The Elephant in the Room

Just had a read of the 2015 ORB Practitioners Roundtable Report, as well as the liquidity report from Q4 of last year, both of which can be accessed via this webpage.

May being unrealistic in my overall aspirations for the ORB, but reading the aforementioned documents one would assume that all is sweetness and light and that we are ticking on nicely. No where in either of the reports ( and more so the Roundtable Report,) is the matter of the lack of bonds coming to market seriously addressed as a major red flag. Six issues for the whole of 2014 cannot be sustainable, and with the consensus of the practitioners being that 2015 is going to much of the same. Also there seems to be agreement that the blue chips like National Grid are unlikely to see the ORB as a method for raising capital and thus Financial Institutions;will be the backbone of the Market and with the potential for 'iffey ' bonds such as Eros becoming the norm.

The reports focus is more about the outputs of the investor as opposed to what I see as a fundamental flaw in that there is simply not enough bonds coming to market. Reference is made to the rise of P2P lending and the threat it poses to traditional forms of finance. But as Practitioners and coal face stakeholders in the ORB I would have expected more substance from them to how the ORB should respond

Would like to gauge other peoples views on where the ORB is going, and in comparison to its Continental counterparts has it got a future?


  • ArthGoch, You must have been reading my own thoughts!
    The lack of "blue chip" bond issues is a major issue, which hopefully the LSE will address.
    Your comment re Eros are similar to mine, I have a large number of bond holdings, this one I decided not to go for.
    There is considerable "Investor demand" for good solid bond issues with a period of around 7 years.
  • ArthGoch and shaunm, I couldn't agree more with both of you. I too, skipped Eros, but would certainly be interested in smaller companies in diverse industries provided I understood what they did.
  • My understanding is that there are significant compliance and distribution costs when bringing a retail bond issue to market. Additionally, I hear the FCA are not minded to allow bond issues to be available to retail investors (ie: in small sizes of £1-2k) as they fear the current hunt for yield is resulting in many "unsophisticated investors" assuming bonds are akin to savings accounts. I am not sure where they get the evidence for this and how this compares to the explosion in equity income funds, absolute return, etc, of which they seem very relaxed about.

    They have enforced a rule for min. size for CoCos, and my fear is that they could do the same with bonds.

    Execution-only brokers also have a role to play as well.
    I hear in general they don't like new issue bonds as most clients hold them to maturity which means lower frequency trading and lower fees. Thus, they charge exorbitant fees to distribute new retail bond issues.

    Last but not least, I have personally heard some institutional credit fund managers being extremely opposed to the development of a retail bond market in the UK, to the extent that they refuse to participate in some new issues or significantly scale down their allocation orders if the new issue is also open to retail investors.

    Fund managers see the development of a retail bond market as a threat to the bottom line as bond funds are significant revenue earners. One of the drivers to the profitability of an industry is the extent of "barriers to entry". A mass market ORB would result in many DIY investors switching out of bond funds and into individual issues in their own ISAs/SIPPs. Over time, this would dent their profits significantly.

    However, the LSE should push on regardless and try to keep costs as low as possible for issuers. The development of the retail bond market in the US was also slow to start with and now it is massive. Let's not give up!

  • It is extremely difficult in this era of low rates to find “Issuers” that can be deemed suitable for retail. By suitable, I refer primarily to the coupon.

    Last week we had several conversations regarding an investment grade (lower end) overseas issuer interested in issuing a Sterling denominated retail bond, tenor 5-7 years. They were prepared to pay 4-4.2%, as a benchmark they recently issued 7yr Euro paper at sub-3%.

    We were told that to get the issue away the coupon needed to be 5% because of the “premium” that retail requires. Unsurprisingly the Issuer said thanks, but no thanks.

    I will leave you to draw your own conclusions on where events such as this leave the market.....all I will say is, we all have to live in the here and now, not in the past or the future.
  • I agree that it looks like retail investors had a good opportunity while the banks were on strike but sadly it appears that time has passed. Seems were are going to have to work a bit harder for returns going forward and maybe seek out new opportunities in other areas.
  • I for one would certainly look at a 5 year bond paying 4%, and I am sure I would not be alone.
  • I'd want to subscribe to a 5 year bond at 4% too, provided it is creditworthy and trades responsibly/ethically.
    With lower inflation, lower nominal returns start looking acceptable.
    Some of the cash isas and fixed rate bonds on offer at the moment are looking quite attractive now, in terms of their real return and the security offered.
  • I agree with Bond007 and RobinH.
    Who takes these decisions? On what basis do they claim that the retail market would not absorb a 5y investment grade bond at 4%?
    I have never seen any surveys about it.

  • Interesting point that Trenator makes in respect of the red tape and regulation that is needed to bring a bond to the market. This is in an area where I would have assumed that the ORB stakeholders would have taken an active role in attempting to influence reform in order to make the listing as straight forwards as possible. For a comparison of what can be achieved, one need look no further than the P2P industry and where practitioners/investment platforms were so successful in obtaining reform to such a degree that the Government itself now "underwrites" P2P loans by its own investment program, as well as the potential for the creation of P2P ISAs some time this year.

    As almost by coincidence, I just seen the agenda for the ORB 5th Anniversary Presentations and are pleased to see that at least one key speaker is taken on the issue of supply v demand. Also having a government minister present it might be a defining moment on moving matters forward.

    One final note, and in concurrence with what a number of people have said in respect of this mythical 5% return demanded by retail investors. Even if this was the case, I would question how retail investors would influence the placement of a bond where all the data constantly shows that Institutional Investors are by far the largest investors in all of the ORB listings to date. Just because it has the name Retail, it does not mean that Joe Public can influence and affect; and thus I would contend that if there is a glass floor, beneath which the market will not go, it is the institutional investor who are dictating this line of thought

  • ArthGoch, re your last point, where could I find this data that shows institutions 'are by far the largest investors' on ORB? I always assumed the issues were bought by wealth managers and execution only brokers.
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