In January, the UK corporate bond market opened far more widely to private investors. New rules made it easier for companies to issue bonds in retail-friendly denominations as low as £1.
But despite these commendable changes, the main problem so far has been supply – three months on and few retail-eligible bonds have been issued. “It’s a little bit surprising that it’s been so hard,” says Mateusz Malek, head of bond research at Killik & Co.
Enter the London Stock Exchange (LSEG). The British bourse-turned-data company has fired the starting gun on its own campaign to broaden the universe of corporate bonds available to individual investors.
On 20 April, after receiving approval from its current bondholders, LSEG successfully re-denominated three of its existing sterling bonds into more digestible units of £1,000, from the previous £100,000.
The securities in question are the London Stock Exchange 1.625% 06/04/30 (XS2327297672) bond, the London Stock Exchange 4.5% 19/10/28 (XS3182450372) bond and the London Stock Exchange 4.875% 19/09/32 (XS3182450539) bond. Investors are now able to buy these notes on the secondary market through their investment platforms.
And while this technically isn’t new issuance, Michael Smith, head of debt capital markets at Winterflood Securities, welcomes the move. “It comes back to the fact that [retail investors] didn’t have them yesterday,” he says.
“This is a part of the solution towards making more bonds available to retail investors,” he adds. “You can imagine the market growing more quickly this way, rather than one by one as corporates bring new issues to market.”
This kind of stimulus is sorely needed given the slow start. Many are pointing to the time and effort required for companies with existing sterling bond issuance programmes to update their documentation and get comfortable with the changes. For the bigger issuers, there has been less incentive to do so given institutional liquidity can fulfil most of their funding requirements.
Mike Coombes, chief operating officer at PrimaryBid, thinks change is therefore more likely to come as part of a “gentle market evolution” that includes retail investors without disrupting current market dynamics.
“The main thing throughout has always been ‘don’t muck up the wholesale market’, which works very well and funds companies fast and cheaply,” he says.
Even so, LSEG’s move not only adds precious supply to a nascent market for retail investors, but serves the important purpose of showing other companies that a FTSE 100 issuer can provide retail access in a way that is not detrimental to its institutional bondholder base.
“If anything, it can only have positive impacts for the bonds, potentially improving liquidity,” says Malek. “Hopefully that process is successful, and if it’s not too costly then other companies will follow suit.”
Indeed, as the flag-bearer for UK capital markets, there is a degree of pressure on LSEG to get the ball rolling. But regardless of who takes the lead, as Smith says: “Bonds that are now available to retail investors [are a] good news story.”
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