1st Nov

Retail Bond Market Tops £1bn in 2012

With bank lending remaining scarce, the recent trend towards companies raising finance from their customers by issuing retail bonds has continued apace such that total issuance is set to exceed £1bn 2012.

Recent issues from property developer St Modwen and the London Stock Exchange (LSE) are expected to raise at least £350m, which will increase the total of all issues to almost £1.3bn for in a year for the first time.

The LSE’s Order Book for Retail Bonds (Orb) platform, where retail bonds trade, was launched in February 2010 and about £2.5bn has now been raised from retail investors looking for higher-yielding investments and guaranteed returns.

Larger companies such as Royal Bank of Scotland, Tesco Bank and National Grid started the trend by issuing bonds in multiple tranches, but in recent months it has attracted a more diverse range of mid-market companies such as interdealer broker ICAP and specialist lender Intermediate Capital Group.

Although still small by comparison, the UK market appears to be mirroring developments in Italy and Germany where retail bonds markets are large and fully functioning. Concerns around illiquidity in the secondary market are being addressed by the issuers.

Demand for the products has been stoked by the low yield on government bonds and low bank rates, which makes the more than 5 per cent coupon typically available on retail bonds relatively attractive. As well as a favourable coupon level, investors have been attracted by relatively low minimum investment requirements – typically about £2,000 – and, in some cases, structures that protect against inflation. In addition to offering attractive and guaranteed rates of return to investors, the issuing companies benefit from a more diversified funding base.

The LSE bond achieved its £300m target last week and closed the offer despite the fact that it is not issued until November 2nd. The 4.75 per cent coupon on the bond reflects the relative security of the issuer. St Modwen, which owns the Elephant & Castle shopping centre in south east London, is aiming to raise between £50m and £100m from an issue of unsecured bonds offering investors a 6.25 per cent coupon, maturing in November 2019.

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