Hotel Chocolat bond: earn 7.33% a year from chocolate

If you have a sweet tooth, and fancy a bit of diversity in your investment portfolio, then a Hotel Chocolat Bond may be to your taste. Unusually, this three-year bond doesn't pay cash coupons as other corporate bonds do. Instead, your yearly returns - of up to 7.33% - come in the form of chocolate treats.

What is a corporate bond?

A corporate bond is a company IOU issued by a business to raise funds for itself. In effect, it's a loan to a firm, for which investors receive 'coupons' (regular cash payouts on their investment, usually yearly or half-yearly). After a fixed period such as three, five or 10 years, the loan is repaid and bondholders get back their original investment at 'maturity'.

In this post-crash economic environment, more and British businesses are raising money by issuing bonds aimed at private investors seeking higher income yields. Some of these retail bonds are listed on the London Stock Exchange and can be bought and sold like shares during market hours. Others are unlisted and non-transferable and, once in, investors are locked in until maturity.

One big risk with bonds is that, unlike UK savings accounts, they are not protected by the Financial Services Compensation Scheme (FSCS). This government-backed safety-net covers 100% of the first £85,000 on deposit per account holder per savings institution. Without the protection of this safety-net, bondholders can - and sometimes do - lose all of their investment.

When a company becomes insolvent and goes under, its bondholders can lose every penny they invested when buying its debt. This credit risk, plus the risk of default (when a bond issuer fails to pay its coupons and/or final repayments, are the greatest dangers faced by bondholders.

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Payment in kind

In many respects, Hotel Chocolat Bonds are bog-standard bonds aimed at private investors. However, the really unusual thing about these bonds is that they pay no coupons in hard cash. Instead, they are payment in kind (PIK) bonds whose yearly returns are paid in chocolate goodies.

[SPOTLIGHT]Here are the particulars of both cocoa-based bonds on offer from Hotel Chocolate, which are three-year, fixed-term investments. Both bonds are unsecured debts, so there is no earmarked cash or hard assets backing them as security.

The Hotel Chocolat Bond

The first type of bond, the Hotel Chocolat Bond, pays yearly 'interest' of 7.25% before tax. The minimum investment is £1,000 and the maximum is £50,000, rising in increments of £1,000.

Interest is paid in Hotel Chocolat Cards, which you can use at Hotel Chocolat stores, cafés and restaurants throughout the UK mainland, online and for mail-order purchases from Hotel Chocolat and the Chocolate Tasting Club.

You can also use your Card at the Boucan restaurant and hotel in Saint Lucia, but not at Hotel Chocolat outlets in John Lewis and the Channel Islands, or in Hotel Chocolat venues outside the mainland UK except in Saint Lucia.

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The Tasting Club Bond

The second bond, the Tasting Club Bond, pays yearly 'interest' of 7.33% before tax. Investors can buy bonds for either £2,500 or £5,000, up to a maximum of £10,000 in total.

The £2,500 bond pays interest in the form of Tasting Club boxes. Each year, bondholders receive six regular Tasting Club boxes, plus the annual Excellence ‘Best of the Best’ Selection, all free of charge. Holders of the £5,000 Bond receive 13 regular Tasting Club boxes each year, plus the annual Excellence Selection, again free of charge.

Each Tasting Club boxes is priced at £20.95 for long-established members, but newer members pay more. At an interest rate of 7.33%, the £2,500 Bond pays a yearly return of £183.31, while the £5,000 Bond pays £366.62, both before tax.

The taxman takes 20%

The net interest on Hotel Chocolat Bonds will be paid on or before 31st October each year, starting in 2014, and investors receive the full amount, even in the first year. However, even though bondholders are paid in chocolate, the taxman still wants his share, so HM Revenue & Customs makes Hotel Chocolat deduct tax at source.

So taxpayers who buy a Hotel Chocolat Bond get only £58 per £1,000 invested credited to a Hotel Chocolat Card each year. This is equivalent to a 7.25% return minus 20% basic-rate tax, which comes to 5.8% a year. Non-taxpayers can get the full £72.50 per £1,000 invested (7.25% a year) by completing a tax certificate available from Neville Registrars.

[SPOTLIGHT]As for Tasting Club bonds, they pay a return of £146.65 on the £2,500 bond and £293.30 on the £5,000 bond, after basic-rate tax at 20% is deducted.

Investors can choose to buy and hold these bonds inside a self-invested personal pension (SIPP), which makes their returns tax-free. However, they cannot be stored inside an ISA.

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Does this bond sound tasty to you?

By selling these new bonds, Hotel Chocolat will use the funds raised to expand its manufacturing and retail operations, fund international expansion, increase employment (it already employs over 1,000 workers in the UK) and further develop Rabot Estate, the firm's cocoa plantation in Saint Lucia.

Obviously, if you have never invested in bonds before, or have debts or little in the way of savings, then this bond definitely isn't for you. However, if you have a diversified portfolio and fancy a sweet treat from time to time, then you can apply online at apply.chocolatebonds.com. This bond offering will close at 5pm on Monday, 9 June (or before, if the issue raises the full funds of £10 million).

Remember that these bonds are non-convertible and non-transferable, so they are personal to you and cannot be sold or passed on to someone else. In effect, once you buy one of these bonds, you and your money are locked in for at least three years. That said, 93% of the holders of Hotel Chocolat's original bonds issued in 2010 are still holding onto their investment, with only 7% redeeming their bonds since they matured two years ago.

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