

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On Facebook I saw an ad promoting a Solar Bond that paid up to 5.75%. Intrigued, I clicked over to learn the details. The good news is that the bonds are offered by Solar City, a legitimate, publicly traded company that is a leader in installing solar panels on houses and businesses. The company chairman is publicly traded on the Nasdaq at SCTY. Its chairman is Elon Musk of Tesla and SpaceX fame.

On Facebook I saw an ad promoting a Solar Bond that paid up to 5.75%. Intrigued, I clicked over to learn the details.

The good news is that the bonds are offered by Solar City, a legitimate, publicly traded company that is a leader in installing solar panels on houses and businesses. The company is publicly traded on the Nasdaq at SCTY. Its chairman is Elon Musk of Tesla and SpaceX fame. Mr. Musk is a bold visionary who exceeds at extracting an enormous amount of capital from investors with Herculean bets on the future. His track record at generating profits at the companies he is associated with is less impressive as neither Tesla or SpaceX are profitable at their core businesses - yet.

Their general model is for the company to pay for the cost of the installation and then lease the equipment back to the homeowner over a twenty-thirty year period. The savings that the homeowner generates on their electricity bill pays for the lease and often leaves some left over, providing an electricity credit to the homeowner. Government subsidies of up to 30% of the installation cost also help to make the installation more affordable for Solar City and the homeowner.

The company is offering several different bond terms. The current terms and their rates are listed below:

1 Year:   2.00%

3 Year:   3.00%

5 Year:   4.00%

10 Year: 5.00%

15 Year: 5.75%

These rates are for bonds purchased directly from the company via an online ordering system. I haven't tried the system so can't vouch for how hard or easy it might be to register and order. Investors can also purchase them through a broker but the rates are slightly lower.

These bonds are not FDIC insured and if the company goes bankrupt, bondholders could lose interest or even principal. Interest is typically paid semi-annually (twice per year) although it may vary according to bond type.

Should You Invest in Solar Bonds?

As of April 15, 2015, the best risk-free rate on an FDIC insured CD according to BestCashCow is close to 2.30% APY.  The rate on a five year Treasury Security is 1.31%. The five year muni bond average is a bit worse according to Bloomberg at 1.26%. The ten year yields show a similar spread. Solar City's offering is akin to a high yield bond, otherwise known as a junk bond. Now, the name doesn't mean the bond is junk, but it is risky. An examination of the company's income statement and balance sheet will illustrate the risk.

Solar City's 2014 annual report shows that the company had a net loss of $375 million versus a net loss of $96 million in 2013. Why the loss? The company had an operating profit of $79 million with a 30% operating margin. It's not a great margin but at least  they generated an operating profit. Their operating expenses, especially Sales and Marketing were responsible for the widening loss.  One way to look at this is that Solar City is in expansion mode and is paying heavily now to get as many panels on customer homes as it can. Once it does this, it will have a recurring revenue stream for the next 30 years, as consumers are not going to rip up the panels.  Sounds good. The only problem is that 30 years is a long time. New technology may arrive and make these panels obsolete. Or the utilities may change the way they buy back excess electricity from the homeowner. As a bondholder, you will have to be confident that no matter what the changes, the company will have enough cash over the time period of the bond to pay you interest and also principal.

The balance sheet shows the company has about $700 billion available in cash or cash equivalents to pay the bills. Looking at cash flow, the company used up $1.3 billion in cash last year, the biggest amount being used for payments for solar energy systems that will be leased.

You can see the entire SEC filing here:

http://investors.solarcity.com/secfiling.cfm?filingID=1564590-15-897&CIK=1408356

The company is a bet on whether it can successfully deploy and lease these solar energy systems in a way that generates enough positive cash flowing going forward.

Conclusion

Solar City is a promising company, but it is also a risky one with no history of profits. It could succeed spectacularly or it could also just as spectacularly crash and burn. Whether you invest and how much you invest depends on your risk tolerance.

If you are willing to stomach the potential of losing your investment and want the higher yield, then this might be an investment for you. The shorter term bonds obviously offer less risk.

If you want to be as assured as possible (is there really ever any assurance in life?) that you will receive your interest payments and principal back then this is probably not an investment for you.


Suze Orman Is Giving Bad Advice About Municipal Bonds

Suze Orman Is Giving Bad Advice About Municipal Bonds

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By and large, I think Suze Orman is great. She provides a great service in telling people with little in way of assets how to preserve them. But, I watched her recent presentation on PBS as part of their fundraising effort, and she was giving one piece of advice that is just dead wrong in the current rate environment.

On Suze Orman’s PBS special, she was telling her audience (the US middle and lower classes) that they should be buying 5 year municipal bonds with any money that they have available and want to safely park for the next five years.

While this advice is ordinarily very good counsel for those in the highest Federal and State tax brackets (not Suze Orman’s audience), it makes little sense at all in the current rate structure.  And, it absolutely makes no sense for Suze’s target audience.

Here is why:  A AAA-rated insured NY municipal bond which matures in 5 years is going to trade at 1.20% at the moment, if you have a broker who can find you one.   The fully taxable equivalent for someone who lives in NY City and pays 39% tax (Federal, State and NY City) is about 1.96%.   For someone who is in a lower tax bracket, the fully taxable equivalent will be lower.  An AAA-rated municipal bond in other high state-tax States like Illinois, California, Massachusetts, Georgia or New Jersey is going to trade roughly at the same level.  In States with low taxes, or no taxes, like Florida or Washington, you may be able to find a high quality 5 year municipal bond trading close to 1.50%, but in no case at the moment is a holder going to a fully taxable equivalent more than 2% on a safe municipal bond.

On the other hand, a fully FDIC-insured 5 year Jumbo CD issued by CIT bank currently pays 2.27% APY, and several online banks are offering 5 year CDs with rates as high as 2.25% APY.  Those rates are available nationally, but depending on where you live, you may find higher rates on BestCashCow that are offered in a branch by a local banks and credit union near you.

Unlike a municipal bond, the purchase of a CD – online or otherwise – ordinarily involves absolutely nothing in the way of a transaction fee (hidden or otherwise).  More importantly, while an investor may think that they do not need access to their money for five years, it is very possible that life circumstances can change and they could need to access it.  In the current interest rate environment, an investor could lose significant principal on a new municipal bond purchased today if rates rise (which is something Suze Orman realizes and her reason for cautioning against bond funds at the moment).  With a CD, that investor would only face an early withdrawal penalty, expressed in terms of interest although it may affect principal in the event of an extremely early withdrawal.   The CIT Bank and Synchrony Bank penalties for earlier withdrawal on a 5 year CD, for example, are only 12 months and 6 months, respectively.

Suze Orman’s advice is generally very good.  But, in recommending municipal bonds, she is wrong because she is not aware of the current bond and CD rates.  You can always remain up on the rates by checking them here.