A NEW SOURCE OF FUNDING FOR SMEs: The Order Book for Retail Bonds
At a time when there is still little appetite for financial institutions to lend and equity fundraisings on AIM are still few and far between, there is an opportunity for smaller companies to take advantage of issuing bonds with a value as low as only £200,000.
In February this year the London Stock Exchange launched the Order book for Retail Bonds (ORB), which for the first time allows retail investors access to an on-screen secondary market in corporate bonds and gilts. At present it is the large blue chip companies that have migrated some of their bond offerings to this platform, albeit the denominations are now ‘retail-sized’, but there is no reason that smaller companies cannot issue corporate bonds onto the ORB facility.
Issuing bonds (as opposed to issuing shares) allows a company to avoid surrendering ownership of part of the business, which is a particular concern when share prices are depressed. This is also attractive to investors as bonds offer a more secure return for them as creditors instead of as shareholders; interest on debt must be paid according to the set terms of the bond, whereas dividends are paid out purely at the discretion of the company. By the same token, the fixed income nature of bonds means they are only appropriate for companies with predictable revenue streams. One of the key benefits of issuing onto ORB is that pricing information is available throughout the trading day which makes the instrument more appealing to investors as they have confidence that they can track the value of their investment.
The advent of ORB is potentially very exciting for SMEs because if they are prepared to grasp the nettle of preparing a prospectus, adopting IFRS and submitting to greater disclosure requirements (see more detail of the criteria below), then a bond issuance may be a real alternative to consider because a small issue value has a chance of a real secondary market given the lower denomination sizes and the improved access for retail traders. Although a bond issuance as low as £200,000 is permitted, and no sponsor or rating agency is required, given the costs of preparing a prospectus and general compliance a larger issuance value will be more cost effective.
In the UK, listing a bond consists of admission to listing by the UK Listing Authority (UKLA) and admission to trading on a recognised investment exchange i.e. the London Stock Exchange. These procedures are parallel processes in which the LSE and the UKLA work together with issuers and their advisers.
Listing Requirements
There are a number of principal requirements which should be fulfilled:
- A company issuing bonds should normally have at least a two-year trading record and should be able to present independently audited accounts covering the past two years. This requirement may be waived if an issue is fully secured, asset backed or guaranteed by a sovereign state or a corporate which itself meets the UKLA’s basic listing requirements.
- The issuer must prepare a Prospectus complying with the UKLA’s listing rules, and with the Exchange’s Admission and Disclosure Standards.
- The debt securities subject to the listing must be freely transferable.
- The market capitalisation of the class of the debt securities to be listed must be at least £200,000.
- The application for listing must relate to the whole class of debt securities, either issued or proposed to be issued, except for those securities already listed.
An additional requirement for admission to trading is that the instrument has a committed market maker to provide two-way pricing on the order book. Normally the lead manager or broker can operate in this role, but the London Stock Exchange can also put issuers in touch with existing market makers on the platform if necessary.
The listing process for bonds can take as little as three days depending on the complexity of the transaction and the completeness of the listing document submitted for approval.
Admission to Trading
A bond must be admitted to trading on the London Stock Exchange’s markets; this is managed via the Admissions Team. The Admissions team require the following documentation before a bond can be admitted to trading on the Main Market:
- Electronic copy of Prospectus/Pricing Supplement/ Final Terms Documentation;
- Copy of relevant Board Minutes;
- Copy of Regulated Information Service e.g. RNS, announcement relating to the admission;
- Written confirmation on the number of securities to be issued; and
- Completed Exchange Form 1.
The London Stock Exchange provides two markets for listed bonds. The eligibility requirements for both markets require that a bond has a minimum value of issue of £200,000, that the security is freely transferable and that all securities of the same class are to be listed. The two markets for listed bonds are as follows:-
- The Professional Securities Market which is a specialist market aimed at issuers wishing to access wholesale investors only. It is regulated by the London Stock Exchange and offers greater flexibility in terms of listing requirements and ongoing regulatory obligations.
- The Main Market is an EU regulated market, offering the highest level of transparency and regulatory oversight. It caters for both wholesale and retail bonds. Only securities admitted to the Main Market are eligible for admission to trading on the electronic Order book for Retail Bonds. When admitting retail bonds to trading on the London Stock Exchange, the issuer must request that the bonds be admitted to the electronic order book as the default location for Main Market bonds is a standard trade reporting-only market segment.
For advice on your fund raising, please contact our sector expert Ross Bryson 020 7440 7190.