12th Jul

Cause for Concern as Grafton Group Withdraws Bond Issue?

Having launched a sterling denominated retail bond offering 5.5% due 2020 on the 24th June (‘Grafton Group Seeks to Build on Strong Foundations of ORB’ Retail Bond Expert) building materials merchant Grafton Group has decided to pull the issue after failing to attract enough investors. 

The move has caused speculation as to the precise reasons behind it and certainly represents a setback for outgoing CFO Colm ó Nualláin. 

This was Grafton’s first retail bond, and was launched with the objective of raising £50 million thereby diversifying the company’s debt structure. In a filing with the London Stock Exchange (LSE) on 9th July the company cited recent interest rate volatility and market uncertainty for the failure in attracting enough investors. 

Retail Bond Expert (RBE) has quoted lead managers on previous issues as having said that the single most important factor in the success of a launch is the recognition of, and trust in, the brand of the issuer, which is weighed against the coupon on offer. 

In this instance RBE questions whether the builders’ merchants and DIY chain of 313 outlets of Buildbase, Jackson and Selco have sufficient brand recognition, particularly in London and the South East, which could go some way to explaining its failure to attract investors. 

However, other sources quote a Grafton ‘insider’ as saying that a swing in sentiment away from fixed income products since US Federal Reserve chairman Ben Bernanke announced plans to rein in quantitative easing about a fortnight ago had affected the issue. 

Whilst undoubtedly a blow to Nualláin, his successor, David Arnold, has considerable cash reserves to call upon as he seeks to build upon the impressive results the company posted in 2012 - €2.17 billion in turnover and underlying operating profits of €75.2 million. 

Kevin Doran, Senior Fund Manager at UK private bank Brown Shipley told RBE that he believed demand for Grafton was impacted by two factors. 

‘The first was market related’ said Doran ‘having announced the deal and pricing, the books opened on a day when Gilt yields had risen 50bps over the past 3 days’. He believes that the uncertainty this created and implied spread tightening that came with it hampered the launch. 

Mr Doran believes that the second factor may highlight the challenges that issuers in similar circumstances may face - ‘The second feature relates to the simplicity of due diligence that often takes place within retail bonds.  The Grafton Group is a decent business with a conservative financial profile, with the construction sector (particularly in the UK) seeing some genuine “green shoots”, Grafton are well placed to make progress in the next few years.  Most due diligence however amongst retail investors would have consisted of an analysis of the domicile (Ireland) and the industry from which they herald (Builders Merchants).  For some, the combination of these two headline snippets will have been enough to turn them off the deal’ 

Observers will be paying close attention to the current 6% offer from Bruntwood Investments for any indication that may suggest that a series of ‘local’ circumstances conspired against Grafton Group rather than the more troubling conclusion that there has been a seismic shift in sentiment away from fixed income investments that could have serious implications for the UK retail bond market.   

As ever, Retail Bond Expert welcomes your thoughts and contributions and looks forward to what could be a very significant few days in the development of the retail bond market and ORB as a source of corporate funding.          


Posted on 15/07/2013 10:22:07

I think a big factor could also have been that investors now are not going to accept inappropriate,low coupons.5.5 % in this enviroment??Get serious please.


Posted on 18/07/2013 09:48:54

I'm a private investor and I've been looking at the ORB as a source of fixed income. I went for the Helical Bar and Bruntwood issues and not this one because Grafton offered a lower coupon than the others and seemed to me to be at least as high risk.


Posted on 20/10/2013 17:22:30

I just came across your blog via Cannelle et Vanille and your posts are just lolvey! I'll be following along. Love your photography...I just had engagement photos near a bridge just like this, wood and covered, up here in Ontario...

Add Your Comment