Retail bonds: What they offer small cap firms

Florian von Hartig
The London Stock Exchange launched retail bonds to give firms a new way to access capital (Source: Getty)

Launched in 2010 by the London Stock Exchange as part of its efforts to help firms find new ways to access capital, the UK retail bond market may still be comparatively new. But it has already shown itself to be an attractive way for small to mid cap companies, particularly those with a well recognised brand name, to finance their growth.

The retail bond market mirrors the wholesale bond market, but is designed for smaller issuers (typically £20m to £100m, but that size can be exceeded in some cases) and aimed at attracting retail rather than institutional investors. Like wholesale bonds, retail bonds are tradable and can be bought or sold during the life of the bond on the Order Book for Retail Bonds. The documentation process is similar too, involving the issuing of a prospectus, including full disclosures, which must be approved by the UK Listing Authority. The potential need for ratings is also being discussed more and more. While ratings are adding an extra financial burden on issuers and may render very small issues economically unattractive, they will give investors comfort about the strength of the transaction.

The distribution process for retail bonds, however, is very different to that for wholesale – and explains why ideally a strong brand and an understandable business model will make it easier for a company to raise finance via this market. Instead of marketing to large institutions, an issuer will target stockbrokers and execution-only investment platforms that will use their tools, including websites, to market the transaction to their retail customers. These investors tend to be more comfortable with companies they recognise and, although firms with strong numbers may still be successful, those with strong brands are more likely to be able to raise the most volume.

There are advantages and pitfalls to this. It is a unique opportunity for the issuer to explain the business and its credit story to the public, alongside raising awareness of the company more generally. But if the company fails in the marketing period, the result may be that it doesn’t reach the expected launch size or has to increase the coupon to entice more investors to come onto the transaction. This makes the marketing plan vital.

But doing this successfully, with the support of a partner who will structure the transaction appropriately, can have major benefits to the business. Although the execution risk for issuing a bond is higher than for borrowing from a bank or consortium of banks, and although banks will sometimes give more favourable terms to longstanding customers, the retail bond market often offers more attractive and less stringent covenant structures for businesses.

As it enters its sixth year, the retail bond market is likely to continue to grow and mature. On the one hand, given that it is relatively insulated from the turmoil facing other markets globally, investors seeking returns will continue to favour the retail bond market as a source of diversification. On the other, as developments like ratings may become more common, the market will become more standardised, giving further comfort to UK retail investors and ensuring that yields are more efficient.

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.

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