Most of our coverage at the IC revolves around shares. But there are other (nominally less risky) ways to invest in companies, one of which is through the Order Book for Retail Bonds (Orb). Orb is a limited market of easily tradable debt launched by the London Stock Exchange in 2011, which was initially pounced on by blue-chips looking for cheap finance. The issues proved really popular, and many readers will have subscribed to the large number of issues - some of which were tacked on to larger corporate bond offerings - in Orb's infancy.
Despite strong demand, new issues have now slowed to a trickle, with just five new entrants to the order book in 2015 (see table below). "[Issuance] has been light, and frankly I'm not sure I see that changing in the short term," says Hardman & Co analyst Brian Moretta. "The difference between now and three years ago, when the market was really strong, is that companies have many alternative routes to financing."
| Issuer | Date | Coupon | Maturity | Price | Yield |
|---|---|---|---|---|---|
| Paragon | August | 6 | 5/12/2020 | 101.975 | 5.54% |
| Wasps Finance | May | 6.5 | 13/05/2022 | 101.746 | 6.17% |
| Retail Charity Bonds | May | 4.4 | 30/04/2025 | 99.5 | 4.42% |
| Provident Financial | April | 5.125 | 9/10/2023 | 103.68 | 4.94% |
| Intermediate Capital | March | 5 | 24/03/2023 | 100.087 | 4.99% |
While there was slim growth in the order book this year, aggregate bond prices fell in the months to December, although of the 104 issues currently listed just a handful are trading below par value. The notes maturing in 2031 for struggling pub company Enterprise Inns (ETI) are 94 basis points down on their issue price and now yield 6.5 per cent. That's the same coupon that came with an earlier issue maturing 2018, which now change hands for £106.67. Sentiment in International Personal Finance (IPF) also leans to the downside. Over the summer - and following incoming consumer finance legislation in Poland - the European doorstep lender saw a sharp fall in the price of its bonds maturing 2020, moving its yield to 6.79 per cent.
Three retail bonds are priced for higher chance of default. Premier Oil (PMO), whose shares have halved for the second year in a row, has seen a sharp rise in the yield on its 5 per cent retail bonds maturing 2020, to 14.45 per cent. This year's decision to suspend dividend payments to shareholders hasn't helped sentiment, nor has the continued low oil price.
Enquest's (ENQ) retail bonds, which have a maturity date 14 months after those of Premier Oil, are priced at even more of a sharp 60 per cent discount to par. The North Sea driller is reducing capital expenditure in the next two years in the hope of moving to a positive free cash-flow position, even with oil at $50 a barrel. That dire position has put Enquest's shares at less than a quarter of JPMorgan Cazenove's risked core book value, and the explorer's bond yield at 25.26 per cent, just slightly below that of Mumbai-headquartered film production house Eros International.
The highest-yielding retail bond on the market above par is one of this year's only issues, for the rugby club Wasps, which issued an oversubscribed 6.5 per cent coupon bond maturing 2022. The issue, secured against the club's assets, was used to pay off existing debt and invest in the 32,600-seater Ricoh Arena stadium acquired last October. Wasps' performance both on and off the pitch has been encouraging since the issue, and although Wasps booked a £5.2m operating loss in the year to June, it expects to make a profit this financial year.
| Issuer | Coupon | Maturity | Price (@ 2/12/15) | Yield |
| Rolls-Royce | 7.375% | 14/06/2016 | 103.185 | 1.29% |
| Smiths Industries | 7.25% | 30/06/2016 | 103.2 | 1.59% |
| Lloyds TSB | 5.5% | 25/09/2016 | 103.504 | 1.14% |
| Provident Financial | 7.5% | 30/09/2016 | 103.15 | 3.58% |
| BT | 8.75% | 7/12/2016 | 107.155 | 1.33% |
| Places for People | 5.0% | 27/12/2016 | 102.55 | 2.56% |
Looking ahead to 2016, bond investors will be watching closely for the way potentially divergent monetary policies will affect yields. One potential effect is on liquidity. The US Federal Reserve's long-anticipated move to raise its base rate (expected as this issue went to press) has been cited as one of the causes of price swings, and difficulties in buying and selling, in the corporate bond market in recent months. The second issue is whether rising interest rates are likely to raise the risk of default for indebted companies.
In the first case, retail bondholders should feel a degree of comfort, as the market was designed to be liquid, and make it easy for investors to trade in the thousands or tens of thousands of pounds. On the second point, with the possible exceptions of the struggling companies mentioned above, most Orb issuers are blue chips with good credit ratings and should not be heavily impacted by a slight, telegraphed lift in interest rates.
Plus, given the likely slow pace of interest rate rises here, Dr Moretta believes the effect will be muted. "In the UK, even if the Bank of England raises the base rate next year, it isn't going to go back to 2 per cent any time soon, so that shouldn't be hugely negative for pricing," he says. "Gilt yields aren't quite as low as they've been in the last year, but they're lower when most of those bonds were issued."
