Order book for Retail Bonds (ORB) Roundtable · 2 Order book for Retail Bonds ORB Roundtable Ian Dixon Investec Mark Glowrey Canaccord Genuity Patrick Gordon Killik & Co Dean Tufts,

Order book for Retail Bonds (ORB) RoundtableJanuary 2015

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Order book for Retail Bonds (ORB) Roundtable

Ian Dixon Investec

Mark Glowrey Canaccord Genuity

Patrick Gordon Killik & Co

Dean Tufts, A2Dominion Housing Group

Stephen Bowcott The Paragon Group of Companies

Pietro Poletto, London Stock Exchange Group

Richard Metcalf, GlobalCapital

Peter Smart, Brewin Dolphin

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: The past year has seen low interest rates prevail in the UK and Europe. How did that affect the development of the retail bond market in 2014?

Pietro Poletto, London Stock Exchange Group: The low interest rate environment means we have a key role to play in educating investors to better understand the fixed income market. For example, whereas there was a time when a coupon of below 5% would be of no inter-est, it is now about providing investors with the ability to build a good, diversified portfolio teaching them about risk, the different products available and duration

of bonds. Advisers will be key to this, ensuring that cor-porates issue the right product to meet investor needs. In the institutional space there has been a dramatic push towards high yield products. This is somewhat inevi-table in an environment where you have government bonds at yields close to zero. You have to look for yield from a corporate name. But it is important that inves-tors understand the risks and all stakeholders — issuers, brokers, arrangers — should play a role in educating the market.

Patrick Gordon, Killik & Co: What we would like to see is a variety of issuance, so we can diversify our

Participants in the roundtable were:Back row, L-R: Pietro Poletto, head of fixed income, London Stock Exchange Group

Patrick Gordon, partner and head of research, Killik & Co

Ian Dixon, head of debt capital markets, Investec

Richard Metcalf, corporate bond reporter, GlobalCapital (moderator)

Stephen Bowcott, head of treasury, The Paragon Group of Companies

Front row, L-R: Mark Glowrey, head of retail bond sales, Canaccord Genuity

Peter Smart, fixed income portfolio manager, Brewin Dolphin

Dean Tufts, executive director, A2Dominion Housing Group

UK pension changes could give ORB next growth spurt

UK retail investors have enjoyed access to selected Gilts, supranational and corporate bonds through the London Stock Exchange’s electronic Order book for Retail Bonds (ORB) since February 2010. Over 180 securities are now listed on the ORB, including dozens issued directly into the ORB’s primary market, as borrowers have seen the benefits of a fresh investor base and the flexibility retail bonds offer.

2014 has brought a diverse group of new issuers to the market, beginning to fulfil investors’ wishes for a broader range of credits. But issuance volume has

dipped, partly because bank lending has become very competitive again.

However, the ORB could profit if new demand is unlocked by sweeping changes the government is making to pensions and savings rules.

Seven borrowers, investors and bankers with experience of the market over the past year met at the London Stock Exchange’s offices in early November to discuss the development of the UK retail bond market, the challenges and opportunities it faces in the coming year, and how they believe it should advance.


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portfolio, which may have some higher yield to it, but also have the option of having some high grade issuance within the portfolio as well. And I think, for us, the big-gest frustration is that we do see high grade issuance but with £100,000 minimum denominations, which obvi-ously causes problems for us.

Ian Dixon, Investec: Our biggest challenge has been finding the right issuers to go into the retail bond space, the reason being that quite a lot of the issuers that we brought to this market previously have found that the banking market is providing greater liquidity, and it’s cheaper for them at this point in time. And while there are some added benefits for issuers who come to the retail space in terms of their PR and enabling them to grow their name in the market, frankly that doesn’t carry weight in comparison to cheaper funding from the bank market.

That’s why I think there has been less issuance in the market generally. I don’t think while we’re in this low interest rate environment we will see high grade com-panies coming out and issuing, because they can find cheaper funding sources in the bank or the wholesale market.

Dean Tufts, A2Dominion Housing Group: But banks, in our sector, have always been active in the three year, five year range but if you want to go beyond that the pricing starts to really rise. We all know why, because their cost of capital is going to have an impact on it, so if you’re getting up to 10 and 12 years — we’ve issued at 12 years — the spread we achieved over the Gilt at that time was very competitive with bank pricing in that space.

And, of course, the banks would want all the security, lots of business-specific covenants, financial covenants whereas with the retail bond that’s not the case. What we liked about the retail bond — and I would encourage others who are potentially thinking of issuing to look at it — is the flexibility that it can offer you. For us, the attraction with the retail bond was how we could use the funds in any part of our group relatively straightfor-wardly. I imagine that may well be the appeal to others, particularly at the longer end where the banks are having to price up quite stiffly.

Peter Smart, Brewin Dolphin: The further we go into this cycle of low growth and low inflation, the harder it is to predict where interest rates are actually going to go. Are we going to be Europe-bound in terms of inter-est rate movements going forward? Or are we perhaps moving to a lift-off type of scenario which we’re expect-ing in the United States? Even during the course of this year it was expected that the UK would be the first lift-off economy of the G7 nations. But against that backdrop we’ve got other economies, Australia being one of them, which have put up rates and swiftly had to bring them back down again.

And so, with that as a backdrop, a lot of investors are underweight fixed income generally. Certainly in most of the discretionary space against any benchmark you’re going to be underweight fixed income and overweight equity, which despite all we’ve seen in October, is probably the right way to be now. But with that small allocation you’ve got to make it work harder to provide

all sorts of kinds of returns into your portfolios. And because of that I think the opportunities things like the retail bond market present us with are actually very, very welcome to have as part of your portfolio. We’re going to have a range of funds doing what they do, some Gilts, some indexation, and then some corporates and, because of the restrictions on size, the retail bond market fits in there very well. And I’d reiterate Patrick’s comment that we need more issuers of all different types of qualities to come to market, and that brings us back to that point in 2005 when they introduced the EU Prospectus Directive, which messed it up for us completely.

: The latest amendment to the Prospectus Directive was in June 2012. Have market participants not adjusted to that by now?

Smart, Brewin Dolphin: Well, it depends on the way you want to look at it. The way I see things, the EU Prospectus Directive was brought in to regulate the initial sales of a wide range of securities across the EU to investors who are perhaps not equipped to look at the conditions in the prospectus. And, of course, it is a pan-European, pan-market piece of legislation, and I’m sure it has some very good effects, preventing the sale of spurious situations to retail investors, but the point is that it’s actually prevented retail investors from access-ing the very markets which are designed to protect them, and that is investment grade corporate bonds.

An investor at any time over the past 10 years could have gone and bought Bank of Scotland, Lloyds Bank,

Barclays Bank and stuffed their portfolio full of equities if they wanted to and lost virtually all of their money, but they couldn’t have bought the senior unsecured paper of those institutions, which would have protected their money. They actually weren’t allowed to do that. The only way they could have done that, of course, is through a bond fund, which is fine as well, but it just seems a little bit topsy-turvy that you’re allowed to buy the riskiest of part of the capital structure without limit and without any safeguards, but you’re prevented from buying the very safest part of the capital structure to provide you with the return. That’s wrong.

Mark Glowrey, Canaccord Genuity: I completely agree. I think a classic example came out recently: Sainsbury’s

Peter Smart Brewin Dolphin


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issued a convertible bond. Sainsbury’s, we all know what that is. Maybe the share price goes up or down but it’s a fairly safe investment. But even safer than the equity would be the convertible where you have the option to either buy the equity in a few years’ time or have your cash back. But a restriction has been placed on that, preventing private investors from buying it. It’s madness.

Smart, Brewin Dolphin: The key to it all is to say that any investment grade issue has to come with a retail prospectus.

Poletto, London Stock Exchange: The industry has certainly voiced some concerns around this and has been looking for further clarification on the regulator’s requirements. I think it might have led some issuers to think again about including a retail element in their debt financing programmes. However, we have to respect the rules, otherwise it is impossible to develop the market in the right way, and to educate the inves-tors. Protection of the investor is already guaranteed by MiFID I and will be so again under MiFID II. In any case, in the UK retail market, all retail investors go through intermediaries, brokers or advisers, so that already provides guarantees about the risk to the final investor. This is important.

Stephen Bowcott, The Paragon Group of Companies: We’ve updated our prospectus this year for the retail bond market, but I think it’s disappointing to see that the Prospectus Directive has put some issu-ers off updating their programmes to keep them retail compliant. If you make it more troublesome to update your programme to keep access to both retail and wholesale, and a large issuer doesn’t necessarily need retail — they can meet their needs out of wholesale — then the obvious choice is going to be, ‘Well, we just won’t bother with retail because it’s too much trouble’.That’s clearly disappointing.

For us it hasn’t changed our view of the market. We still like the market. It still meets our needs vis-à-vis size, diversification and so on, but it has meant addi-tional work and additional costs.

Smart, Brewin Dolphin: But, Stephen, once you’ve actually made the decision to have a retail prospectus,

once you’ve got through that, it’s just an annual mainte-nance. Is it much more expensive?

Bowcott, Paragon: This time round there was quite a bit of extra work in terms of reworking it, and what was slightly frustrating was that earlier in the year, when we were looking at whether to keep the retail aspect, there was a bit of uncertainty as to what was required. Now, as it panned out later in the year, things did settle down and it became a bit clearer what those requirements were, and the process wasn’t particularly problematic for us. It went fairly smoothly.

But there was uncertainty and in that respect it hasn’t served the market particularly well, because when you look at the prospectus and ask the question, has it actu-ally given investors any more protection? Well, it might have made it slightly easier for those investors who already read the prospectus to understand the risks in there. It has made issuers think a bit harder about the risks and not put the kitchen sink in and the factors you have to include are real risks and can be more clearly described. But I don’t think it’s actually given a lot more protection to investors, because I’m not sure that every investor reads the prospectus from one end to the other when they invest.

Smart, Brewin Dolphin: Absolutely. And here’s anoth-er thing. It protects investors at the time of the issuance of the securities, but in the secondary market there’s nothing to stop an investor with £200,000 worth of savings going and just buying two bond issues. It’s just a bad piece of legislation for the bond market. I’m not talking about equities, but for the bond market that is a bad piece of legislation for most participants, certainly in our market in the UK.

Dixon, Investec: I don’t think it’s going to affect new issuers now that the documentation has been through the UK Listing Authority and we know precisely what format it’s going to take. But existing wholesale issuers in the market may not be bothered go back and change their prospectus.

Tufts, A2Dominion: Having issued in 2013 and 2014, the first one was quite awkward in that we followed Helical Bar, and that seemed to be the one the UKLA really got hold of and shaped, and that one obviously must have been very difficult for them. The lawyers were effectively learning the new process that the UKLA were insisting on.

There was a feeling at that time that this would con-tinually evolve and change issue to issue, but in fact, a year later, Helical Bar was still the benchmark, and cer-tainly our second issue this year was far more straight-forward in that the format that we had used the year before was perfectly OK and was relatively straightfor-ward to update. It has settled down, so that’s encourag-ing for those that are starting out.

: There have been some other regulatory announcements that could affect retail bond issuance: the changes to the rules on pension annui-ties and the eligibility of shorter dated retail bonds for ISAs. Could this encourage more or greater diversity of issuance?

Pietro Poletto lonDon stock exchange group


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Glowrey, Canaccord Genuity: It’s a tremendous opportunity. The first opportunity is the relaxation of the ISA rule, so in theory it will be possible to bring short paper. That will be largely dependent on the desire of issuers to issue it, but it could give us a com-petitive product against fixed term bank deposits. It would be great to have that in the market and I think it would be very useful for wealth managers to have those alternatives.

The annuities rule change is potentially huge. We heard reports that the annuity providers had actually just stopped writing annuities — that was how big it was. They may be coming back on to it now, but for a moment it just froze the market. The underlying fact is that there’s a tremendous amount of people retiring who will need income generative assets of one sort or another. So I would have thought that we are uniquely positioned to try to fulfil those requirements from investors.

Bowcott, Paragon: Both of those changes are actually quite interesting because they could potentially impact the market in a number of different ways. For us, the ISA rules won’t really make any difference. We pre-fer longer maturities because that better matches our investments. It is more defensive and that suits us much better. But it will help the market, as you say, because it will allow investors who want a shorter bond to pick those and put them in their ISAs and that’s certainly beneficial.

The pension change is more interesting because there’s quite a natural fit, as Mark has said, with inves-tors who want to manage their own funds and want to get better value out of their money and their pensions because they recognise that long-term annuities and long-term government bonds are not really providing them with best value. The ability to buy retail bonds as part of your pension is attractive to those types of investors, because they want certainty of income and they want less volatility with their pension monies at that particular point in their lives.

It’s also beneficial to issuers like us and A2Dominion to the extent that these investors are more likely to want to get an income for a fairly reasonable length of time. If you’re just tripping into retirement then to buy something that’s got 10 or 12 years maturity would be fine. So short-term ISAs are good, but I don’t think it’ll have a massive impact.

Smart, Brewin Dolphin: That’s right, Stephen. The people who take their money out of an annuity, who have a reasonable amount of money, and don’t spend it on a Ferrari, are going to be the people who are inter-ested in their savings and their investments. They are going to be shopping around the whole of the market to get the best returns for their money. They’re going to be speaking to execution-only places and saying, “am I able to do this myself ? Do I need the help of an advisory manager? Or do I want to pass it on to a dis-cretionary wealth manager?” So you’ve got those three pillars of our business that will benefit from that type of investor, the concerned, interested investor. Retail bonds in the formats that we’re seeing, and the better quality issuers, are the right place for that money to go. If we can have some indexation in there as well, that would be nice.

Gordon, Killik: There are a lot of things on the demand side, which are very favourable, so we just need the issu-ance to meet the demand that is out there.

: So that’s going to affect the demand side and potentially encourage new issuance. What about secondary trading of retail bonds? Is there enough activity?

Glowrey, Canaccord Genuity: Well, it’s not as big as we would like it to be. Of course, bonds don’t turn over quite like equities. People buy them and tend to keep them, they’re income generative, you don’t have to sell them, and they get redeemed. So it’s unrealistic perhaps to expect the same type of turnover. We’d like to encourage more, though, and obviously bringing new issues would be wonderful and I’m sure we will in due course, but they’re not coming on at a rate of knots and I do wonder whether it would be possible to bulk up the ORB platform with existing issues, because we have to make it a market that works well for investors and keep that turnover going.

It seems to me that the missing link here is that all these high quality sterling issues currently listed on the Luxembourg Exchange: Nestlé, BMW and similar, and I know we have been talking with Pietro and his col-leagues on this subject with regard to the development of this sector, I believe that a parallel platform on the London Stock Exchange should be encouraged in the interests of transparency, so that investors can see a big list of bonds which include what you might call the native issues that are brought into the UK, but also other issues. These are large, high quality issues that I think would help to get that mix we were talking about.

Smart, Brewin Dolphin: At the moment, the way I see it — and I’m not a bond dealer or trader — the liquidity points occur in the market when we have a new issue.

Glowrey, Canaccord Genuity: Yes.

Smart, Brewin Dolphin: And it gets kind of crazy but that’s the way the market works, a new issue comes out and people, rather than committing new funds in this environment they stir up their portfolio, sell a bit of this, bit of that, to buy the new issue, and that causes price liquidity.

Patrick Gordon killik & co


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Dixon, Investec: It’s the same in the wholesale market as well.

Smart, Brewin Dolphin: Except in the wholesale mar-ket, it happens four or five times a day, rather than a year.

Dixon, Investec: It does, but there’s the same issue in the wholesale market as in the retail market, and that is the traders in that space have less ability to trade than they used to. And I think that was a significant issue in October when the market hit the buffers a bit, and it obviously hit equities to start with but it’s the lack of liquidity generally that limits the market.

Bowcott, Paragon: Two things were disappoint-ing. One was slightly more volatility than you would expect of bonds. The retail bond market reacted per-haps a bit badly compared to the wholesale markets that were a bit more realistic in terms of how much they moved.

And a part of that is the second point. It’s because of the bid offer spreads in that market and the lack of liquidity. That’s what’s caused the volatility. And it’s a perceived volatility, not necessarily an actual volatility. The widening of the bid offer spreads we’ve seen exag-gerates the apparent volatility in the market, and that’s what the private investor sees.

Now the market’s recovered, but I think for many investors it will have left a little bit of a bad taste in their mouths, that their steady bonds are not quite so steady in all markets. The only way around that is to get better pricing and better pricing visibility.

Smart, Brewin Dolphin: It’s kind of an exaggeration of what’s going on in the markets generally, it has had an amplified effect on the ORB, particularly in October. But I think liquidity for all the capital mar-kets, the fixed interest markets particularly, is the big problem we have yet to face, rather than anything else.

Gordon, Killik: It’s a big issue.

Dixon, Investec: A liquidity crisis will cause these massive blips in the market because it’s got nowhere to move.Smart, Brewin Dolphin: In isolation it could prove to be a fantastic opportunity, right?

Gordon, Killik: Yes, when you see those dislocations in the market and spreads widening it can actually present an opportunity, if you come within the spread, but the liquidity is an issue, whether it’s the inventory levels which are a lot lower than they used to be, or whether it’s just a widening of the spread, it does create this per-ception of greater volatility.

Glowrey, Canaccord Genuity: The price elasticity is the main problem. A relatively small amount of trade can push a pretty big price move. As Patrick says, there is perhaps some opportunity there and I wonder how well that opportunity is being tackled. A lot of investors are very focused on the primary market, less on the sec-ondary, and what the investors are not doing is they are not doing DMA [Direct Market Access] on to the ORB.

They tend to deal through RSP [Retail Service Providers] and through market makers — we are market makers, so that’s probably quite good business for us — but maybe at some point we should see investors dipping directly into that market to try and take advantage of those anomalous prices rather than being perturbed by them.

Poletto, London Stock Exchange: It is clear that we should try to offer solutions for DMA access because it will be the future. We have to work together towards another model that will increase transparency on the platform for both retail and institutional investors.

Peer-to-peer lending and mini-bonds

Smart, Brewin Dolphin: Another thing I’d like to talk about is, in the past 18 months-two years —it’s prob-ably been going longer than that — we’ve seen peer-to peer-lending, internet lending models, internet-based dealing for small sized deals and things like that. And I have a fear, as an investment manager, that peer-to-peer lending is going to usurp bank deposits, which, of course, are highly regulated, and it’s the capital markets that we’re dealing with here. We are going to be mov-ing into a highly unregulated market at this stage, which seems to be gaining acceptance because, ‘hey, I’ve got an app, and that’s groovy so I’m going to put my money into that thing’. That’s a risk to me, I think, in this area. Not to my company, you understand, but to my interest as being a fixed interest investor.

Dixon, Investec: Peter, have you looked at any of the mini-bonds?

Smart, Brewin Dolphin: Mini-bonds are something distinct and unique and, to me, anybody who managed to issue a mini-bond is laughing all the way to their own bank with that money, most of the time. But it is the peer-to-peer lending programmes which are coming up and being very, very popular, and they’ve proved to be, I think, quite profitable for people who have put money into them, and it may be the future rather than the tra-ditional markets that we are talking about here.

Mark Glowrey canaccorD genuity


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Dixon, Investec: And certainly riskier.

Smart, Brewin Dolphin: Yes, absolutely riskier. If there is going to be a rogue, some sort of big accident, if you have a decline in the economy of some depth over some period of time, that peer-to-peer lending model is going to be very much at risk.

Gordon, Killik: You separated out those mini-bonds but, quite frequently, less so perhaps now, but certainly in the past they have been written about as retail bonds. So if you do have a default in that space there is a potential read-across into the regulated market if something were to go awry in the mini-bond space. That would be quite concerning because if there’s no clear differentiation in what is being read by investors, then it is a potential issue.

Bowcott, Paragon: Yes, it has surprised me actually, that the mini-bond market, where you’re selling more risky, less liquid, or illiquid, bonds to retail investors, actually exists, given that the thrust from regulators has been for greater regulation, greater protection for con-sumers. Smart, Brewin Dolphin: You get discounted chocolates.

Bowcott, Paragon: You might, but coming back to the point Pietro was making at the start, I don’t think inves-tors really understand the risks that they take with those kinds of issuers. I don’t think they realise that actually they are fledgling companies. Would they put their money on an AIM listed company? Well, some inves-tors would, if they know what they’re doing and they’re comfortable with the high risk, but I suspect a lot of the investors that are buying those types of bonds actually think they are less risky than they are, and they’re cer-tainly not being paid for that risk.

Poletto, London Stock Exchange: Technically they’re not bonds, because they are non-transferable, this is the point. If we are talking about bonds, we know quite well what the structure is but we must continue to educate retail investors about the important differences between traditional bonds and so-called mini-bonds

Glowrey, Canaccord Genuity: They’re loans.

Smart, Brewin Dolphin: Yes.

Bowcott, Paragon: But even if you look at bank prod-ucts, some of them are deposit accounts and some of them are two year bonds — they’re not bonds either, you know, it’s being used in the wrong context there as well.

Glowrey, Canaccord Genuity: This has been a prob-lem for years. The FCA and the FSA before it has never been interested in it, and not just that, fixed term life insurance products are sold as bonds, so I would have thought, yes, some clarification on the terminology would be very helpful both for us and for investors and, to my mind, a bond is a transferable fixed income secu-rity and that’s it, nothing else.

Bowcott, Paragon: Mark, I think we all agree on that.

Tufts, A2Dominion: That’s just one of the definitions in the Oxford English Dictionary, that’s the problem, isn’t? We know what it is, but it seems to me it’s a bit like having a market where there’s a series of licenced traders, and then there’s someone in the corner there that actually hasn’t got a licence, but you think you’ve bought from that market and if something is wrong with the product you might say, ‘well, I’m not going to that market again, they sell things that don’t work’. But the problem is there isn’t a licence to use the name ‘bond’.

Risk of default

Smart, Brewin Dolphin: The wrong word for the mar-ket is retail. I wish we could strip that out. It sends the wrong message. It’s a private wealth market; it is not a retail market.

Bowcott, Paragon: It’s a risk to the market if there’s a mini bond default. If there is a default in the mini-bond space, it begs the question, will that contaminate the retail bond market? And I think that’s a real risk because there are very small companies issuing those mini-bonds and they are the kind of companies that do from time to time fall over, and obviously have a higher risk of fall-ing over, and because there isn’t this clear dividing line between that market and the retail bond market, that’s a risk for the retail bond market.

Smart, Brewin Dolphin: I think perhaps default is something to talk about for our market generally, and if we do have a default of a born-on-ORB issuer, then I think it will cause a knee-jerk reaction across the whole market. But you’ve got to look at the reasons for an individual issuer’s default. If it’s something which is down to that particular issuer, they’ve gone into a par-ticular market situation and it just hasn’t worked their way, well, sure it will create a bit of short term volatility but once the newsflow starts to come out and the rea-sons for the default become very clear, I think you can look at it logically and say that it’s not going to affect all of the other issuers, and get back on with investing again.

Stephen Bowcott the paragon group of companies


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Glowrey, Canaccord Genuity: I think we should be pragmatic. If this market is successful and runs for many years, for another 10 years, and keeps issuing bonds, at some point there’s going to be a credit event. It’s inevitable. There’s risk in the market. There’s risk in all markets. I think one of the questions is how we prepare for it. Some preparation perhaps could be done at the issuing stage, particularly with structures of bonds, ensuring that there’s not too much structured subordination or if there is structured subordination you’re at least getting suitably rewarded for it.

Dixon, Investec: Or structured subordination can be limited or controlled in some way.

Glowrey, Canaccord Genuity: Yes, covenants to help moderate that risk. So, yes, you have to be pragmatic. We’ve been in benign credit conditions since the credit crunch and at some point in the future we might not be.

Bowcott, Paragon: And like any market, there’s a risk of disruption in the retail bond market. Issuers have to be aware that the retail bond market should be one of a number of funding sources. It’s something that we’ve focused on since the crisis, which is partly what drove us to the retail bond market in the first place. But the issuer should make sure they’ve got alternative access to wholesale markets, to secured funding markets, and in the case of ourselves, we’ve set up a bank within the group to give access to retail deposits.

Dixon, Investec: All of your investors will also be looking at you to make sure you’ve got diversity of funding, because you need to have liquidity to keep your business going. If you cease to have that liquidity and you’re only reliant on the retail bond market that’s an issue for retail investors.

: Institutional investors increasingly participated in retail bond issues in 2014. How has that affected the market?

Bowcott, Paragon: When retail investors are looking for places to put their money, they buy principally on the price. Yes, they look secondarily at the term,

and they look at the credit and if it’s a less rated name compared to a very highly rated name they’ll expect a difference.

With the term retail investors are less focused on what the real price for the duration is, and we often see that the retail bond market may look at times slightly cheaper in certain parts of the spectrum. That’s because investors don’t really price for duration in this market. The introduction of institutional investors, combined with advisers and brokers, has brought a bit more discipline, making sure that the price is pitched appropriately for that particular issuer, for that particu-lar duration.

The introduction of institutional investors we’ve seen, in the second half of this year in particular, where you had half of deals going to institutional investors, has guided pricing into a more natural place where it is quite well aligned now with wholesale. Investors are benefiting from that. It’s imposing a discipline on the market, and that means investors are getting a fair price for the duration, for the credit that they’re taking on board.

Tufts, A2Dominion: Following on from Stephen’s point, with the pricing on our recent bond you can see that when the Gilt market fell a lot through the sum-mer what seemed to be happening was that the retail bond pricing followed it, but with a lag. It doesn’t automatically, which is probably because of those retail investors slowly getting used to looking at the Gilt market, but of course the institutions are always look-ing at that. Our bond had a real mix of the two, and so you have perhaps two slightly different investors looking at different things and you end up with a price somewhere along that line.

: Do you think there’s a risk that institu-tional investors could squeeze retail investors out of these transactions?

Bowcott, Paragon: We did a deal at the beginning of this year, we only sold a small proportion of the deal to wholesale investors, and those wholesale investors were certainly very guarded in terms of their price transparency, and were putting their orders in quite late in the process. We didn’t get a huge amount of feedback on where their price preferences were, and I think that was deliberate.

They wanted to try and maximise the value to them and that’s a way of doing that. And they were also quite late in the game when we were doing the book build, again because they want to see that the book has built to a certain size.

That was not ideal for us because we didn’t really get the best value out of having institutions in the book. That said, I understand that the market has moved on a little during the course of this year, and the institu-tional investors that have come into the market and are buying a proportion of the retail bonds are quite wel-come, because to the extent that there is better price discovery and a shorter book build process, that’s what we would like to see in that market, while at the same time keeping the retail bond market as a retail bond market with a majority or near majority of the placings going into the retail space.

Ian Dixon investec


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Gordon, Killik: The offer periods have come in signifi-cantly, clearly, from when it started as two weeks. It’s very seldom that you have a deal that’s open for the full period now. One point, though, is that when they do close so quickly it does mean it’s very much the dis-cretionary side of the retail world that are able to act quicker, so some of the advisory would prefer to have a little bit more time, particularly if they’re expected to read the prospectus! It does squeeze them out, to some degree, when it is such a short time period.

Glowrey, Canaccord Genuity: But haven’t they become a lot more efficient? They see a transaction coming through into the market; they do the research on the company, independently perhaps, and then look at the terms.

Gordon, Killik: Certainly, we would do our own credit analysis on any issue that comes to the market, and we can communicate that internally. But the investor may be at work during the day and then only pick up on the email notification of a new issue that afternoon or in the evening, so you still ultimately have to wait for them to come back to you, and that’s where the poten-tial is for them to be squeezed out.

Tufts, A2Dominion: On our recent roadshow, having had the experience of 2013 where it went very quickly, we were careful to forewarn investors how it sold very quickly last time and we think it may do the same again. With the first issue, at the close of the business the market would say, ‘Well, we’ve already got to £100m, or closing on £100m’, and people knew there was a limit, so all it did was encourage people to really pile in the next day. Obviously it’s great to go in and out quickly, but there must be some retail investors that do get squeezed out of that. We were very mindful of what the name on the tin was, and it was important that there was a spread of investors. We welcomed the institutions nonetheless because of those ongoing rela-tionships that could profit us elsewhere in other spaces.

Dixon, Investec: What do you think was the biggest driver of that bookbuild? Was it the fact that you were highly rated or was it the fact that you got more institutions in the deal? Or was it the fact that there isn’t that much issuance…?

Smart, Brewin Dolphin: For us there were three things: the rating, the highly regarded, well known name in the market, and the sector as well. Despite the downgrade of the sector recently, it is a sector that we still feel quite comfortable with, and I think then if you add on the duration aspect of that, you’ve got a deal which had appeal for a wide range of investors.

Tufts, A2Dominion: Ethical investors, as well, because that’s the other part of the housing association sec-tor: It meets a lot of ethical fund rules, and there is a dearth of issuance that fulfils their criteria.

Dixon, Investec: We’re quite active in the wholesale bond market and also private placements, and one of the issues we’ve got, going out to see the institutional investors, they too have a lack of product. They are desperate to see new kinds of issuers. They’ve got the same issues as the retail bond space, so it was no sur-prise to us at all that they then started dipping into the retail space, because they were seeing product there and it’s a tradable instrument. In fact, I happened to see two institutional investors this week who are now looking at the retail space because it’s an area of activ-ity they think they should get into.

But it doesn’t solve your earlier problem, Peter, that wholesale deals going into the market aren’t accessible to retail, it’s actually going in the opposite direction.

Smart, Brewin Dolphin: It doesn’t, and I can’t see in my lifetime of investing that it’s going to get fixed, because it is a political process, rather than a regulatory process, it’s got a political process behind it and there are other things to do.

: What else do you think will affect the development of the retail bond market next year?

Dixon, Investec: Personally, I think we’re probably going to see a repeat of 2014. A continued low interest rate environment, I don’t see that changing dramatical-ly, but I think people will have the liquidity available. I think, therefore, we’ve got to concentrate on trying to find some different companies to come and present to the retail space and try and diversify the pool of trans-actions that are out there.

I can’t see the likes of National Grid and other utility companies coming to the retail space over the course of the next year, but I’m hopeful that the market will readjust and there will be a time will they will come back.

Smart, Brewin Dolphin: Yes, we’ve got a lot going on next year. We’ve got an election, we’ve got the potential further slowdown in Europe, we’ve got geo-political tensions, we’ve got certain macroeconomic situations, and they all are going to have a bearing on the investment landscape in the UK. So I think Ian’s prediction of a repeat of this year, which is going to be OK, with steady progress, is one that we would hope to happen. But you just feel that some things, as ever, could come along and derail that process. And the longer we have a calm period the closer you get into the derailment. So let’s hope we have a couple of years of calm. w

Dean Tufts a2Dominion housing group


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Pietro PolettoHead of Fixed Income Markets, London Stock Exchange GroupEmail: [email protected] Gillian WalmsleyHead of Fixed Income UK, London Stock ExchangeEmail: [email protected] Lillian GeorgopoulouORB Product Specialist, London Stock ExchangeEmail: [email protected] Alessandro ChiozziFixed Income Associate, London Stock ExchangeEmail: [email protected]

London Stock Exchange – Order book for Retail Bonds

Welcome to ORBOpening up a new world of capital through retail bondsORB, the Order book for Retail Bonds managed by London Stock Exchange, gives companies - from ambitious SMEs to large multinationals - access to the capital they need to grow their business.As the UK’s regulated retail bond market, it enables businesses to access additional investors and an entirely new funding source. With ORB, you can take the direct route to a high profi le liquid market - and a wider investment audience.

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Documents

Order book for Retail Bonds (ORB) Roundtable · 2 Order book for Retail Bonds ORB Roundtable Ian Dixon Investec Mark Glowrey Canaccord Genuity Patrick Gordon Killik & Co Dean Tufts,