The Order Book for Retail Bonds (ORB), the trading exchange for retail bonds, celebrated its third birthday this month and investor appetite seems to only be increasing.‘The interest in retail bonds shows confidence and stability but we need to continue education,’ says Gillian Walmsley head of fixed income at the London Stock Exchange.
Thirty-four bonds have been launched since the market’s inception and Walmsley says she is particularly encouraged by the repeat issues by some companies, with Provident Financial widely expected to issue its fourth bond this month.
The lure of a relatively high coupon, at an average of around 5 per cent, has generated interest in an environment where savings rates have been at rock-bottom for four years and there are few signs of any respite.
Though ORB was created to meet perceived investor desire for access to fixed income Walmsley is surprised by the high levels of demand and trading. ‘New issues are always the most heavily traded,’ she points out. Initially the exchange did not believe it would be a market with high turnover ‘but liquidity is strong and there is more activity on the secondary market than we had thought there would be.’ This popularity is evident in that the London Stock Exchange’s own retail bond, which launched in November, is currently trading at a premium of 6.3 per cent to it’s issue price, and Alpha Plus’ mid-December issue is already up nearly 4 per cent. While she is pleased with ORB’s popularity, Walmsley sees scope for improving investors’ knowledge of the exchange and retail bonds in general. ‘There is a risk of bonds not being put in context, for example many people do not realise that bondholders will get paid before equityholders in the event of a company liquidation,’ says Walmsley, addressing some of the concerns that surround the sector.
She also highlights key differences between ORB-listed bonds and unlisted retail bonds, such as those launched in 2012 by retailer Hotel Chocolat and hotel company Mr and Mrs Smith. ‘With our bonds you can always trade them, always see a price and always get a full prospectus,’ she says. The progress of the sector can now also be tracked via an index – the FTSE ORB, launched 31 January - which Walmsley says could easily lead to the creation of an ORB exchange traded fund in the future.
While the last quarter of 2012 saw an influx of launches, Walmsley points out that there is rarely more than one available to buy at initial issue at any one time. For example transport and logistics company Stobart Group (cut: even) withdrew its bond when another issue went live, which Walmsley says is proof that the market is operating as a market should. ‘It shows that investors are looking at the details and not that just any company can come onto ORB and be absorbed. We don’t yet know how much the market can take at one time, however we have seen that two can work at once,’ she adds.
There has been some industry discussion as to whether bonds should be covered by a compensation scheme, such as the Financial Services Compensation Scheme, but Walmsley is not convinced. ‘There is a risk/reward profile with a bond and such a guarantee could skew the pricing. Not every financial product can be covered by a compensation scheme.’
This year will be one of education for ORB investors, with plans to expand website resources, engage a wider audience and provide further support for companies. ‘We need everything as transparent as possible to help investor understanding,’ says Walmsley.
More information on ORB and its issues can be found here on its website
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