Retail investors step in where others fear to tread

David Hellier
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With UK institutional shareholders effectively closing the door on supporting money-raising for anything that has the smell of risk about it, like an IPO or new issue for instance, some companies and their financial advisers have been scurrying around to find new methods of raising capital.

One such instrument that has been gaining currency in recent months has been the retail bond, which plays well to the needs of investors whose savings choices are limited by the historically low level of interest rates.

These instruments tend to offer a coupon of around five per cent or more per year, far higher than rates of interest currently being offered in bank or building society accounts (even though there is obviously greater safety in leaving one’s money in a bank or building society).

Last week Primary Health Properties, a company that builds and manages doctors’ surgeries and pharmacies, raised £75m, reaching its target a week earlier than expected due to the strong demand.

Managing director Harry Hyman said: “The demand for the issue was incredibly strong. The chance to get five per cent plus interest is attractive to investors whereas the conditions in the market for a large equity raise are not strong.”

Most strong companies such as Primary Health, with highly certain revenues from long rental agreements with government agencies, would be able to raise equity, even in these below par market conditions.

But often issuers find they have to do so at a big discount to their existing share price, which becomes dilutive to investors that do not wish to participate.

In the case of Primary Health the bond that was issued had a 5.4 per cent coupon, which compares very favourably with seven year gilt yields that are currently around one per cent.

Most of the recent issues are regulated by the London Stock Exchange and the bonds issued are tradeable in the event of investors wishing to trade ahead of their fixed term, although some, such as the John Lewis one, aren’t.

Those that have tried the retail bond market include some large companies such as National Grid, Severn Trent, Tesco Bank and Provident Financial with advisers including Barclays Capital, Evolution and Investec.

The advisers to the Primary Health issue are Independent Debt Capital Markets, a firm co-founded by former ABN Amro executive Stuart Bell in 2009. He told me that “the retail market has provided another source of capital in a reasonably efficient manner where the pricing of an unsecured bond is set between the cost of equity and secured finance.”

In 2011, there were 10 new issues on the official stock exchange market, raising more than £1.1bn.

As equity issues continue to struggle, this is a market looking set to expand.