The Retail Bond Alternative

The UK and European retail bond markets are becoming an increasingly credible alternative to the traditional institutional bond and bank markets for borrowers.

While certain European markets have maintained active and liquid retail bond markets for years and are an established platform for companies to raise debt, more recently the UK has seen the launch of several bonds specifically targeting retail investors.

The Overseas Story

The European retail bond market has long provided a route to liquidity for borrowers by attracting the proverbial ‘Belgian dentist’- representing the typical middle-class, conservative investor – to invest in corporate names. Luxembourg, Germany, Belgium and Italy are among those to have established liquid retail bond markets. Several European stock exchanges operate dedicated retail bond platforms, including Germany’s Börse Stuttgart Bondm and Italy’s Borsa Italiana MOT, while others list retail bonds alongside wholesale bonds, as in the case of Luxembourg and Belgium.

European retail bonds are typically publicly listed instruments, with issuers comprising not only a range of domestic corporates but also multinationals with high brand recognition locally. For example, Shanks Group, Europe’s largest listed independent waste management company, listed on the London Stock Exchange (LSE) and operating in the UK, the Netherlands, Belgium and Canada, issued its debut €100m retail bond in October 2010 to investors in Luxembourg and Belgium.

Further afield, the US also has a long track record of retail bond issuance, while in Australia direct retail investment in corporate debt appears to be increasing, echoing recent developments in the UK market.

The UK Market

In the UK, interest in retail bonds is continually growing across both investors and borrowers. Demand from UK retail investors is increasing as they seek alternatives to traditional savings products and equities. In addition, long-term structural change to the funding markets is ongoing, impacting traditional financing routes and in response borrowers are seeking alternative funding options.

Two principal routes to market have come to the fore in the UK. The listed market has been assisted by the launch of the LSE’s retail bond trading platform, the Order Book for Retail Bonds (ORB) enabling trading in bonds with small denominations. UK issuers that have already accessed this market include Tesco Personal Finance, property manager Places for People, utilities National Grid and Severn Trent, Primary Health Properties and, most recently, ICAP.

The second route to market, used by borrowers including retailer John Lewis, hotels chain Mr & Mrs Smith, Leon restaurants and green energy company Ecotricity, is the unlisted “mini-bond” route which offers non-transferable bonds with issues typically targeted at raising funds directly from customers. With more than 1.5bn raised in the UK retail bond markets since the beginning of 2011, the market could provide meaningful opportunities for borrowers to diversify debt funding.