Mid-cap Corporate Finance - The new UK retail bond market
On 1 February 2010 the London Stock Exchange launched a new UK retail bond market with its Electronic Order Book for Retail Bonds. This new retail bond exchange – the 'ORB' - opens up a new source of finance for UK mid-cap corporates.
Lawyers William Belcher, Robert Fenner, Tim Stocks
How does the ORB work?
The ORB is a dedicated electronic trading platform for 'retail' bonds, being bonds with minimum denominations not greater than £10,000. The trading day starts with an initial opening auction phase running from 08:00 to 08:45, followed by continuous trading until 16:30 market close.
Dedicated market makers commit to quote two-way prices in a range of bonds throughout the trading day. All trades settle in CREST.
What is required in order to list?
Bonds must be admitted to trading on the Gilt Edged and Fixed Interest Market (that is, the Main Market) so a full prospectus, approved by the UK Listing Authority, is required. Bonds must be issued in Sterling. There is no minimum rating requirement. Minimum issue size is £200,000.
What sorts of corporate bonds are trading now?
More than 20 corporate bonds are now trading on the ORB. All are established, rated issuers such as British Telecommunications plc, Unilever plc and Tesco plc.
Two initial retail offerings of bonds have been made on the ORB since it opened. On 1 February 2010, The Royal Bank of Scotland plc - rated A by S&P, A1 by Moody's and AA- by Fitch Ratings - launched a 5.1% 10-year bond (£50m in the series) to UK retail investors. Provident Financial plc – rated BBB+ by Fitch Ratings - has since offered a 7% 10-year £75m bond to UK retail investors. Minimum denominations were £100 and £1 respectively.
What about unrated UK mid-cap corporates?
HM Treasury want to see UK mid-caps have access to the bond markets. The LSE have stated they want to see UK mid-cap bonds trading on the ORB. We think UK bank balance sheet capacity will be constrained for the foreseeable future.
This is new territory but our view is that UK mid-caps:
- should examine the new UK retail bond market closely as a substitute for bank finance
- will be better off with a sub-investment grade rating than with no rating
- should be sceptical of suggestions that they have to follow the 'high-yield template'
Why don't we discuss?
To discuss further, please see contacts above.
