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THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK2015
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This chapter was originally published in:THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK 2015
For further information, please visit www.euromoneyplc.com/yearbooks, or contact theManaging Editor, Pam: [email protected] or +44 (0) 1206 579 591
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London Stock Exchange’s ORB: Analternative source of fundingby Pietro Poletto, London Stock Exchange
Debt capital markets
It is important to note however that our mission of
providing cost-effective and easily accessible capital
markets for firms looking to raise funds is not limited to
equity. Against a backdrop of reduced bank lending due to
greater regulatory constraints on financial institutions, we
have increasingly seen companies look at other borrowing
options through debt capital markets. This can help them
mitigate and spread their risk and position themselves to
react to potential adverse market conditions more
effectively.
Hence, to ensure funding diversification, many companies
look to debt capital as well as equity; in the first half of
2014 alone, we have seen nearly 800 bond issues raise
more than £180bn on our London markets. At London
Stock Exchange Group (LSEG) we have a range of options
for firms looking to raise capital through debt. From listing
and trading through to post-trade clearing and settlement,
we are one of the only exchange groups in the world able
to provide the financial community with a fully integrated
fixed income offering. Well established retail bond markets
in Italy (MOT and EuroTLX) and now London (Order Book
for Retail Bonds or ORB) provide companies with direct
access to private investors, while our more traditional
wholesale markets allow firms to issue corporate bonds in
typically larger denominations. MTS, part of LSEG,
In 2014, much has been made about inflows into equities and an IPOpipeline fit to burst, and understandably so: in the first half of 2014, over£13bn was raised on London’s markets through initial public offerings(IPOs) alone, the best performance since 2007, when confidence in the Citywas at an all-time high. This equity raising function will always remaincore to our exchange group and other exchanges around the world, alongwith the guarantee that high profile floats will catch the attention of thepublic and make the front pages of the papers.
Pietro Poletto
Head of Fixed Income
London Stock Exchange
tel: +44 (0) 20 7797 3482
email: [email protected]
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complements our fixed income secondary market offering,
helping buy-side and sell-side institutional participants
that trade pan-European corporate and government bonds.
Changing landscape
As a result of the financial crisis, the UK’s banking and
lending environment has changed dramatically.
Participants are operating against a backdrop of regulatory
change, which has seen more stringent legislation
introduced across the financial markets. This situation
encourages banks to reshape balance sheets and change
their attitudes towards risk. As part of a long-term trend,
there has been a marked decline in the availability of bank
financing to UK businesses – especially small and
medium-sized enterprises, which many would argue is due
to increased regulation. In contrast, banks have remained
more willing to lend to large corporates, who have access
to the widest range of financing options.
The capital markets have not always been at the top of
firms’ list when it comes to raising debt but ORB has, and
will continue to, play a very important role in altering this
perception. Although traditional short-term borrowing will
remain the backbone of many corporates’ funding
structures, ORB has proven to be a very successful route
for complementing bank finance and has provided
solutions for the entire spectrum of issuers – from the
largest FTSE 100 corporates to private enterprises.
The rise of retail bonds
Following the launch of ORB, retail bond issues have seen
a particular rise in prominence over the past four years.
ORB was launched in February 2010 and it was an entirely
new market that addressed the demand from retail
investors for greater access to fixed income products. It is
the only dedicated platform for this asset class in the UK
and has rapidly established itself as a new source of
sustainable non-bank financing for companies looking to
access a new funding stream. At the same time, ORB has
proved popular with an extremely wide range of investors –
from institutions to retail – providing private individuals
with access to a new form of investment which offers
regular fixed income returns.
Since launch we have seen 45 dedicated issues on the
platform, raising more than £4.3bn for companies from a
wide range of sectors and of varying sizes. From FTSE 100
companies and large household names such as National
Grid and Tesco Bank, to midcap companies such as
Workspace Group and housing association Places for
People, organisations have been attracted by this
strategic, long-term financing tool that helps them move
away from a reliance on bank lending and offers access to
a new investor base and pool of capital outside of the
traditional wholesale markets.
Corporate issuers also appreciate the flexibility of a market
where the issue sizes can range from £25m up to what
could be considered a ‘benchmark size’ in broader
wholesale markets (£300m+). Such flexibility has therefore
allowed a number of smaller companies to access the
public markets for the first time through ORB listed bonds.
The average bond raised is only slightly larger than £95m
and the smallest issue just £11m. Since its inception, ORB
has been exceedingly receptive to small issues for which
the wholesale public bond market does not cater.
With the ability to raise less than £100m, the retail bond
market creates an opportunity both for smaller issuers who
have previously found it unfeasible to issue in the
wholesale debt markets and for larger borrowers that
appreciate the additional benefits of issuing ‘retail eligible’
bonds. Larger companies may also want to spread out their
debt maturities further, or refinance a bank facility that is
not of benchmark size or raise money for an acquisition.
The flexibility that the market can offer does not relate to
issue size alone. Companies that have issued bonds
through ORB have raised capital at competitive rates,
offering sensible covenants that work for both themselves
and the investors. As well as the primary capital raising
function, firms have reported a number of additional
benefits from issuing a retail bond. A London listing
through ORB is a high-profile route to market; it provides
the prestige of admission to trading on a globally
recognised exchange, alongside the opportunity to reach a
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wide investment audience in a cost-effective and efficient
way. A typical ORB issue is supported by around 100
different accounts, including institutional investors,
discretionary and advisory brokers, wealth managers and
execution-only brokers who represent the interest of
thousands of end investors. This opportunity to
communicate directly with customers has been valuable for
many companies, along with the associated PR benefits
that come with a retail bond issue.
Another key advantage of issuing a retail bond for a
corporate issuer is investor diversification. Born as a
market for retail investors, ORB is increasingly developing
into a market for retail-eligible bonds, where both the
primary and the secondary market are accessed by a wide
range of investors, from private individuals taking their
own investment decisions and trading through
execution-only brokers, to yield-seeking bond funds.
However, the core of the market is made up of that large
community of advisory and discretionary brokers, as well
as wealth managers, that are not able to access the
institutional bond markets.
Investor appetite for retail bonds has remained strong
since the launch of ORB. Primary market offers in the last
12 months have always closed early due to high demand,
and secondary market trading is increasing year-on-year;
in the first half of 2014, we have seen a 66% rise in ORB
trading volumes compared with the same period in 2013.
Facilitating a transparent, electronic order book for the
trading of retail bonds, with two-way pricing provided by
market-makers throughout the trading day, means
investors can exit their investment before maturity if they
feel the need to free up capital. Furthermore, issuers can
always see a reliable price for their bonds that helps them
plan for future debt issues.
Government support and fiscalincentives
The UK government has also been a supporter of this new
financial product and recent changes announced in the
Budget will offer greater choice and flexibility for issuers.
The extension of ISA-eligibility for bonds with less than five
years maturity came into force on July 1, 2014. This will
offer further opportunities for corporate issuers looking to
spread the maturity of their retail bonds along the entire
curve. It will also benefit retail investors who will be able
to build up a well-diversified, tax efficient portfolio of fixed
income securities, and reduce the average duration of their
portfolios in periods of rising interest rates.
The 2014 Budget announcement also signalled the
potential for further significant changes in the UK savings
and investment market. If the proposals become law,
beneficiaries of defined contribution pension schemes will
no longer be obliged to buy annuities and be allowed to
manage their own pension pots as they wish. ORB and
retail bonds offer a great opportunity to those investors
that are looking for predictable and stable income from
their investments. From a corporate issuer’s perspective,
this is likely to foster investor appetite for longer dated
instruments.
LSEG remains dedicated to providing innovative ways for
companies to raise funds for growth and increase retail
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Requirements for admission to ORB:
For every security to be admitted on ORB, some key requirements must be met to ensure that they are suitable for theretail market:
• London listing through the UK Listing Authority (UKLA) and admitted to London Stock Exchange’s Main Market.
• At least one market-maker committed to provide electronic two-way prices throughout the trading day.
• Bond denomination must be no larger than £10,000. Bonds on ORB are usually tradable in units of £100 or £1,000.
• Compliance with the minimum disclosure requirements for the retail regime as set out in Annex IV and V of theProspectus Rules.
• The bonds should, in most cases, be enabled for settlement in CREST (Euroclear UK & Ireland).
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investor participation on our markets. ORB has, and will
continue to help us achieve both and is well-positioned to
benefit from regulation that seeks to increase transparency
and supervision in the financial markets. LSEG’s sister
exchange, Borsa Italiana, has a well-established retail bond
platform, MOT, which was launched 20 years ago and
demonstrates the enormous potential the UK offering has.
As a primary market platform, MOT has provided an
innovative alternative for the Italian government to raise
€87bn directly on the market in the last three years, while
on the secondary market, it regularly sees over €1.5bn in
daily trading. The UK market for retail bonds continues to
grow and develop, and as increasingly sophisticated market
participants and investors look to new structures such as
floating rate and inflation linked bonds with the potential
for new currency lines, the future for ORB looks bright.
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ORB Issuers Group
The Order book for Retail Bond Issuers Group (ORBIG) mission is to promote the merits and understanding of retail
bonds listed on the London Stock Exchange’s ORB trading platform. ORBIG was launched in February 2013 and there are
currently 10 member companies from a range of different sectors. It is chaired by Harry Hyman (also MD of Primary
Health Properties plc) who describes ORBIG’s purpose to: “provide a unified voice for all companies and organisations
that have issued or are involved in the issue of retail bonds. It aims to educate the wider financial community, including
the media, on the benefits of retail bonds for companies and investors alike.”
Contact us:
London Stock Exchange
10 Paternoster Square, London EC4M 7LS, UK
tel: +44 (0) 20 7797 1000
email: [email protected]
web: www.londonstockexchange.com/ORBguide
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