Editorial: ORB adds options for SMEs and investors

In a timely development, the London Stock Exchange’s launch of a new online retail bond market for government and corporate bonds – the Order book for Retail Bonds (ORB) – has positive implications not only for private investors but for the small and medium-sized companies they invest in too.

First day’s dealings in a market offering private punters a secondary market in London-listed debt securities began on 1 February, with the first bonds made available in blue-chips such as Tesco, BT and Royal Bank of Scotland.

Yes, dealings on day one were modest, but volumes should build as retail investors, until now excluded from the bond market due to the minimum £50,000 lot size in which most bonds are traded, warm to the opportunity.

Operating in the same way as trading shares, with two-way spreads, the new market now allows private investors to buy and sell modestly sized individual corporate bonds and gilts as easily as they can trade shares.

Deal sizes could be as low as £1,000 (or even lower), and with interest rates at a historic low and yields on cash in the bank negligible, investors should take a serious look at this newly available market, even though some corporate bonds have already performed pretty well. So far, more than 15 retail brokers have signed up to operate in the new market, though the LSE expects that figure to rise closer to 20.

Leading capital markets lawyer Andrew Chen, of international law firm Jones Day, waxes lyrical about the benefits of the launch, particularly on the corporate bond side: ‘Retail investors can now deal in bonds in much smaller sizes of £1,000, and over time I think this will come down, if there is enough retail demand, but time will tell if it is successful.’

Chen also points out that the new market could benefit investors in another way, by providing an alternative pool of investment capital to the small and medium-sized companies they invest in.

‘It will be a huge benefit to smaller companies, which are having difficulty in getting financing from the banks,’ explains Chen. ‘The hope is that more and more of these companies will now start issuing [bonds].’

He insists that ‘some of the mid-cap brokers are urging clients to start issuing bonds’, and believes that ‘FTSE 250 and FTSE 350 companies could come to market, and it would be a huge source of funding for them’. Chen sees even more companies seeking to raise debt finance from retail investors, ‘if pending European Commission proposals to simplify prospectuses for capital raising by SMEs are adopted’.

However the retail bond market develops, the universe for private investors has widened and the funding options for small-caps have broadened, which can be no bad thing.