Improving access to capital markets financing was a key recommendation of the Breedon Report. In addition to mezzanine loan funds the UK government is also promoting online receivables exchanges and P2P lending platforms. In March it awarded £5 million to Market Invoice, an online receivables platform, £10 million to Urica, a supply-chain finance platform, and £17 million to Beechbrook Capital to establish a mezzanine fund focused on growth capital for SMEs. The UK government has also launched a feasibility study into an aggregation platform for SME loans known as the Agency for Business Lending (ABL), which would then sell securities backed by these assets essentially a big SME CLO. The private placement market in the UK is woefully undeveloped, with those corporates that do issue relying on US investors. It also tends to be limited to deals over £50 million in size for firms with turnover greater than £350 million.
The US private placement market prices relative to secondary trading levels on US public securities," says David Cleary, senior director, corporate DCM at Lloyds Bank in London. "As these tend to price inside UK public securities, going to the US enables UK borrowers to access low cost long term debt. The UK private placement market is modest relative to its US counterpart and remains hindered by investment restrictions in place on many UK funds that have to remain in listed, tradable securities. They are therefore prevented from investing in private placements.
Ever since the London Stock Exchange launched the Orderbook for Retail Bonds (ORB) in February 2010 the hope has been that the retail bond market in the UK can become a more robust source of finance for small firms, as it is elsewhere in Europe, particularly in Italy. There have been very small scale exercises in the past such as the £627,000 raised by shaving products company King of Shaves and £3.7 million by retailer Hotel Chocolat.
By March this year the ORB had raised £3.2 billion from 34 issues and four taps, but issuance has been dominated by large firms that already have good capital markets access, such as Tesco, National Grid and RBS.
Gillian Walmsley, head of fixed-income products at the London Stock Exchange, tells Euromoney that this is understandable given the nature of the exchange. The ORB was launched to provide an alternative source of funding for firms. It offers companies access to a growing pool of retails investors, many of whom may be new to fixed income. Because of this ORB has initially been developed as part of the Main Market, not as an AIM-type bond market. ORB It requires the highest level of disclosure and transparency so tends to be used by mid- to large-cap firms, she says. This is in stark contrast to the recent development of the retail bond market in Germany, where the five different exchanges have developed platforms for small-scale issuance. It will therefore be some time before the bond market is a regular source of funding for mid-caps and it will likely remain out of reach for smaller firms.
Bonds listed on the ORB are public securities so the process will probably be too expensive for issuers wanting to raise less than £25 million, says Lloyds' Cleary. However, creditworthy SMEs looking to raise such sums will be able to raise it from the bank market. Indeed, it is the liquidity in the bank market that has resulted in many such companies not needing to consider the retail bond market.
Retail investors in Germany have a greater understanding of fixed-income and structured products, explains Walmsley at the LSE. There is also a larger base of SME corporates. She does, however, concede that: It is important to diversify ORB issuers. We are targeting mid-caps along with large caps and there is potential for SMEs. But ORB requires EU Regulated Market standards of disclosure and although there are moves to streamline the process and to standardize documentation, this can only reduce costs so far. Currently we estimate that the market many not be economical for issues less than £25 million the combined costs for smaller amounts may be prohibitive.