Future Renewables Eco PLC (FRE plc) – unregulated renewable energy bonds paying 7-10% per annum

Future Renewables Eco plc (FRE plc) offers 3 and 5 year unregulated bonds paying interest as follows:

• 3 year bonds:
  • £7,500 – £24,999 – 7%pa interest paid biannually or annually, or 6.999%pa if interest is deferred and paid out at the end of the term. (The literature states 7.5% interest for the deferred option, however a footnote states that this is simple interest. 7.5% simple interest paid after three years is equivalent to 6.999% Compound Annual Growth Rate.)
  • £25,000 – £49,999 – 8% interest paid biannually or annually, or 7.9% interest if deferred and paid out at the end of the term. (8.5% simple interest paid out after three years = 7.9% CAGR)
  • £50,000 + – 9% interest paid biannually or annually, or 8.7% interest if interest is deferred and paid out at the end of the term. (9.5% simple interest paid out after three years = 8.7% CAGR)
• 5 year bonds:
  • £7,500 – £24,999 – 7.5%pa interest paid biannually or annually, or 6.96%pa if interest is deferred and paid out at the end of the term. (8% simple interest paid out after five years = 6.96% CAGR)
  • £25,000 – £49,999 – 8.5% interest paid biannually or annually, or 7.7% interest if deferred and paid out at the end of the term. (9% simple interest paid out after three years = 7.7% CAGR)
  • £50,000 + – 9.5% interest paid biannually or annually, or 8.4% interest if interest is deferred and paid out at the end of the term. (10% simple interest paid out after three years = 8.4% CAGR)

The front page of the literature states “7-11%” returns but the highest headline rate of return, even on a simple interest basis, is the 10% paid to those who invest more than £50,000 in the 5 year option and roll up interest. I could find no mention of how investors can earn 11% from FRE bonds anywhere in the literature.

Furthermore, £50k+ investors in the 5 year deferred interest bond do not receive 10% returns. They receive 10% simple interest, but 10% simple interest paid out after five years (i.e. £75,000 on an investment of £50,000) is an annualised compound growth rate of 8.4%.

The use of compounded annual growth rate to represent the rate of return is universal in the finance industry. This is because those who elect for annual or biannual income can reinvest their interest payments, which those who elect for deferred income cannot.

The highest return available from FRE’s bonds is therefore 9.5%pa, the interest paid out to £50k+ investors in the 5 year bonds who elect for income paid out.

Why investors receive a lower rate of return for electing not to receive income is not clear. In most investments, investors who elect not to receive income receive a higher return to reflect the fact that they are exposed to more risk. For illustration only, if FRE defaults just before the end of the five year term and no money is recovered for investors, biannual income investors have at least received 42.75% of their money back (9 biannual payments x 9.5% / 2) whereas deferred investors lose all their money.

FRE is not the first issuer of unregulated bonds to apparently ignore how compound interest works when setting its bond coupons, but it is the most egregious example I have come across so far.

Given that FRE bonds should only be marketed to high-net-worth and sophisticated investors, I have to ask how many high-net-worth and sophisticated investors, and their professional advisers, are likely to overlook this point. A return to the drawing board may be necessary if FRE expects any sophisticated investors to opt for deferred income.

Who are FRE plc?

FRE’s website and the literature lists the directors as Gerry Woods (CEO) and Brian Duffy (Finance Director).

Future Renewables Eco plc was incorporated in May 2015, and is 100% owned by Future Renewables Eco Energy Ltd, which in turn has three shareholders: Jadenorth Properties Limited 45%, Bananas Consulting Ltd 45% and Anne Sellar 10%.

Jadenorth Properties is equally owned by Yvonne Duffy and Carolyn Paterson, presumably the wives of Bryan Duffy and Walter Paterson, who are listed by Companies House as having significant control. Bananas Consulting is wholly owned by Mark Eprile.

This means the ultimate controllers of Future Renewables Eco plc are as follows: Mark Eprile 45%, Bryan Duffy (via his wife) 22.5%, Walter Paterson (via his wife) 22.5% and Anne Sellar 10%. Mss. Duffy and Paterson are not registered as directors or mentioned anywhere in the literature, and it can safely be assumed that they do not exercise day-to-day control of the company and hold the shares for tax-efficiency reasons.

Gerry Woods and Brian Duffy were previously director and secretary respectively, and both shareholders, of Marlborough Residential Finance, a company which owned four adjacent properties in the Scottish countryside outside Perth. Marlborough Residential Finance defaulted on its debts in January 2017, owing £2.4 million to its secured creditor (Clipper Holdings who bought the debt two months previously from Allied Irish Bank). It is currently in administration.

How safe is the investment?

These investments are unregulated corporate loans and if FRE defaults you risk losing up to 100% of your money.

The purpose of the loan is to allow FRE to acquire wind turbine sites that benefit from government subsidy.

If FRE fails to receive sufficient money from the Government and other customers for its wind energy, or for any other reason FRE has insufficient money to service these bonds, there is a risk that they may default on payments of interest and capital to investors.

Asset-backed security

Following the acquisition of a wind turbine site, FRE “will grant a fixed charge over the Project Site and any assets subsequently built on or affixed to the Project Site” to a Security Trustee who will hold these assets in trust for the bondholders.

Investors should not assume that because their loans are secured on these assets, they are guaranteed to get at least some of their money back through sale of the collateral if the issuer defaults. Investors in asset-backed loans have been known to lose 100% of their money (e.g. Providence Bonds and Secured Energy Bonds) when it turned out that the collateral was insufficient to pay investors after paying the insolvency administrator (who always stands first in the queue).

We are not in any sense implying that the same will happen to investors in FRE plc, only illustrating the risk that is inherent in unregulated corporate loan notes even when they are asset-backed.

If investors wish to rely on this security, it is essential that they undertake professional due diligence to ensure that in the event of a default, these securities are valuable and liquid enough to raise sufficient money to compensate all investors, as well as any other creditors that FRE plc has borrowed money from.

Overdue accounts

At time of writing, Future Renewables Eco plc is nearly three months overdue with its accounts, which were due to be filed on 31 December 2017.

This is not the first time; FRE’s June 2016 accounts were filed over four months late in May 2017, and FRE survived a compulsory strike-off notice in January 2017 after somebody objected (probably HMRC, possibly another creditor).

By not filing its accounts on time, FRE risks a further strike-off notice from Companies House, and the directors also risk a criminal prosecution. If Companies House files a strike-off notice and after two months the company has still failed to file accounts and no objections are received, the company is dissolved and all its assets become property of the Crown.

Should I invest with FRE plc?

This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.

As with any unregulated corporate bond, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.

Any investment offering up to 9.5% per annum yields should be considered very high risk. As an individual security with a risk of total and permanent loss, FRE plc’s bonds are higher risk than a diversified portfolio of mainstream stockmarket funds.

This particular bond is described as asset-backed. Before relying on the security backing the bond, investors should undertake professional due diligence to ensure that in the event of default, the security could be easily sold and would raise enough money to compensate all the investors, after the adminstrator deducts their fees and any higher-ranking borrowers are paid.

Before investing investors should ask themselves:

• How would I feel if the investment defaulted, the sale of the security failed to raise enough money to compensate all investors, and I lost 100% of my money?
• Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
• Have I conducted due diligence to ensure the asset-backed security can be relied on?

If you are looking for a “secure” investment or one which is backed by the Government, you should not invest in unregulated products with a risk of 100% capital loss.

Given that basic due diligence into a loan investment would start with reviewing the company’s accounts, investors should also exercise extreme caution when investing in a company that has failed to file accounts on time.