That goes some way to allaying suspicions that retail bonds were a top-of-the-market phenomenon that would flop in an era of rising rate expectations. The ‘taper tantrum’ of May 2013 - when the US Federal Reserve announced it would begin to reduce or taper its bond-buying programme, sparking volatility in global capital markets - caused some hiccups in retail bond issuance last summer. Manchester office landlord Bruntwood had to increase the coupon on its £50m retail bond at the last minute, and Irish builders merchant Grafton pulled its issue.
Since then, however, demand has stabilised. This year bond yields have fallen, and the FTSE Orb index is up 4.8 per cent (including income returns). Investors have seemingly shrugged off their worries about a rapid reversal in monetary conditions and resumed the fierce hunt for yield that started back in 2009. Burford’s oversubscribed issue - which came with a 6.5% coupon, but against the backdrop of hawkish comments on the need for rising interest rates from Mark Carney - underlines the point.
The problem with the retail bond market has been lack of supply, not lack of demand. There was only one issue in the second quarter, from Ladbrokes with a coupon of 5.125%. The only other recent launch was from Golden Lane Housing, the property arm of learning disability charity Mencap. Billed as the "first ever retail charity bond" with a coupon of 4.375% over seven years, the issue raised £11m.
The paucity of new bonds reflects the banking recovery. It is easier for companies to borrow from banks than directly from the capital markets - particularly the retail capital markets - as it does not involve trying to second-guess the potentially disparate needs of a large number of different investors. When banks are willing to lend on decent terms, the rationale for companies tapping retail money is weaker.
That rationale does still exist. Investors are willing to lend for longer than banks, which typically issue debt for three to five years only. That was the key reason why Burford Capital chose the retail bond market, says Canaccord Genuity, the lead broker on the issue. It does not need to repay its new bonds until 2022 - eight years hence.
Diversity of capital is another reason for companies to issue bonds. Property companies are sometimes called 'bricks and mortar' investments, but this expression gives a misleading impression of their business model: the raw materials of real estate are really debt and equity. Keeping diversified funding streams - not becoming overly dependent on banks - is therefore as important for a property company as keeping a diversified supplier base is for a clothing retailer. That's why so many retail bonds have been issued by property companies.
Another reason companies have for launching retail bonds is that the exercise can boost their brand - rather like an IPO. This is particularly true because retail bonds are bought by a broader set of investors than shares. Small listed companies typically have several hundred shareholders; a retail bond may bring them several thousand bond holders.
Still, the case for issuing a bond weakens when the banks are competing to lend, as is now just starting to happen. That’s a shame, because for private investors they fill a noticeable gap. No other investment can provide the certainty of return a bond held to maturity can. Bond funds are useful in their own way - notably because they diversify away the risk of a default - but do not offer the fixed income (or fixed capital return) that has given the asset class its name.
Of course, that apparent certainty of return needs to be weighed against the risk of the issuer going bust. The real test of the retail bond market will not be the first interest rate increase, but the first default. That may not be for some years; so far brokers are being careful to maintain the quality of issues. But when default eventually comes, it is likely to frighten off those holders minded to think of retail bonds as alternatives to fixed-rate bank deposit accounts. For the sake of private investor choice, I hope the market survives that shock...
