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THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK 2015
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Page 1: THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK · PDF fileThis chapter was originally published in: THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK 2015 For further

THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK2015

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Page 2: THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK · PDF fileThis chapter was originally published in: THE EUROMONEY INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK 2015 For further

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

If you are interested in joining the editorial board of experts in other future Euromoney Handbookspublications, please contact Scott Morton: [email protected] or +44 (0) 20 8519 9885

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CHAPTER 8 I EUROMONEY HANDBOOKS

43

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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CHAPTER 8 I EUROMONEY HANDBOOKS

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

44

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CHAPTER 8 I EUROMONEY HANDBOOKS

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

45

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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CHAPTER 8 I EUROMONEY HANDBOOKS

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.

46

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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