The London Stock Exchange’s Order Book for Retail Bond market celebrated its fourth birthday this year.
Since its launch in February 2010, the ORB has proved incredibly successful, helping companies to raise over £4bn and diversify their sources of funding, proving very popular among private investors.
Changes to annuities announced in George Osborne’s Autumn Statement are likely to shake up the investment market, and present an excellent opportunity for retail bonds. As individuals gain control over their pension pots, they will be forced to make decisions about long-term financial planning. Retail bonds present a high, stable income stream at a time when returns from other savings accounts are very low. Also, investors in retail bonds are not locked into their investments and can trade them in a highly liquid secondary marketplace.
A varied mix of companies have launched retail bonds, most notably a plethora of real estate companies. These include Helical Bar, A2Dominion, Workspace Group, Primary Health Properties, CLS Holdings, Unite, Bruntwood, St Modwen, Places for People and Alpha Plus Holdings (Delancey). Why have so many real estates companies decided to access capital in this way – and will this trend continue?
In the past, real estate companies have struggled to access adequate funding from the major banks. This was most acute during the credit crunch of 2008, when many closed their doors to the sector. Despite this negative sentiment easing significantly, many property companies still believe retail bonds present an attractive tool for diversifying their funding platform.
As an example, Primary Health Properties issued a tranche of retail bonds in 2012. The issue was unsecured with a maturity of seven years and a bullet repayment and was closed early because of high demand. Without the option of retail bonds, PHP would have struggled to recover from the financial crisis and move forward with its growth strategy.
A2Dominion raised £150m in October 2013 with a 4.75% bond maturing in October 2022. A2D’s offer was the quickest to close in ORB’s history due to extremely strong investor demand – the books remained open for less than 36 hours. Having been issued at 100p, the bonds are currently trading at 105.36p. According to LSE data for the first half of 2014, all property retail bonds are currently trading above par, indicating continued strong investor appetite.
A number of companies have issued bonds on ORB with coupons of 5-6%, a competitive rate in today’s market. One recent entrant, Burford Capital, has launched a 6.5% bond to mature in 2022. And Mencap’s property arm issued a charity retail bond promising a 4.375% return. This is the first charity bond to be issued on ORB, with more expected to follow soon.
Retail bond funding presents a range of benefits for companies, most notably the opportunity to diversify their funding structure and investor base. The market also allows flexibility for debt maturity and with maturities ranging from seven to 10 years provides long-term financing at competitive rates – especially important for real estate players.
Despite increasing popularity, there are three common misconceptions about retail bonds:
l Mini bonds are the same as retail bonds. Unlike ORB retail bonds, mini bonds are not tradable on capital markets and are not freely transferable. The bonds are also not eligible to be held within an ISA and are outside the scope of the Prospectus Directive. Mini bonds are generally offered by smaller, more niche businesses that often offer returns in the form of vouchers or goods, instead of interest.
l Retail bonds are not tax efficient. As of 1 July 2014, all ORB retail bonds are now eligible to be held within an ISA and SIPP wrapper.
l Retail bonds are not regulated. All retail bond issues must comply with the LSE Admissions and Disclosure Standards and must be admitted to the official list by the UK Listing Authority. Also, companies must publish periodic financial statements, drafted according to IFRS standards and audited by an independent auditor.
Companies and organisations that have issued retail bonds are eligible to join the Order Book for Retail Bond Issuers Group (ORBIG), which promotes the merits and understanding of retail bonds listed on the ORB trading platform and creates a common voice on regulatory matters.
Harry Hyman is ORBIG chairman
