Article 4.4 Concerns mount over UK retail bond issues
By Steve Johnson
Financial Times August 18, 2013
By most measures, the London Stock Exchange’s order book for retail bonds has been a runaway success.
Since its launch in 2010, the electronic hub has hosted 38 corporate bond issues and raised £3.4bn from yield-hungry small investors, who have been able to snap up the bulk of these issues in denominations of just £100.
As yet, not one of these retail bonds has defaulted and most are trading above par.The development filled an embarrassing hole in the UK’s capital market landscape; whereas countries such as Germany, France, Italy and Spain have long had flourishing retail bond markets, UK companies’ historic unwillingness to issue paper in denominations of less than £50,000 had long stymied a similar market in London.
‘In terms of the development of the market, it has been a very good thing,’ says Kate Ball-Dodd at law firm Mayer Brown. ‘It has allowed access to a type of investment that was difficult for retail investors to access before because of the very high denominations.’
However, some investment industry professionals are raising concerns about the nature of some of these bond issues. One concern is that retail investors may be unwittingly assuming more risk than traditional institutional bond buyers.
National Grid and Severn Trent have issued retail bonds backed by cash flows from their holding companies, rather than the regulated operating companies that stand behind many of their bonds aimed at institutions.
The key difference is that the regulated entities are barred by the regulator from taking on too much debt, reducing the risk to lenders.
‘[A retail bond] might have a good name on the tin but the debt may be issued by an overseas subsidiary,’ says Jason Hollands, managing director of Bestinvest. ‘You need to know where you sit in the capital structure of the overall business if the company runs into trouble.’
Tesco Personal Finance, the banking subsidiary of the retailer, has issued three retail bonds.
[Have] all the buyers understood that the debt is issued by a subsidiary, not the parent company?Retail and institutional bonds have been issued by the same entity, but with the retail version paying a lower coupon. For instance, Provident Financial, a subprime lender, simultaneously issued a retail bond with a 7% coupon and an institutional one paying 8% last year.
FT
Source: Johnson, S. (2013) Concerns mount over UK retail bond issues, Financial Times,
18 August.
Mini bonds
There is another class of bonds targeted at retail investors, but these do not have a secondary market. They have been dubbed mini-bonds (mini-retail or self-issued bonds) and are issued in very small amounts by small companies - see Article 4.5 for some examples. With these bonds lenders are committed for the full term (usually 3-5 years), to a small, usually non-stock market- quoted firm, with less open accounting than quoted firms. The marketing and information material has not been vetted by the FCA. The covenants placed on the bond to reduce lender risk tend to be much lighter than those of normal bonds. The interest rates offered on the bonds described in Article 4.5 are greater than those on ORB due to the additional liquidity and default risk. They also suffer from not being eligible for inclusion in retail investors' tax shelters such as self-invested personal pensions and not being covered by the regulators' Financial Services Compensation Scheme should something go wrong.