By Philip Gilbert, Beaufort Securities
In February 2010, the London Stock Exchange launched its new
electronic bond market for retail investors, the Order Book for Retail Bonds
(“ORB”)
The background to the reason behind the launch was two-fold;
increasing private investor focus on fixed income, and corporate funding needs.
In reality, both were a consequence of the Global Financial Crisis; historical
low interest rates led investors to chase yield, and the deterioration of bank
balance sheets lead to them stopping lending, particularly to “smaller”
companies.

One of the Key aims of ORB was to develop an efficient,
transparent secondary market in bonds for UK investors and to establish a
primary market for distribution of dedicated retail bonds, opening up new
sources of capital for companies seeking to diversify their funding
In addition to offering more than 180 retail-size bonds on
the platform, ORB is now established as an alternative source of funds for a
wide range of corporates. There are now in excess of 50 ORB-dedicated new
issues and 6 taps of existing ORB issues that have raised more than £4.75
billion for 28 different issuers.
ORB has successfully enabled:
-
A diversified investor base - increasingly
strong demand for retail bonds from retail brokers, wealth managers and private
investors
-
An alternative source of funding for issuers
-
Flexibility - the size of a retail bond can be
tailored to meet issuers’ particular needs; issues have ranged from £20 million
to £300million
-
“Simple” structures for retail investors to
assess
However ORB issuance has diminished overtime:
Year
|
Amount raised (£m)
|
Number of Issues
|
Number of new Issuers
|
2015 (yr.-to-date)
|
262
|
4
|
2
|
2014
|
476
|
5
|
4
|
2013
|
810
|
8
|
7
|
2012
|
1, 400
|
15
|
12
|
2011
|
1,250
|
11
|
5
|
2010
|
240
|
6
|
3
|
The key columns here are the number of Issues and the number
of new Issuers coming to market each year. 2012 was the halcyon year, since
then there has been a steady decline, what explanations are there for
this?
• Cost –
the necessary documentation and legal costs required to support an issue are
considerable, £200,000 would be a conservative estimate.
• Regulation
– ORB, quite correctly, is viewed as the “blue chip” listing, as such it can be
difficult for an issue to match the criteria required.
• Size –
because of cost it can be
- uneconomical
for issues of less than £25m.
- difficult
to get the support of market-makers which is a prerequisite of listing on ORB
Whilst supply has fallen there has been no diminution in
investor demand, in the fact quite the opposite:-
“Mini bonds are part of the so-called UK alternative finance
market…..
-
Issuance grew by 91% from £492 million in 2012
to £939 million in 2013, according to The Rise of Future Finance: The UK
Alternative Finance Benchmarking Report by Nesta, the University of California
and the University of Cambridge.
-
The study discovered that more than 647,000
projects, individuals or business financing campaigns were fully funded through
alternative finance intermediaries. When compared to 2011 and 2012, in which
the figures were around 448,000 and 503,000, respectively
-
Based on the average growth rates between 2011
and 2013, we can cautiously predict that the UK alternative finance market will
grow to £1.6 billion next year and provide £840 million worth of business
finance for start-ups and SMEs in 2014.
Source: Moneywise 2nd September 2014
Whilst mini-bonds serve the needs of investors seeking
greater income from their investments, and have successfully allowed “smaller”
issuers to access a debt market, they do have shortcomings when compared to ORB
issues, such as:
-
Liquidity: There is, at best, a very limited
secondary market, requiring them to held to maturity
-
They do not have the same levels of transparency
and disclosure required of ORB issues as they are not written under the full
prospectus required by EU law
-
Currently, they do not qualify for ISA
investment
The net effect of all this has been to create a two-tier
retail bond market that, possibly, doesn’t reflect what investors actually
want. ORB has delivered considerable benefit to investors allowing them to:
What is hasn’t achieved is sufficient supply to meet the obvious
demand. Mini-bonds have achieved the opposite,
What is the ideal solution? Is a different market to list
onto where smaller issues, possibly £10m plus, can be listed with the
disclosure standards required by ORB? Whatever the solution, it must find a way
to serve some of the issuers that have used the mini-bond route whilst offering
investors the protection afforded by the disclosure and transparency of a full
prospectus. Only in this way, can we ensure that investors have the benefit of
plentiful supply and sufficient visibility to fully assess the loan they are
making.
Philip Gilbert
Philip Gilbert is Head of Fixed Income & Structured Products at
Beaufort Securities www.beaufortsecurities.com.