DIY Investor Magazine
/
2015 Issue
27
2012 was the halcyon year, since then there has been a
steady decline, what explanations are there for this?
•
Cost – the necessary documentation and legal
costs required to support an issue are considerable,
£200,000 would be a conservative estimate.
•
Regulation – ORB, quite correctly, is viewed as the
“blue chip” listing, as such it can be difficult for an
issue to match the criteria required.
•
Size – because of cost it can be
•
Uneconomical for issues of less than £25m.
•
Difficult to get the support of market-makers which
is a prerequisite of listing on ORB
Whilst supply has fallen there has been no diminution in
investor demand, in the fact quite the opposite:-
“Mini bonds are part of the so-called UK alternative
finance market…..
•
Issuance grew by 91% from £492 million in 2012
to £939 million in 2013, according to The Rise
of Future Finance: The UK Alternative Finance
Benchmarking Report by Nesta, the University of
California and the University of Cambridge.
•
The study discovered that more than 647,000
projects, individuals or business financing
campaigns were fully funded through alternative
finance intermediaries. When compared to 2011 and
2012, in which the figures were around 448,000
and 503,000, respectively
•
Based on the average growth rates between 2011
and 2013, we can cautiously predict that the UK
alternative finance market will grow to £1.6 billion
next year and provide £840 million worth of
business finance for start-ups and SMEs in 2014.
Source: Money wise 2nd September 2014
Whilst mini-bonds serve the needs of investors seeking
greater income from their investments, and have
successfully allowed “smaller” issuers to access a
debt market, they do have shortcomings when
compared to ORB issues, such as:
•
Liquidity: There is, at best, a very limited secondary
market, requiring them to held to maturity
•
They do not have the same levels of transparency
and disclosure required of ORB issues as they are
not written under the full prospectus required by
EU law
•
Currently, they do not qualify for ISA investment
The net effect of all this has been to create a two-tier
retail bond market that, possibly, doesn’t reflect what
investors actually want. ORB has delivered considerable
benefit to investors allowing them to:
•
Access to listed bond investments
•
Achieve higher yields
•
Full disclosure and transparency over the company
they are lending to.
What is hasn’t achieved is sufficient supply to meet
the obvious demand. Mini-bonds have achieved the
opposite,
•
Plentiful supply
•
Without the disclosure and transparency expected
of an ORB issue
What is the ideal solution? Is a different market to list
onto where smaller issues, possibly £10m plus, can be
listed with the disclosure standards required by ORB?
Whatever the solution, it must find a way to serve
some of the issuers that have used the mini-bond route
whilst offering investors the protection afforded by
the disclosure and transparency of a full prospectus.
Only in this way, can we ensure that investors have the
benefit of plentiful supply and sufficient visibility to fully
assess the loan they are making.
Philip Gilbert
Philip Gilbert is Head of Fixed Income & Structured
Products at Beaufort Securities
