Frequently Asked Questions:
What are the benefits for companies?
Retail bonds can offer companies more flexible financial arrangements, often for a longer term, than may be available using other finance sources such as bank loans. This helps companies to invest with more confidence for the long term. Moreover, issuing retail bonds on ORB allows companies to diversify their sources of funding, tapping into a different and innovative pool of capital.
ORB can also help companies that are seeking to increase their brand awareness amongst wealth managers, investors and potential clients as well. Some listed companies that have issued retail bonds on ORB have also seen benefits to their equity shares, as some private investors may wish to own some of the retail bonds and some of the shares in the same company.
For more information on issuing a retail bond please refer to the London Stock Exchange’s Listing Guide – click here
What are the benefits for investors?
With interest rates from savings accounts currently at very low levels, so many private investors are looking for higher income but with more security and less volatility than shares. Retail bonds can offer investors a more attractive income stream with yields often ranging between 4% - 6%, depending on the company issuing the bond. These attractive rates can help investors’ returns as part of a balanced portfolio.
How do I invest?
Retail bonds are purchased normally by private investors via their usual stockbrokers, and can be acquired either when the bond is originally issued (i.e. on the "primary market"), or afterwards at any time during the life of the bond. A list of ORB market participants offering access to the ORB electronic secondary market is available on the London Stock Exchange website.
How do I sell?
In the same way as buying bonds in the secondary market; by private investors selling via their usual stockbrokers. This can be done any trading day during the year. There is no obligation to hold the bonds for a minimum period.
How does the price of the bond vary on the London Stock Exchange’s ORB market?
Normally the price of a bond in a company will vary somewhat less than a share in the same company. A bond is issued at a price of 100, (which is known as the “par” level) and normally a bond would be expected to trade within a relatively close range around this par level, unless:
- The perception of a company’s financial strength changes: so a retail bond may go up in value if people believe a company’s financial strength has improved; alternatively if people believe the opposite then the price of a bond may go down
- Bank interest rates change significantly, either up or down
- Inflation rates change significantly
- There may be other reasons, such as everyone trying to buy or sell bonds at the same time; this is true with shares as well
What is the minimum amount I can invest?
One of the main advantages of the ORB retail bond market is that you can normally invest from £100 upwards, although at a bond launch the minimum may be around £2,000.
How often is the interest paid?
Each bond can vary but normally either quarterly, every six months or once per year. However, unlike shares or bond funds, if you sell a retail bond in between these interest payment dates, you will receive the interest accrued on a daily basis since the last interest payment. (Interest is sometimes called the “coupon”). This can be a real attraction for private investors.
What are the charges?
The only charges that should be incurred are the buying and selling fees that a stockbroker or wealth manager charges to the private investor. Often these can be quite low. There should be no upfront fee, unlike as is often the case with a bond fund or unit trust type investment; this is very important to appreciate as it can make a large difference to your returns during the period that you hold the investment, particularly if it is for a relatively short period.
What are the risks for investors?
A retail bond is an investment. As with any investment, there are always potential risks to consider.
Some common concerns are addressed below:
What if the company goes bust?
It is important to do your research on a company before investing in a retail bond, to make sure you are comfortable with its size, business model and financial position. If a company does go bust, you may lose some or all of your capital and some or all of the interest due thereafter. However, you would be ranked ahead of shareholders if company goes into administration or liquidation, if there are proceeds left available to distribute
This is why it is important to have a diversified portfolio of bonds in the same way that one would normally have a diversified portfolio of shares
What about inflation?
For fixed rate issues (not adjusted for inflation) inflation rises, since the company always pays the same absolute level of interest, the “real” rates of return will be reduced
What about interest rates?
Interest rates are currently at low levels and medium and long term interest rates are also at historic lows, which indicate that markets expect interest rates to remain this way. If interest rates rise, the value of the bond is likely to fall, as there may be other investments that offer comparable yields
However any subsequent new bond issues by companies, after interest rates rise, would generally be at higher interest rates, so if investors have a diversified portfolio of different bonds with different maturity dates (the date when the company pays back the bond to the investor) then investors can reinvest at these higher levels thereafter.
Am I covered by the Financial Services Compensation Scheme?
Retail bonds are not covered by the Financial Services Compensation Scheme (FSCS). Unlike a bank deposit, the FSCS will not pay compensation to an investor in the bonds in the event of the failure of the issuer company.
Retail bonds offer an opportunity to purchase debt directly from a company and thus offer higher returns, in exchange for taking on a degree of risk. They are not risk-free and should be researched with the same diligence as would be applied when buying shares. However as a company should pay back its debt and interest before paying money back to shareholders, owning retail bonds, being company debt, is intrinsically less risky than owning shares.
What are the differences between ORB retail bonds and other financial instruments often marketed as similar investments?
There has been a recent increase in the amount of instruments marketed as ‘bonds’ targeting retail investors. These are quite distinct products from ORB retail bonds, and investors should be aware of the differences. The key characteristics of retail bonds tradable on ORB include;
- they are listed on the London Stock Exchange and have a full prospectus approved by the UKLA, compliant with EU regulation
- they are easily tradable in the fully regulated secondary market run by the London Stock Exchange, with transparent pricing available throughout the trading day
- they are ISA eligible, as long as they have over 5 years until maturity at time of purchase
- they are ranked with credit seniority ahead of the equity in the event that the issuing company defaults
It is worth noting these points as there are some products that are marketed as bonds, but do not have the same features and so do not offer investors the same benefits.