The London Stock Exchange’s UK retail bond market has been doing pretty well since its launch in 2010. It suits private investors looking for reasonable yields in a low-interest rate, low-growth/high-inflation environment, as they can buy in small amounts and trade cheaply, and investors in the market have given debut issues by property companies a warm welcome.
Three have issued so far, beginning with Primary Healthcare Properties in July. A fourth, from St Modwen, is due to close any day. Judging by the eight authorised distributors for St Modwen’s issue it would be surprising if the company doesn’t raise nearer the top than the bottom end of its £50m-£100m issuance range.
The market is a property company FD’s dream – relatively long-term, unsecured finance with no amortisation – and accessible to the kind of well-run, listed mid caps that would find the wholesale corporate bond markets difficult and expensive to access, especially if they have to get the issues rated.
Fans would go further and say this new junior capital market has advantages for both issuers and investors over its vastly bigger sibling, such as the liquidity in the bonds that comes from having thousands of investors in most issues and the profile it gives the issuing businesses – 5,000 bought CLS Holdings’ retail bond, 4,000 more than invest in its shares.
The high level of interest from property company boardrooms in the capital markets goes much wider than retail bonds. Since the summer there have been bond issues galore, including a run of convertibles and vanilla corporate issues too. Almost all the big REITs are tapping the markets.
What is going on? One or two of these companies have pressing refinancing issues but most do not. Yet almost no listed property firm has not refinanced, or contemplated refinancing, recently.
A remark by St Modwen chief executive Bill Oliver offers a telling insight into their motivation. Commenting on the launch of his company’s retail bond he said: “We just want to remove that theoretical risk that banks won’t be there,”.
This determination to find alternative sources of funding reveals just how fearful prop cos have become that Oliver’s theoretical risk is not theoretical at all; they dread being backed into a corner by “relationship” banks professing undying love, only to decide at an awkward moment that commitment is not for them after all.
It would be over-egging it to say that any capital markets coupon is worth paying to avoid such a pass, but make no mistake, property companies are very serious about diversifying away from banks.
All possibilities are being analysed: private placements, insurance companies, any structure that can aggregate investors. This suggests that non-bank finance will make serious in-roads to replacing bank lending. For many prop cos, the new lenders can’t get their act together fast enough.