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Amerco social lending idea targets small investors

Originally posted 03/17/2012 on by Russ Wiles.  Read the original article at

Amerco, the parent of U-Haul International, is offering a series of collateralized bond investments, called U-Notes, tied to its need to buy trucks, trailers and equipment and finance rental centers and other real estate.

Inspired by the social-lending movement that matches lenders to borrowers without any intermediaries, you lend directly to the firm through a dedicated website,

"The concept is to connect lenders and borrowers in a more direct fashion," said Jim Shoen, an Amerco vice president and champion of U-Notes.

Amerco is paying bondlike yields ranging up to 8 percent or so, depending mainly on years to maturity. U-Notes are registered like regular bonds with the Securities and Exchange Commission, so you can pull down a prospectus filled with the usual financial and legal details. The maturity of a particular U-Note is tied to the expected life of the underlying asset, with real estate having the lengthiest terms.

The notes could foreshadow a trend where more corporations reach out directly to the public to fill some of their financing needs, by way of the Internet.

From Amerco's point of view, dealing directly with investors reduces its reliance on Wall Street.

"The capital markets are fickle," Shoen said.

During the worst of the financial crisis, for example, Amerco raised only about 30 percent of the capital it wanted.

"When we don't get access to capital, we have to run our equipment longer, which can lead to higher maintenance expenses and lower customer satisfaction," he said.

The company also faces fewer legal restrictions on U-Notes than with traditional-bond offerings, partly because it wrote the rules. For example, conventional bond issuers that fail to meet certain financial requirements, known as "covenants," can trigger a technical default, even if they continue to make payments on their bonds. Amerco specified with its U-Notes that a default would occur only if it missed payments, Shoen said. As another example, Amerco can redeem U-Notes at any time without prepayment penalty, he said.

There are other peculiarities to U-Notes. One is a $100 purchase minimum, which is well below the entry point for most bonds or even bond mutual funds. Another is that you must sign up for the U-Haul Investors Club, though there are no fees to join. So far, the club, little more than a year old, counts about 500 members, who have bought nearly $14 million worth of U-Notes.

"We wanted it as simple as possible, with no hidden costs," Shoen said.

There's no resale market for the bonds, so you should plan to hold until maturity. But if you can find a buyer, you're allowed to sell to other club members, paying a $25 transfer fee.

Be aware that the interest payments you receive on a particular bond come with a return of capital. In other words, you get your principal back gradually over the course of the investment, not at the end, in a lump sum.

The ability to buy U-Notes is open to U.S. citizens age 18 and up, though custodial accounts can be established for minors. The bonds also can be held in individual retirement accounts or in business and trust accounts.

Buyers need Internet access and either a savings or checking account because all transactions are conducted electronically. One interesting feature is that the website provides a payment schedule, so you can see how much you'll get back, and when.

The bonds are asset-backed securities, and buyers choose which type of U-Haul equipment, vehicles or real estate they want as collateral. Current offerings are tied to trailers, appliance dollies and various U-Haul rental facilities.

While collateralized, the bonds ultimately are backed by parent Amerco. The company is heavily leveraged through bank loans and leases, Shoen said, but doesn't have any traditional bonds out there.

Amerco also doesn't have an independent bond-market rating, Shoen said, but there are other ways to gain a sense of its creditworthiness. For example, researcher Morningstar Inc. currently gives Amerco a "B" for profitability and a "C" for growth.

Even if you don't plan to buy U-Notes, it might pay to gain familiarity with this type of social-lending investment.

"We think it could be common 20 years from now," Shoen said.