The risks associated with retail bonds are not being adequately communicated to an inexperienced and vulnerable investor base, according to some brokers. "Our concern is that some people are taking advantage and not being as assiduous about communicating the risks as they could be. Retail investors don't know what questions to ask. These are more complex instruments than they are used to buying," one broker told Investors Chronicle.
Meanwhile, analysts at Investec wrote in a note that certain bonds had received a "mixed response" due to their lack of covenants, citing as examples the paper issued by property companies Primary Health Properties (PHP) and CLS Holdings (CLI). The PHP retail bond has none of the loan-to-value covenants or restrictions typically imposed by banks and other lenders when property companies borrow from them, while the CLS bond only has limited protection.
These warnings follow a sudden spate of retail bond issues. At first the London Stock Exchange's Order Book for Retail Bonds (Orb) platform, on which they have traded since its 2010 launch, featured paper from FTSE 100 household names such as Tesco, Lloyds and National Grid. But over the past few months a new range of companies, including several small-caps, have joined the fray. Last week industrial property and office provider Workspace (WKP) became the sixth company to launch a retail bond in three months.
Retail bonds are popular with issuers for a number of reasons. They allow them to raise capital in small doses - the minimum companies can raise on the institutional market is £250m. The publicity surrounding a retail bond issue may also boost the profile of their ordinary shares. "Some intermediaries have gone away from management pitches liking the equity as much as the bonds," says Henrietta Podd at Canaccord.
Finally, retail bonds offer greater flexibility for the borrower. Insurers and banks tend to demand tight covenants, often in exchange for lower interest rates. Retail bonds are higher yielding but would come lower down in the corporate pecking order if the company went bust. It is this 'structural subordination' that some brokers fear is not being sufficiently stressed by issuers who are only too happy to peddle their usual corporate story to a receptive audience.
