We explain how to get exposure to these fixed income instruments
Thursday 01 Aug 2019 Author: Holly Black

Income-seeking investors have had a notoriously difficult time in recent years. As interest rates have remained at rock-bottom and quantitative easing sparked a flood of money into fixed income assets, the yields paid by bonds collapsed.

As a result, investors have been forced to move up the risk scale in order to find an income that beats inflation. Retail bonds may be one way for investors to boost the yield of their portfolio and to diversify their income stream – as long as you do your research.

These are not to be confused with the high-yielding mini-bonds offered by the likes of Chilango, with its 8% Burrito Bond, and Wellesley’s Property Mini-Bond. Listed retail bonds are those available through the London Stock Exchange on its Order Book for Retail Bonds (ORB) platform.

STRINGENT CHECKS APPLIED

Unlike mini-bonds, listed retail bonds are vetted and checked and must meet the stringent rules of the stock exchange in order to be able to list. They must publish a full prospectus, written in clear language so that investors can understand what they are investing in and how they can expect to be paid, for example.

Elena Chimonides, fixed income specialist at London Stock Exchange, says: ‘Retail bonds are more robust than mini-bonds, which are more akin to crowdfunding.’

Retail bonds typically offer a higher income than standard corporate bonds, historically 5% or more. Companies often use ORB to issue smaller tranches of debt than they might be able to with an institutional bond – issues listed on ORB are as small as £11m, for example.

This may appeal to smaller companies, which don’t have the need to issue hundreds of millions in debt, as well as to larger and more established firms looking to diversify their investor base.

Firms with retail bonds currently listed on ORB range from private firms such as property management group Places for People and housing group A2D to huge household names including Royal Bank of Scotland and HSBC.

A STEPPING STONE INTO CAPITAL MARKETS

Chimonides says: ‘For some companies it’s a first stepping stone into capital markets, for others it’s a useful way to diversify their investor base by engaging with a new set of retail investors. Because of that, some firms have come back to issue second or third bonds.’

For an investor, the main appeal of a retail bond is usually the coupon it pays. A retail bond from Beazley has a coupon of 5.3%, Burford Capital 6%, and Provident Financial 5.2%.

These beat both base rate and inflation, which can be hard to achieve elsewhere. However, as demand for high yields remains strong and bond issues remain in short supply, coupons are not as generous as they used to be.

But there is also the potential for capital gains to be made when investing in retail bonds. The prices of these assets move in line with supply and demand, and investors are free to trade listed retail bonds on the secondary market at any time – as long as they can find a buyer or seller.

Popular bonds can see their price rise above par value. The Burford Capital issue, for example, currently has an offer price of 107.6p. Those who bought at issue and sold at this price would have made a capital gain of around 8%.

But, just as with any other asset, negative sentiment can drag down the price of retail bonds. An issue by Wasps Finance, which has a coupon of 6.5%, currently has an offer price of 90.4p – a capital loss of nearly 10% for those who bought at par.

The coupon represents what a bond would pay at its par value and movements in price will affect the yield, with a fall in the bond price leading to a higher yield and vice versa.

DO YOUR HOMEWORK

As with any investment, doing your homework first is crucial when choosing retail bonds. Research the company issuing the bond, consider why it is making the issue and what it plans to do with the money as well as its financial strength and the likelihood that it will be able to pay its coupon and repay the capital you have invested when the bond matures.

Chimonides says: ‘You should look at the financial projections of the company, how they have performed and what they are planning to do in the future in order to gauge the credit story of the issuer. Check what else is out there and how the interest rate on offer compares. You shouldn’t go into any investment blind, you need to do the research.’

Investors can buy and sell retail bonds through an investment platform, as they would any other listed entity such as a company share. 

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