12th Feb

Celebrating Three Years of ORB and £3bn of Funding

London Stock Exchange

Retail Bond Expert is proud to have taken part in celebrations at the London Stock Exchange today (Tuesday 12th February) to mark the third anniversary of the Orderbook for Retail Bonds (ORB).

CEO of the LSE Group, Xavier Rolet, welcomed guests to the event CEO of the LSE Group, Xavier Rolet, welcomed guests to the event

CEO of the London Stock Exchange Group, Xavier Rolet, welcomed guests to the prestigious event by extolling the virtues of an Exchange that has delivered transparency, cost efficiency and diversity to a new community of borrowers and retail investors. 

Rolet expressed his gratitude to the UK Government for its support of the bourse and particularly its decision to waive stamp duty and the €15,000 minimum investment that delivers the potential for ORB to mirror the stellar performance of the MOT market in Italy. 

With a theoretical minimum investment of £1, Rolet said that ORB offered investment opportunities to genuine retail customers who were able to see the true value of the debentures on offer and weigh the long term prospects of the companies in which they were investing. 

"ORB offers investment opportunities to genuine retail customers who are able to see the true value of the debentures on offer" – Xavier Rolet

The UK market has seen a total of 172 issues raising a total of £3bn; half of this total has been raised in the last twelve months and daily trading volumes have increased five-fold over the period. By way of context, if not implied potential, he reported that the MOT market in Italy averages €1 - €5bn per day and in 2011 traded €700bn of fixed income debentures.  

Rolet moistened the palate of those assembled by asserting that ORB had the potential to exceed the liquidity and depth of products of MOT mart, thereby alluding to the massive potential that he believes to exist.   

Sajid Javid, Economic Secretary to the Treasury added his congratulations Sajid Javid, Economic Secretary to the Treasury added his congratulations

By way of thanking the UK Government for its continuing support, Rolet then welcomed keynote speaker Sajid Javid, Economic Secretary to the Treasury. 

Mr Javid added his congratulations to all those associated with ORB, announcing that its third anniversary coincided with his own as an MP following twenty years as a banker. He echoed the belief of the coalition that it is vitally important that the UK remains a leading financial centre and that ORB adds diversity to investors and financiers alike to support, in particular, small and mid-cap companies seeking alternative sources of funding.   

Next up was industry veteran Michael Dyson, MD of Fixed Income Products at Numis Securities  who wrestled with the thorny issue – ‘A Bond Bubble? Should we be Worried?’ 

“It is vitally important that the UK remains a leading financial centre and that ORB adds diversity to investors and financiers alike” –Sajid Javid

Seemingly without a sop to the sensitivities of the assembled throng, he appeared determined to dampen the mood by discussing such nightmare scenarios such as ‘Bondmageddon’ and ‘The Great Rotation – Does it Matter’ ..........Frowns from the bleachers suggested that it did. 

Battling on with a backdrop of his younger self who had apocryphally experienced bond yields of 12% in the early nineties, Dyson contended that now that real returns on ten year gilts had turned negative, retail investors had three key concerns when considering retail bonds as a potential investment:   

Low Return

Market Risk

Credit Risk

 Michael Dyson, MD of Fixed Income Products at Numis Securities  who wrestled with the thorny issue – ‘A Bond Bubble? Should we be Worried?’ Michael Dyson, MD of Fixed Income Products at Numis Securities

His salvation, and passion for his subject, became evident when Mr Dyson compared the return of a retail bond held to redemption with that of a Cash ISA as well as similarly dated gilts. 

The evidence presented was impressive, and even when annual increases in interest rates were factored in, the case for the retail bond still appeared compelling – perhaps the most striking statistic being that because of the coupons that are paid along the way, the bond would have to trade at lower than 63 (issued at 100 or ‘par’) before the investor lost money in real terms. 

Having choked off the seeds of doubt that he had so calculatingly sewn in the auditorium, Dyson then went on to display the minimal risk of default of investment grade bonds as witnessed by Moodys and concluded that whilst never risk-free, chosen carefully, retail bonds were unlikely to be discounted as an investment purely on the basis of credit risk. 

“whilst never risk-free, chosen carefully, retail bonds were unlikely to be discounted as an investment purely on the basis of credit risk”. – Michael Dyson

With the home crowd firmly back on side, Dyson concluded by saying that we may or may not be at the end of a bull market for retail bonds, but with pricing at par, new sectors coming in stream as witnessed by EnQuest and choice in terms of coupon and the time to maturity, the retail bond sector should continue to offer interest in the future.

‘The Investors’ Perspective’

With a tangible sense of relief Panel Discussion ‘The Investors’ Perspective’ was launched.

  • Russ Mould (RM), Editor at Shares Magazine was charged with moderating:
  • Patrick Gordon (PG), Killik & Co
  • Bryn Jones (BJ), Rathbones
  • Peter Smart (PS), Brewin Dolphin
  • Chris Stevenson (CS), Barclays Stockbrokers
  • RM kicked off by asking if the appetite for retail bonds that was seen in 2012 is perpetuating.
  • CS ‘2012 was very successful and we are expecting a strong, steady 2013. Execution Only (XO) demand has been high and is set to continue to be so based upon the quality of product on offer and simple and effective communication’.
  • PS EnQuest was well received by discretionary, advisory and XO clients alike – ‘all made room; fixed income should play a part in all portfolios’
  • BJ There is a constant source of investable cash from maturing bonds. Clients with anything up to £2m to invest can be excluded from participating in wholesale bond issues because of minimum denominations of up to £100k, and have been wary of an alternative investment in funds due to concerns over liquidity and cost.
  • PG Retail bonds have been receiving much attention, and have attracted investment from those exiting bond funds.
  • RM asked if investors were taking advantage of tax wrappers when investing in retail bonds.
  • CS Tax wrappers dominate for those purchasing retail bonds – 50% are held within an ISA and 20% within a SIPP with SIPPs seen as the growth market.
  • PG ‘Index linked bonds sit well in a tax wrapper’ and the demographic is compatible with those operating a SIPP.
    The panel considered the potential for treasury exemption of index linked bonds outside a tax wrapper.
  • BJ Suggested to issuers that it might be attractive to add a floor to index linked products – such as the post meltdown RBS 3.9% guarantee – by sacrificing some upside.
  • PS ‘Floating rate notes make perfect sense if the spread is sensible’ suggesting that retail investors would be attracted if returns were linked to LIBOR.
  • RM probed the increasingly contentious issue of the importance of ratings
  • CS Said that Barclays Stockbrokers always opined upon the benefits of a balanced portfolio, and that included a balance between rated and non-rated retail bonds.
  • PS Considered ratings to be very important – ‘we need a ratings agency in this market’. This was considered particularly important for discretionary and advisory managers, and PS called upon the Treasury to ensure that a lack of rating does not inhibit the growth of the market.
  • BJ Rathbones will consider a position of up to 8% of a rated bond, but without senior sign-off will not exceed 3% on an unrated bond. BJ questioned whether Rathbones should cover the cost of analysis or whether it should be covered by reducing return and closing the spread. He also sounded the warning ‘if there’s a collapse, there will be litigation in this space’, going on to say that ratings help markets grow.
  • PG Said that non-rating was not an issue for household names but was otherwise time-consuming and thereby expensive for analysts.
  • RM asked how easy it was to analyse a retail bond ?
  • BJ There needs to be a ‘rating-lite’ fact sheet to support each launch.
  • CS Something like a Key Investment Document should be used to standardise data for the retail investor.
  • RM asked if the panel believed that retail investors understood the risks associated with investing in retail bonds.
  • PS Echoed the belief of Retail Bond Expert that there is a ‘great need’ for investor education, and that there ‘must be’ a ratings agency.
  • A question from the floor asked the panel to consider the potential role of the FSCS in indemnifying retail bond investments.
  • PG Questioned who should pay for such a surety – should it come out of the coupon, and if so would it remain attractive?
  • PS ‘This is an investment market, and it should be treated like any other’
  • BJ Was less sure – ‘there’s no place for it’

‘The Lead Managers’ Perspective’

Henrietta Podd, Canaccord Genuity headed the Lead Managers perspective Henrietta Podd, Canaccord Genuity headed the Lead Managers perspective

After a break Panel Discussion – ‘The Lead Managers’ Perspective’ was introduced by Henrietta Podd (HP) of Canaccord Genuity, and featured:

  • Stuart Bell (SB), IDCM
  • Marcus Coverdale (MC), Lloyds Bank
  • Eden Rich (ER), Investec
  • HP Said that ORB is now a reliable and predictable source of capital and that the market was now diverse and the retail market stays open when wholesale markets close down. She said that the retail bonds were now a very good source of medium term funding (5-10year) and that a wide range of mini markets and credit structures were on offer.
  • SB Wholesale markets are now very regimented in terms of the way they operate.
  • MC We need to ensure that this is a sustainable market with standardised market practices.
  • ER Said that investors do not want low coupons, which mean that larger companies will not join the market. He felt that there needs to be an arbitrage between small and risky investments and large and seemingly unattractive offerings. ER believes that enlisting the support of a body such as APCIMS would add structure and stability to the sector.
  • HP asked what was a ‘suitable investor’ ?
  • SB Called for transparency – ‘this is what you are getting; this is the risk you take – the retail market should be self-regulating’
  • HP Said that she would like to see the convergence of wholesale and retail markets in terms of processes and book-building periods. Answers from the floor suggested that offer periods could be reduced as education improves.
  • HP asked what type of issuers the panel thought would be attracted to the exchange as it develops?
  • SB Believed that markets will come together when central banks stop manipulating interest rates.
  • MC Said that retail bonds need to be considered as part of the bond market with the same standards as institutional business; 2013 will show consolidation and a rush to SMEs would be ‘dangerous’.
  • ER Thought that the listing of EnQuest was encouraging as it represented a new sector and proposed a pooled SME investment opportunity.
  • HP Wrapped by suggesting that the sector required consolidation in order to confirm retail bonds as a reliable source of funding and said that increased disclosure and harmonisation would confirm ORB as a mainstream and efficient market.

‘The Issuers’ Perspective

The Issuers’ Perspective was moderated by Richard Tice of CLS Holdings The Issuers’ Perspective was moderated by Richard Tice of CLS Holdings

Last up was Panel Discussion – ‘The Issuers’ Perspective moderated by Richard Tice (RT) of CLS Holdings; panel members were:

  • Simon Atkinson (SA), LSE
  • Graham Clement (GC), Workspace
  • Mike Dunn (MD), St Modwen
  • Gerard Tyler (GT), Severn Trent
  • RT kicked off by asking the panellists why they had chosen retail bonds as a source of funding?
  • SA As hosts of ORB, the LSE wanted to show its support of the exchange and was ‘delighted’ with the support it received. He believed that it was important that the coupon ‘made sense’ but also came in sub-5%, and with interest in the secondary market. The one-week book build to £300m gave great confidence that they had ‘got it right’.
  • GT The company had traditionally utilised wholesale sources but decided to try to raise £75m from the retail market in order to diversify its debt structure and also leave it the option to return for further tranches if required.
  • GC The Workspace issue was unrated and unsecured but the debt now trades at a premium and has allowed the company to get its story heard by a wider audience of potential equity investors.
  • MD Welcomed the opportunity to diversify from traditional bank lending, whilst propounding the need for a Key Features Document (Retail Bond Expert passim) in order to facilitate the objective comparison of issues.
  • RT rounded off by asking the successful issuers if they had any tips for those considering using ORB as a method of raising finance?
  • SA Ensure that you have as much information as you can have about potential competitive launches, and ensure that you clearly communicate your story vision and credit strategy to investors.
  • GC Understand what you can and can’t say, and craft your message to a retail audience.
  • MD Choose the right adviser and recognise this as a relatively straightforward and cost-effective way of raising finance.
  • GT Get the legals and prospectus right, and don’t under estimate the level of press and PR attention that an issue could generate.
  • RT Closed with an impassioned plea for issuers to avoid conflict in terms of timing if at all possible and negative campaigning at all costs in a competitive situation. He also called upon an issuers group to educate investors and raise the profile of the sector which is one of the founding pillars of Retail Bond Expert, and to support a credit rating system for issuers.
  • Gillian Walmsley, Head of Fixed Income at the LSE brought the curtain down by thanking all attendees and market participants, and painted an extremely positive picture as the retail bond market enters the next phase of its development. Whilst ORB may have some way to go before it warrants comparison with the MOT market in Italy, the very fact that Xavier Rolet draws parallels between the two gives great cause for optimism in the future.
  • Retail Bond Expert intends to be at the very heart of debate as the market develops, and we welcome comment and participation from all quarters so that issues can be addressed and discussed and that between us we can become a positive force for the promotion of retail bonds in the UK retail investment space.
Kevin Doran

Posted on 14/02/2013 18:12:05

Some interesting comments. For those perhaps unable to attend the London showing, Brown Shipley shall be hosting a Retail Bond Seminar at its Manchester Offices on 20th February @ 12:30pm. Featuring presentations from both Gillian Walmsley and Michael Dyson, there remain a limited number of places. To register interest, call Jane Cannon on 0207 606 9833

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