Marketing corporate debt directly to retail investors, a well-established practice in the United States, is just getting started in the UK. The market effectively opened in 2010 when the London Stock Exchange launched its Order book for Retail Bonds (ORB), a service via which retail bonds can be traded in denominations of 1,000 pounds. After raising only 230 million pounds in its initial year, the market showed dramatic growth in 2011 with total issuance of more than 1.2 billion pounds. So far 2012 hasn’t quite matched this pace; as of the end of August, the UK market had raised 635 million pounds, bringing total issuance since the market opened to over 2 billion pounds.
“This year has begun a little slower than expected,” says Toby Croasdell, director of the medium-term note syndicate at Barclays in London. “Especially as yields have compressed, a number of potential borrowers have been sidelined. But in the last few months, we have started to see the increase in breadth of issuers which the investor community has been keen for. This has been led by new names, many of whom have been mid-cap companies rather than the big FTSE 100 names.”
To date, the largest transaction in the UK was National Grid’s issue in September 2011. “For us, the key thing really was one of investor diversification,” says Malcolm Cooper, the company’s global tax and treasury director, pictured at right. “Our interest was particularly in index-linked debt—with over 5 billion pounds outstanding already, we are one of the largest issuers of index-linked debt in the UK, which means that there is limited institutional investor demand for further index-linked issuance from us. Retail investors gave us an additional opportunity.”
At the time of the issuance, inflation was running relatively high, Cooper points out, while the returns that retail investors could earn on other investments were relatively low. “We thought that if we offered a retail [retail price index] bond, that would give investors an opportunity to preserve their capital against inflation, and actually earn a positive real return,” he adds.
While Cooper was expecting the size of the deal to fall within the 50-million to 100-million-pound range typical of the market, demand greatly exceeded his expectations. The original issuance raised 260 million pounds and was followed by two further taps that brought the size of the deal to 282.5 million pounds.
Croasdell says that in addition to diversification of funding sources, issuers are attracted by the name recognition or PR benefits that retail bond issuance can provide. “As with equities, investing in a company gives investors a certain buy-in to the company and the brand,” he says. “If you own a bond from a company, there’s a much higher chance that you will buy their products or services.” Aside from the National Grid deal, other notable issuers include ICAP, which saw its 50-million pound retail bond close a week early in July, and Tesco Bank, which has issued three retail bonds to date, the latest of which was a 200-million pound, 8.5-year bond launched in May.
Documentation is generally seen to be the biggest hurdle for UK issuers that are not traded on exchanges, particularly in the current regulatory environment, although the process is becoming smoother as the market becomes more established. Cooper notes that raising funds in the retail market is much more labor-intensive than in the institutional market: “A lot more effort goes into it, and the process takes far longer,” he says. “If you do an institutional offering, you can go from decision to pricing in a day and receive the funds within a week. The retail timeframe is a lot longer than that.”
Of course, the retail bond market in U.K. is still dwarfed by that in the U.S. If lightly structured notes are included, issuance in the U.S. totaled $10.3 billion in 2011 and is on track to exceed $12 billion this year. “The market has done remarkably well,” says John Radtke, CEO of securities and investment banking firm Incapital. “While the equity market is still struggling with the austerity issues in Europe and a slow recovery in the US, investors continue to favor retail corporate bonds and short-term bank CDs.”
The UK’s retail bond market may be young, but it is already giving companies access to an additional investor base. Appetite for the securities is strong and the ICAP issue is only one of several recent transactions that have closed early. If volumes in the U.S. market are anything to go by, there is significant potential for growth in the years ahead.