29th Jan

ORB Set to Celebrate Fourth Anniversary as ‘Mini-Bond’ puts the Wind up Investors

As Retail Bond Expert prepares to join the celebrations to mark the fourth anniversary of the London Stock Exchange Order Book for Retail Bonds (ORB), a story in today’s Daily Telegraph adds poignancy to its campaign for standardised definitions and key information documents in support of the various product types that are seemingly interchangeably described as ‘retail bonds’ 

(Caveat Emptor – Mr Bond UrgesCaution When Purchasing Retail Bonds – Retail Bond Expert June 7th 2013) 

Although 2013 was quieter than some commentators had predicted on the exchange in terms of new issuance, by any yardstick ORB has been an unqualified success; since 2010 more than forty companies from a wide range of industry sectors have raised a total of £3.9 billion. 

Appetite still exists

The most recent launch, from buy-to-let lender Paragon Group, demonstrated the appetite that exists for this type of investment by raising £125 million and closing its books three days early (Para gone! Buy-to-Let Lender Impresses as RetailBond Closes Early – Retail Bond Expert 23rd Jan 2014) 

The eight-year unsecured bonds offered 6.125% and the amount raised was more than twice that achieved by the company’s first foray into the market in February 2013. 

The retail bond sector appears to deliver one of the few scenarios where benefits accrue to all. Issuers are able to diversify their sources of lending and reduce their traditional dependency upon bank lending, shareholders and institutional bondholders; with fees often amounting to less than 1% of the amount raised it is also a relatively cheap source of funding when compared to an IPO or rights issue.  

With interest rates apparently rooted at historically low levels for the foreseeable future, investors have the opportunity to improve upon the meagre returns to be had from their savings with the comfort that the companies in which they are invested are relatively secure and without the uncertainly of investing in shares. 

Bringing Liquidity

ORB has also demonstrated the benefit of bringing liquidity to the market and has delivered good business to the LSE, with the value of trading on the exchange rising to £251 million last year, up from £66 million in 2011. 

No investment is risk-free and however blue-chip the issuer may appear, an investor could theoretically face the risk of a total capital loss if a company should fail, with no recourse to the Financial Services Compensation Scheme; this is just one of the risks that can be mitigated against with the construction of a balanced portfolio  

The story in the Daily Telegraph highlights the need for caution when choosing to loan a company money and to ensure that as an investor you fully appreciate the structure of the product you are considering – inter alia corporate bonds, retail bonds, loyalty bonds, mini-bonds – what security you have and where your loan sits in the debt structure of the company if it were to fail. 

Unsecured 'mini-bond' 

Investors lured by the 7.5% offered by Wind Prospect Group when it launched its bid to raise £10 million in 2011 may now wish that they had chosen the relative security of ORB. 

This unsecured mini-bond comes with none of the secondary market liquidity that ORB provides, and investors have still not been paid the 3.75% coupon that was due on 22nd January sparking fears about the long-term prospects for the company and thereby the investors’ hard-earned. 

With no mechanism of selling out of a position, investors are obliged to sit it out until the product matures and run the risk of being paid late due to cash flow problems, or ultimately the loss of their entire investment if the company should hit the buffers. 

The rules around the issuance of mini-bonds are less onerous than those for products listed on ORB, and by definition the amounts raised tend to be smaller and the companies less well known. 

Wind Prospect Group initially told investors that payments were being delayed until February because of cash flow issues, but has since rescinded that, saying that payments were being processed and should be received ‘in the coming days’.  

Late payment

The company has said that the late payment was caused by ‘a number of factors’ and that it ‘looks forward to resuming (its) normal prompt level of service for your forthcoming July payment’ – none of which will provide much comfort to those that meticulously plan their income and outgoings. 

Whilst taken as a whole the family of fixed-income debt products is less risky than other investment types, but that statement conceals large variations in terms of liquidity, security and overall risk. 

The relationship between risk and reward is well documented and what coupon to offer is one of the key decisions to be made between the issuer and its lead manager when coming to market. 

When asked in a recent interview with Retail Bond Expert whether there was any science behind the coupon that is offered, FD of issuer Premier Oil, Tony Durrant replied:  ‘there is a degree of psychology involved, particularly in the retail sector; we believe that to a retail investor a coupon that begins with a ‘5’ is seen as being positive’ (For Your Eyes Only - Mr Bond in Conversation withPremier Oil Finance Director Tony Durrant – Retail Bond Expert 29thNovember 2013) 

However, Mr Bond questions now whether those lured by the siren call of a coupon that began with a ‘7’ wished they were now enjoying the relative sanctuary of an ORB investment and whether now is the time to once and for all agree definitions for this diverse set of products. 

In the meantime, we would like to wish ORB, and in particular its customers, many happy returns and look forward to expressing our support in the time-honoured fashion.      

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