News

8th Feb

ORB Blossoms as it Celebrates its Fourth Anniversary and Government Support

London Stock Exchange

At a well-attended event at the London Stock Exchange to mark the fourth anniversary of the launch of its Order Book for Retail Bonds, participants from all sectors of the market came together to celebrate its success to date and look forward to its prospects for the future.

Pietro Poletto, Head of Fixed Income Markets at the LSE got the ball rolling by thanking everyone who had contributed to the success of ORB thus far and said that the exchange was proud to have built a market that represented a ‘strong reality and a future opportunity’.

Sig Poletto said that he believed that ORB represented a ‘new beginning’, bringing increased liquidity and price transparency to the benefit of retail investors and alluded to a range of additional services to be delivered in partnership including currencies and clearing, with the overall objective of increasing the number of participants on the exchange.

"ORB represented a new beginning, bringing increased liquidity and price transparency to the benefit of retail investors" – Sig Poletto

He then vacated the lectern in favour of CEO of the LSE, Xavier Rolet, who heralded the ‘joyous occasion’ of the anniversary of an exchange that has made it cheaper for companies to raise finance – typically less than 1% of the amount raised – and brought primary and secondary liquidity to the market.

Pietro Poletti - Head of Fixed Income Markets, LSE

M Rolet said that the performance of ORB since its inception - £3.9 billion raised by 41 issues – gave great hope for the future and by way of indicating the great potential in the sector he alluded to the success of ORB’s ‘big sister’, Italy’s MOT market, which has raised €100 billion of medium and long term finance.

Next up was guest speaker and late replacement Mark Garnier, Member of Parliament for Wyre Forest and a member of the Treasury Select Committee and Parliamentary Committee on Banking Standards.

Mr Garnier confirmed his credentials to address the conference as a former ‘blue-button’ and then immediately undid his own good work by declaring that his career to date amounted to what some may consider the ‘unholy-Trinity’ – Investment Banker, Hedge Fund Manager and MP.

Financial Gateway

Mr Garnier lauded the success of the exchange and reinforced the importance of the City as a financial gateway to the EU and the rest of the world.

He emphasised the importance of allowing SME’s to ‘access their dreams’ through achieving funding which in turn boosts government coffers.

Mark Garnier MP

Mr Garnier said that ORB represents an ‘exciting opportunity’ that reduces the reliance on bank funding and that the government ‘not only wants the retail bond market to grow, it wants it to flourish’.

He confirmed that the government had been informally consulting on ISA eligibility for shorter dated bonds and that he would like to create space to allow the market to achieve a ‘perfect virtuous circle’ of more issues and increased secondary market liquidity.

Mr Garnier knew which buttons to press as he left the stage wishing ORB continued success ‘supported by and helped by the actions of government’.

To follow was the first panel session of the afternoon The Evolution of the Order Book for Retail Bonds; How the UK Retail Bank Market has Developed in the First Four Years.

Moderator

John Hughman (JH), Editor Investors Chronicle

Panellists

Henrietta Podd (HP) Head of Debt Advice Canaccord Genuity

Phil Shepherd (PS) Group Treasurer, Provident Financial

Patrick Gordon (PG) Partner Killik & Co

Elaine Keats (EK) Partner Linklaters

Richard Tice (RT) CEO, CLS Holdings

Whilst its title was anything but a study in brevity, the panel session delivered pithy debate with good contributions from all elements of the retail bond sector.

  • (HP) ‘Retail investors have different motivation than wholesale investors. Retail bond issuers are looking to entice equity investors looking for income, whereas institutions are more inclined to seek value’ she said. 
  • Ms Podd said that regulation is a big issue and that retail business is ‘looked upon as being dangerous’, adding that as the legal process is better understood it could encourage new entrants to the market.
  • (PG) suggested that education was the key, as ‘bonds’ in the past may have been interpreted as savings bonds issued by banks. 
  • Mr Gordon said that it was important that investors understand how the market works and also appreciate the difference between the various products – inter alia, corporate bonds, mini bonds, loyalty bonds – that are often interchangeably referred to as retail bonds. (Caveat Emptor – Mr Bond UrgesCaution When Purchasing Retail Bonds – Retail Bond Expert June 7th 2013)  
  • He said that clients were now more familiar with retail bonds and were not just looking for income, but also diversification and certainty of return.
  • (RT) said that many had not heard of CLS Holdings before the launch of its bond and those attracted by the certainty of eight or nine year debt could also be inclined to consider an equity investment as CLS’s share price increased along with its investor base.
  • Mr Tice said that he hopes government support for ISA admission would mean less risk, a reduction in the coupon he would have to pay and increased secondary market liquidity.
  • (JH) asked why issuers to date were predominantly from financial services and property companies rather than, for example, retail.
  • (RT) suggested that it may be because property tends to be less volatile, but said that he expected there to be issues from other sectors.
  • (HP) said that UK companies may be less familiar with issuing bonds as a source of finance and that at £300 million, the wholesale markets may still be the best option; however issues of £100/£125 million is where ORB becomes cost-effective.
  • She also identified ongoing nervousness around retail investors – witness recent events at the Co-Op (Absolution or Hobson’s Choice? Bondholders Back Co-op Bank's Plans – Retail Bond Expert 3rd Dec) and questioned whether issuers had been put off by the prospect of rising interest rates and increased regulation.
  • (PS) said that he thought education would take some time and (EH) pointed to the importance of an easily understood and standardised prospectus in this process. (RT) said that he believed that documentation was too onerous and that was one of the factors that had dissuaded would-be issuers from coming to market in 2013. (HP) concurred, saying that there was a danger that issuers would plump for the ‘lightly regulated’ mini bond market when faced with the requirement for burdensome and thereby expensive documentation.
Patrick Gordon - Partner, Killik & Co
  • (PG) repeated the call for ratings that would allow discretionary managers to deliver whole of market portfolios, and welcomed institutional participation in the market as a source of liquidity.
  • When quizzed about ORBIG’s progress towards a ‘traffic light’ system of rating, (RT) said that it remained work in progress adding that traditional ratings were ‘very complex’ and probably unsuitable for retail investors.
  • (PG) admitted that was no consensus around ratings and in acknowledging the time and expense in their construction, considered how comparison would be possible if retail and wholesale investors were fed ratings based on different systems.
  • (PS) said that the early closure of issues demonstrated the demand for retail bonds, and said that the lack of issuers could be because debt markets were ‘easing’, offering cheap institutional, bank and private placement funding.
  • (JH) asked what could stimulate the market in the future and suggested that a wholesale book building period may encourage issuance.
  • (PG) agreed that response times were improving and that it was important that those who see retail bonds as an alternative to a bank deposit should look at the ‘absolute coupon level’. (HP) said that the ‘5% floor had been broken’ and that ISA admission could see three or four year bonds issued at lower rates.
  • (EH) said that law firms now understood what the UK Listings Agency (UKLA) required in terms of documentation and was ‘in the home straight’ towards the construction of a universal template.

Flying solo was Brewin Dolphin’s Head of Fixed Income Portfolio Management, Peter Smart, who got the rapt attention of the room when he kicked off his presentation of The Current Status of the UK Bond Market by contending that ‘it’s only just begun’.

Serendipitous Confluence

Mr Smart congratulated ORB for becoming a ‘mainstay’ on the UK investment scene and said that the exchange had been ‘conservatively, overwhelmingly positive’, performing well against corporate bonds, funds, gilts and cash.

Lest we forget, we were reminded that conditions at the conception of ORB were immaculate on the grounds that banks weren’t lending and there was no interest to be had on savings – a ‘serendipitous confluence’ according to Mr Smart.

If the exchange was born in uncertain times, its pioneers found an attractive source of funding, and its investors an attractive rate of return.

The following years were difficult – equity markets recovered and although it didn’t happen, Armageddon was predicted for bond markets; ORB not only survived but flourished because, according to Mr Smart, it offered the investor the opportunity to access, in the footballing vernacular, the Championship; that is well run, lowly geared second-tier businesses with solid balance sheets.

Mr Smart said that he now looked forward to the first maturities of ORB listed products such as Lloyds Bank and Places for People which are due in 2016 and to aligning with the LSE in its quest to widen the investor base for retail bonds, encourage more corporate participation and engage with all sectors of the bond market.

Outlook for the Coming Year and Beyond

The second panel discussion was the Outlook for the Coming Year and Beyond.

Moderator

Mark Dunne (MDu) Reporter, Shares Magazine

Panellists

Marcus Coverdale (MC) Director, Lloyds Bank

Toby Croasdell (TC) MD Barclays

Ian Dixon (ID) Head DCM, Investec

Michael Dyson (MDy) MD, Numis

 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
  • (MDu) ‘It’s been five years since interest rates fell; with unemployment levels approaching Mark Carney’s trigger point for a review, when do you think rates will rise?’.
  • (MDy) ‘It feels as though it should be soon’
  • (ID) agreed, but said that he didn’t think it would happen. Mr Dixon said that he didn’t think the UK economy was as strong as some believed and that if interest rates rose, the effect on mortgages would put a dampener on it. He predicted that rises would be ‘gradual and longer term’.
  • (TC) suggested Q2 2015 following a gilt sell off whilst (MC) said that the Lloyds ‘house view’ pushed that out to H2 2015 – ‘long term and steady’.
  • (MDu) asked ‘are there deals coming through?’ and asked the panel what they thought would improve the deal flow.
  • (ID) said there were, but that companies did have other options as bank funding had become cheaper and more readily available than when ORB started and regulation was an issue.
  • (MC) said ‘the pipeline is not hugely full’ but said that he believed the unwinding of the Funding For Lending scheme would have an effect and there would be demand to diversify from bank funding.
  • (TC) agreed that ‘red tape’ was a problem but that Sterling was not attractive and competitive pricing was essential.
  • (MDy) believed that the compression of spreads would be a factor and that inflation-linked products would be attractive in certain circumstances. Mr Dyson said that whilst retail investors are attracted by absolute returns, wholesale investors were more inclined to look at relative performance.
  • Mr Dyson considered the attractiveness of index linked bonds and floating rate notes (FRN) such as Investec’s Impala products but said they were not finding traction in retail markets.
  • (TC) said that equity IPOs may have attracted the attention of retail investors with more to come and whilst he thought that education was imperative, he did think that FRN made sense in certain circumstances. (MC) agreed, saying that FRN were a useful point of differentiation from wholesale markets.
  • (ID) said that it was difficult to convince issuers from new sectors to come to market but that well priced offers with the right structure will sell.
  • (MDu) noted that the Helical Bar prospectus was the first in the ‘plain English’ required of the UKLA and asked how this initiative was playing out.
  • (MC) said that things were ‘settling down’ and that Premier Oil, as an example, had ‘expected worse’ of the process. ‘The UKLA worked with us and were flexible – the process was tough but achievable’. (TC) agreed that things had improved. (ID) said that documentation was not holding back issuers and contested that retail investors ‘didn’t read them’. He also called for protection around mini-bonds.
  • (MDy) said the documents had ‘some good features’ and highlighted the need for information. He also threw down the gauntlet for Investors Chronicle and Shares Magazine to champion the value of retail bonds in a balanced portfolio in a bear market.

Quizzed on the possibility of shorter dated bonds qualifying for ISA eligibility, (TC) said that it sends a message of support for the government that could engage discretionary managers and that liquidity would improve. (MC) believed that the effect on the primary market would be limited but that coupons would reduce.

Overall the panel agreed that it was unlikely that a large number of SMEs would come to market.

What is sure is that 2014 will be an important year for ORB as many of the factors that gave it such a boon in the early days have dissipated and alternative sources of funding may now be easier to achieve.

Predictions for the coming year made at the third anniversary celebration were almost universally over-optimistic, and from where we stand today the numbers banded around by ORB’s big sister MOT look an awfully long way away.

However, with issuers and their advisers seemingly getting grips with the requirements of the UKLA and demand for the issues from investors self-evident it is to be hoped that next year’s gathering will be in celebration of a record year for all concerned.

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