26th Apr

Back to the Future – Numis Predicts a Positive Future for UK Retail Bond Market

At a well attended conference at the London Stock Exchange yesterday, prolific lead manager Numis Securities painted a very positive picture of the future prospects for the UK retail bond market. 

An eclectic mix of past and potential issuers, lead managers, brokers and wealth managers enjoyed a series of positive presentations from key industry participants and were left with the overwhelming message that this was a sector on the up.  

CEO of Numis Securities, Oliver Hemsley, opened the proceedings

Whilst its title – The Past, Present and Future of Bond Issuance by UK Companies – may not have been snappy enough to snare the casual observer, the conference served up sufficiently pithy fare to ensure that there was something for participants of every hue. 

Numis Chief Executive Oliver Hemsley was the first to the lectern, and having set the agenda for the forthcoming couple of hours he expressed his gratitude to Xavier Rolet and the LSE for its support of the Order Book for Retail Bonds (ORB) and spoke with passion about the fact that retail bonds offer the companies a vital new source of alternative funding and match borrowers directly with investors. 

Chief Executive of the London Stock Exchange Group Xavier Rolet was granted the 10.05am slot, and he wasted little time in reciprocating Oliver’s kind words and acknowledged the fact that 15% of all issuance to date on ORB had been via Numis Securities; he thanked Hemsley for his vision and the growing band of issuers for their faith. 

"retail bonds offer companies a vital new source of alternative funding and match borrowers directly with investors" – Oliver Hemsley

M Rolet praised the fact that more than just a market, ORB was creating a community and this had manifested itself in the recent creation of an issuer user group – ORBIG – under the tutelage of Richard Tice of CLS Holdings. He said that the issuance of retail bonds allowed companies with strong management and a good story to raise the capital required for growth at a lower cost than institutional borrowing. 

The LSE remains firmly behind the core benefits of ORB in its transparency, secondary market performance and liquidity and Rolet again more than hinted at the potential that he sees in this market if it can come anywhere near to emulating the performance of the Italian MOT Market which issued €500 billion of government and corporate debt in 2012 – ‘ORB has the potential to be even bigger’ he said and predicted that it would be a ‘great success’.

Rolet quoted the startling statistic that of the five hundred most successful global start-ups since 1977 only one has started life in Europe (he kept us guessing, so answers on the back of a £10 note are welcome to RBE), whereas 27 have come from California. However, far from highlighting a dearth of talent and entrepreneurial spirit, Rolet thought that the key factor was access to investment, and he voiced his belief that funding via ORB had the potential to unleash the power of innovation and job creation in the UK.

Xavier Rolet, CEO of the LSE contributed to the debate

M Rolet said that the £3.3 billion raised by ORB to date was a small step along the way and that the LSE would continue to ‘invest in, support and promote ORB to the benefit of all in small and medium enterprise’ – including the LSE, and thanked the government for its support by exempting the bonds from stamp duty. In a powerful endorsement, Rolet stated that ‘There is nothing within the LSE Group that we wouldn’t do to help, support and nurture this market’. 

Next up, and with practical experience of the process was Chief Financial Officer of recent issuer EnQuest, Jonathan Swinney.

Mr Swinney presented a fascinating insight into the working of a North Sea oil business that majored on ‘exploitation not exploration’ and one that neatly exemplified the diversity of business propositions that are now on offer via ORB.

Based around marginal field development and late-life exploitation, En Quest has very quickly established itself as a FTSE 250 business with market capitalisation of around £1 billion, and impressive EBITDA for 2012 of $626 million.

Swinney explained the company strategy of raising money to fund production and development which it efficiently transforms into cash-flow. He then explained the factors that caused him to decide upon the launch of a retail bond – key of which were size and tenor, pricing and execution.

EnQuest considered that it needed to raise £100 million to consider the issue ‘material’ and the fact that the LSE, which is of a broadly similar size, raised £300 million was a catalyst. The time horizon on its bond appealed to Swinney as it dovetailed with the typical terms of the company’s development projects and a more diverse capital structure reduced its dependence on bank lending.

Over time Mr Swinney explained that the company aspires to issuing investment grade debt, but that the ratings agencies would not countenance that until the business has a market cap of £2 billion and produces 50,000 barrels of oil a day – a target that is in its cross-hairs due in no small part to the purchasers of its retail bonds.

Jonathan Swinney, CFO of recent issuer EnQuest contributed to the debate

Key attractions of a retail bond from the perspective of execution were the fact that issuance was in Sterling, documentation was considered straightforward, execution was quick in comparison to private placing – typically 4-6 weeks, costs were relatively low and there was keen interest from retail investors.

In fielding a question as to whether he would consider further issuance, Mr Swinney confirmed that he would, and cited increasing awareness of the company and an uptick in its share price as attendant benefits.

Numis Securities’ Head of Fixed Income, Michael Dyson was next to the dais, and his fascinating preamble traced the origin of retail bonds back to the imposition of compulsory loan notes on the over-taxed inhabitants of Florence in 1362 with the objective of financing its war with the presumably better heeled inhabitants of Sienna and Pisa.

Via asset-backed bond such as those issued by the Confederates to fund its American Civil War campaign and those to open up the Canadian railways, Mike brought us up to date with the news that the £270 million raised in 2013 to date brings the total for ORB to £3.3 billion.

When considering what investors want, Dyson considered that fixed return, a recognisably named issuer, transparency and liquidity in dealing and choice were all key factors. The issue of rating was tentatively introduced, to be discussed further later, and the issue of protection in a banking sense was alluded to.

Whilst highlighting some rather high profile corporate and sovereign failures that have occurred, Mr Dyson reassured that over time recovery rates from failed businesses were high and he cited Woolworth as a business that had hit the buffers but had repaid all of its debt.

He then compared retail bonds as a source of funding with banks, wholesale bonds and private placement and concluded that they were good for the issuer and investor alike.

Mr Dyson then gave us an insight into some of the work that goes on behind the scenes before the public is even made aware of an issue and gave us a flavour of the kind of costs that an issuer may incur; his conclusion was that the process is attractively cost effective, particularly when compared with the alternatives.

Michael Dyson, MD of Fixed Income at Numis Securities posed the question, 'Is there any money left'?

His question ‘Is There Any Money Left’ was a little teaser, but one that left the audience salivating at the potential for the retail bond market if it gets its message right.

Evidently the cumulative total of non institutional cash sitting in a range of fixed term deposits, cash ISAs, SIPPs and fixed income funds to name but a few totals more than £700 billion and this could be considered fair game for all those wishing to attract retail investment whilst offering an inflation-beating rate of return. 

Peter Smart Head of Group Fixed Income at Brewin Dolphin then offered the investors perspective by representing possibly the most important buy-side faction in this equation – the Private Client Wealth Managers.

Mr Smart charted the impressive growth of Brewin Dolphin since 1995 and described a business that now boasts £26 billion of client assets under management, 40 offices, 130,000 clients and 624 qualified investment managers. He explored the negative affect that European regulation had had on individual bond ownership in the past, and alluded to the efforts of TISA to turn back the tide which, by his own admission, looks a little over-ambitious if well-intentioned with the benefit of hindsight.

"Private investors use bonds because they want income – particularly approaching or in retirement, want their capital returned, prefer a diverse portfolio of investments and seek inflation protection" – Peter Smart, Brewin Dolphin

Smart believes that private investors use bonds because they want income – particularly approaching or in retirement, want their capital returned, prefer a diverse portfolio of investments and seek protection from inflation.

He then gave us an insight into his experience of the equities vs bonds debate, and as there is in any market, there are certainly two sides to this particular conundrum.

One thing is for sure, neither answer is right nor wrong; what Mr Smart did dispel is the myth that retail bonds are inherently more risky by dint of the fact that they come with no FSCS protection – he voiced his belief that equities inherently come with more risk, and he also said that in the face of a deflationary period investors are more likely to tend towards cash assets.

In summary, Brewin Dolphin is skewed toward growth strategies based upon equities, but investors still require a reliable source, and ideally fixed income.

Unashamedly addressing the elephant that Mr Dyson had alluded to, Smart then addressed the issue of ratings four-square. Describing it as a ‘hot topic’ he said ‘this is a big problem for us moving forward’, and described the problems that would accrue should ‘something go wrong’.

When considering who should fund the ratings that seem to at least appear on the wish list of all interested parties, he drew no firm conclusion – ratings agencies did not wish to be involved as the companies were too small/problematic, arrangers were focussed elsewhere, issuers balked at the cost and were concerned about the long term implications and investors largely rely upon in house research that has invariably been designed to consider equities.

It is clear that the issue of ratings will continue to be an thorny one until or unless an industry standard is agreed, and someone agrees to pay.

Aware that he had poked the tiger, Mr Smart returned to safer ground and in considering the benefits to be had from retail bonds concluded that demand was firmly established, bonds were widely and tightly held, and that they represented sought after investments – by way of an example he cited an unsettled trade that dates back six months.

In the spirit of the conference, Mr Smart then gave us his wish list for the future development of the sector and concluded that he would like to see more issuance, diversification in the range of issuers (witness EnQuest), larger issue sizes (à la LSE), increasing number of bond types (particularly convertibles) and maturity diversity (perhaps FRNs).

Mr Smart concluded a thoroughly engaging presentation by considering what he thinks will help the sector was education – the understanding and realisation of where bonds sit; that equity is subordinate to debt and, in line with the ethos of Retail Bond Expert, his punchy conclusion was that ‘education is the key to resolving this risk misunderstanding’. 

Financial Commentator, Anthony Hilton, put retail bonds into context

Renowned raconteur and financial commentator Anthony Hilton was last up, and in typical fashion simplified things to such a degree that the assembled masses were left wondering what all the fuss was about.

Riding out his fourth recession and seventh banking crisis – ‘this one’s really not that bad’ – Mr Hilton put retail bonds into context and declared them a ‘product for our time’. He feels that in lieu of the banking crisis many lessons of the past need to be relearned, and that we need to ‘return to banking as it used to be’.

Just in case anyone were feeling buoyed by the morning’s announcement of a 0.3% increase in GDP, and therefore the avoidance of a triple-dip recession, Mr Hilton trimmed our sails a little with his pronouncement that ‘all figures are wrong’; something he then went on to prove with some dexterity.

He then proved beyond reasonable doubt that we could avoid negative growth by working through just one lunch hour a year and RBE would be pleased to hear from anyone who gives it a try.

Hilton contested that this recession is being proclaimed the ‘worst ever’ on the basis that growth levels of 2008 have not been regained, despite the fact that these levels were demonstrably founded on unsustainable levels of debt.

This appeared to rally the mood of the room, as did the fact that evidently 70 currency unions have been dissolved since 1945, that current debt/GDP levels are actually historically low, and a sizeable portion of the audience appeared onside when Mr Hilton proclaimed that ‘Greece was like Scotland but with better weather’ and that ‘Germans were like Americans although they spoke better English’.

Ever the old pro, Mr Hilton then introduced the subject du jour and contended that the reason the US was emerging from recession more quickly than elsewhere was that across the Pond, 50% of corporate debt comes from the markets and not from the banks; this is why he sees such a vital role for ORB in the UK.

He believes that corporate finance has to adapt to changing circumstances and that rather than the ‘retail bond market’ Hilton believes that this should be dubbed the ‘Mid Cap Corporate Finance Market’ – a mechanism that allows SMEs to tap into the huge amount of money that sits outside of the institutional system. He believes that it is currently prescient as not only do corporates require capital, but savers and investors need to improve upon the negative real rates of growth they are currently achieving.

"I believed retail bonds could ‘revive investor spirits and support the businesses we need – it allows them to raise the capital they need, at the rate they need, for the duration they need from the duration they need" – Anthony Hilton

Mr Hilton then considered two aspects of trust facing the investors – intellectual and emotional, and whilst he contended that institutions such as the lifecos engender intellectual trust because of the brands they have, investors lack emotional trust on the basis that they don’t expect a fair deal; it is his belief that retail bonds deliver emotional trust on the basis that they have ‘all the ingredients to allow the investor to see that they are getting a fair deal’.

Building to something of a Churchillian-crescendo, Hilton said that ORB had the potential to ‘develop a market where the investor can get a stake in UK growth businesses – rekindling trust, a sense of alignment and restoring faith in the capitalist system’.

In conclusion Mr Hilton said that he believed retail bonds could ‘revive investor spirits and support the businesses we need – it allows them to raise the capital they need, at the rate they need, for the duration they need from the investors they need’ 

How on earth would Michael Dyson follow that? In the only dignified way possible – he thanked everyone for coming, pointed everyone toward the buffet and brought to a close a conference that marked yet another milestone in the development of this exciting sector. 

Retail Bond Expert would welcome any comments from either those who attended today’s event, would like further information, or would like to pose questions to the experts who brought the conference together.


Posted on 01/05/2013 09:15:38

I am a firm believer in fixed income for retail portfolios - and in efficient allocation of capital to potentially productive projects, which are being throttled by banks not lending. That said, a number of questions arise; Why would an investment manager select an unrated (junk?) bond at issue over an existing rated one which the (free hand of the) secondary market had already discounted and determined a price for? Surely they are more opaque than the secondary market issue if unrated. If numbers are crunched, do the current wave of Retail Bonds present market value within the hierarchy of comparable credits and risks - and if so why are they not being aimed at the IM industry as well as retail? Ergo, presumably Retail Bonds issues are largely aimed at XO/prospectus sales? If so, how is a private investor (generally unable to value the opportunity cost accurately) expected to value it? Also, does this not lead the investing public away from the investment management industry? All comments gratefully received.

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