1st May

Retail Bond Boom to Continue Despite Crowded Market

The race is still on: mid-sized UK companies are still rushing to the retail bond market in hopes of tapping into strong demand for debt instruments that yield more than your average blue-chip bond. 

Last week, racecourse operator The Jockey Club jumped on the bandwagon, promising potential investors an annual return of 7.75% in an attempt to raise £15 million. 

The plan clearly aims to ride the latest wave of interest in retail bonds: the coupon is only partly paid out in cash – some of it will come in the form of discounts on online purchases – and the bond will not be listed on the LSE's order book for retail bonds. 

Although mid-market investment bank Investec is not involved in the Jockey Club deal, it is a market leader in UK retail bonds with 7 transactions under its belt including the largest ones carried out by the likes of Provident Financial, Severn Trent and Tesco Bank. 

A boon for the unit

The unexpected surge in retail bonds has been a boon for Eden Riche, Investec’s head of global debt capital markets, who joined the bank 2-and-a-half years ago. "My remit coming into the bank was to build a debt origination team from scratch," he recalls. Up until then, the bank was focused on balance sheet and advisory relationships with corporate clients. Its capital markets activity was strictly limited to equities. This has changed considerably. In late 2011, the bank acquired investment banking firm Evolution Securities, giving it a strong presence in the retail bond space when the market was just beginning to take off. 

The other 2 areas Riche's team of 8 focusses on are private placements and mid-sized, high-yield bonds, although they have yet to complete transactions in either of them. "[Private placements and mid-sized bonds] have longer lead times and they tend to follow balance sheet lending," Riche says. "It's more difficult to get corporates off of that link, so progress has been slower." Even though Investec does lend money to companies, this only tends to be for special purposes such as project finance. The companies that it helps with bond issuances typically do not have a lending relationship with the bank. 

Winning customers is nonetheless possible, even in those areas, Riche insists, thanks to reliable and long-standing relationships built up by other parts of the business. "We have a very strong investment banking franchise with 100 retained clients, many in the FTSE 250, so we're getting many great intros," he says.

Not just retail bonds

Despite the obstacles, a single-minded focus on the retail bond market is out of the question for Riche's unit. "We want to retain our position in the retail bond market, but the market is always going to be a niche market, which acts as a natural limit to our ambition," he says. "That’s why we have to be active in the wholesale markets too.

"The retail bond market is already getting crowded, Riche admits. "I believe we reached natural capacity in retail bonds last year," he says, adding that just keeping that pace will be hard to pull off this year. "There haven't been as many deals this year to date as last year," he points out. "It's hard to do more than 1-2 [retail bonds] per month, so 15 for this year would be nice.

"The surging interest in retail bonds has also meant that some CFOs may have been over-eager to tap the market. Last November, Stobart tried to raise money in the market, only to be rebuked by investors who took issue with the small volume and tight pricing of the bond. To avoid the embarrassment of a botched issue, Riche advises companies to aim for a volume of at least £50 million to ensure sufficient liquidity. He also believes the issuer should have an Ebitda to interest ratio of 2:1, and the bond volume shouldn't exceed Ebitda by more than 5 times.    

Still a lucrative market

That notwithstanding, Riche is convinced that the retail bond market will continue to be a lucrative place for Investec to be. "The market is able to satisfy our margin expectations. We expect a lot more issuers coming to the market, and not just our retained clients and also from other geographies," he says hopefully, adding that, "[A]lthough volumes may be smaller, fee levels are higher in the high-yield space so the cash economics tend not to be far off from the big investment grade deals.

"Perhaps unsurprisingly, Riche is also upbeat about eventually crowning the sales efforts flowing into private placements and mid-sized bonds with success. "I'm also hoping to sell in the two other products categories, which we're pushing aggressively," he says, putting slightly more hope into the bonds. "Selling the mid-sized bonds seems more likely as institutional investors seem to be more comfortable with a listed security that they can trade more easily. We expect several transactions in this space here before the end of the year," he says. 

"This story was first published by CFO Insight. Read HERE


Posted on 20/10/2013 04:45:32

You should have some cernocn. If interest rates are above the coupon rate for the bond, you should demand original issue discount, i.e. pay a price below par value. Also, if you cannot hold the bonds until maturity, higher interest rates will depress their value at the time.

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