THE PROFESSIONAL rugby union club Wasps launched its debut retail bond at the London Stock Exchange last week, raising £35m. I was very proud to have been involved in the transaction, and it’s fair to say that the success of the issue is the latest sign of growing investor appetite for retail bonds in the UK. But what are they, and could they be suitable for your business?
The retail bond market only started five years ago in the UK, as part of the London Stock Exchange’s efforts to help companies find new ways to access capital and increase liquidity. The market was set up to mirror the wholesale bond market, but for smaller entities and for smaller issue sizes, with the idea of encouraging smaller investors to get involved. Retail bonds are tradable instruments, meaning that they can be bought and sold during the life of the bond on the Order Book for Retail Bonds (ORB) – which is one of the ways in which they are distinct from mini-bonds, which often have to be held until the end of the bond’s life, and sometimes pay coupons in goods/services, not just cash.
There are other differences too. First, the process for issuing a retail bond is much more stringent. Before a bank will agree to be mandated by the company, it will have to be comfortable that it’s a suitable transaction to bring to market, and that it’s suitably structured and the appropriate levels of due diligence have been conducted. The company will have to be transparent and clear on all the underlying aspects of the business, including its purpose for raising the funds. The retail bond prospectus will have to have full disclosures and be approved by the UK Listing Authority. This process is not required for a mini bond.
There are advantages to this rigorous process, however. Wasps, for example, can show its sponsors and potential sponsors that there’s a lot of data and information about it in the market. Being so transparent can have clear benefits in other areas of the business. The associated publicity around a retail bond will improve brand awareness of the issuing entity.
Second, a retail bond reaches a wider range of investors than a mini-bond, since it will have been placed in the market by an experienced bank which knows how to structure and distribute the transaction. Investors are first engaged through a roadshow of fund managers, discretionary and execution only, who are consequently expecting these deals and are familiar with them. With mini-bonds, by contrast, the issuer has to reach out to their customer base or via advertising to seek appropriate investors.
In more general terms, bonds are useful products for companies and investors because they pay a fixed coupon (the Wasps retail bond yields 6.5 per cent). The firm knows exactly what its obligations are. Investors, meanwhile, can hold the bonds in a Sipp or Isa, and know what they are getting (the coupon paid yearly, in addition to the repayment of the original investment at the end of the bond). Some retail bonds are also secured against bricks and mortar, which itself has advantages in terms of investor confidence. Not every deal needs to be secured, however, as it will depend on the nature of the issuer and what the money is needed for.
The retail bond market is relatively new, and it’s still evolving. I don’t think every kind of business is suitable to access the retail bond space – and certainly not every rugby club. But if you have a senior debt need above £25m, an easily understandable business, a good name, and are willing to be transparent with investors about your company, retail bonds have clear advantages.
Ian Dixon lead the Wasps transaction from Investec’s debt capital markets team.
This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.