Looking for alternatives to equities?
A retail bond issue can be as much a profile-raising opportunity as a funding exercise
By Clive Gibbard, debt advisory partner, KPMG | CFO UK | Published 12:49, 10 July 12
Certain European markets have maintained active and liquid retail bond markets for years and are an established platform for companies to raise debt. But it is only recently that the UK has seen the launch of several bonds specifically targeting retail investors – and judging by recent issues it is with great success.
Interest in retail bonds from both investors and borrowers is growing quickly. Demand from UK retail investors is developing as they seek alternatives to traditional savings products and equities. And because long term structural change to the funding markets continues - impacting traditional financing routes - borrowers are seeking alternative funding options.
Two principal routes to market have come to the fore in the UK. The listed market has been assisted by the launch of the London Stock Exchange’s retail bond trading platform (the Order Book for Retail Bonds, or ‘ORB’) enabling trading in bonds with small denominations.
With Tesco Personal Finance, Places for People, National Grid and most recently Severn Trent counting among the UK issuers that have already accessed this market its growing popularity is clear.
The second route to market used by borrowers including John Lewis, Mr & Mrs Smith, Leon and Ecotricity, is the unlisted ‘mini bond’ route, which offers non-transferable bonds with issues typically targeted at raising funds directly from customers.
With more than £1.3 billion raised in the UK retail bond markets since the beginning of 2011 the market could provide meaningful opportunities for borrowers to diversify debt funding. But depending on a borrower’s objectives and circumstances relevance is likely to vary. An important factor in the continued development of the retail bond market will therefore be building borrowers’ understanding of the market’s key features – and whether a retail bond is right for their business.
For example, retail bond pricing is driven by different factors to other funding options and reflects the alternative products available to retail investors, such as bank deposits or equities, as much as credit risks.
Cost of funds can therefore vary compared to other sources of capital and across different debt maturities. This can result in retail bonds looking comparatively more expensive than other options, but in some cases pricing can be more attractive than that available in other markets.
Issue size is smaller than the institutional bond market, typically around £25 million to £150 million in the listed market and around £1 million to £10 million in the unlisted mini-bond market. Funding is therefore possible for companies without the scale normally associated with public bonds. This may be important where bank funding lines are unattractive or unavailable.
While National Grid’s £282.5 million bond indicates issues of scale are possible, small issues can be more accurately matched to borrower requirements and may reduce the over-funding inefficiencies associated with ‘benchmark’ issues.
With Provident Financial, Tesco Personal Finance and Places for People having completed repeat issues, the market continues to develop and is showing signs that it can absorb periodic multiple issues to allow substantial funding programmes over time.
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