During the peak panic a few weeks back, real time pricing on many retail bonds traded on the ORB moved into absurd territory with many trading at below 70 and even 50% of their nominal value. This extra ordinary price reaction was a function of the peculiar characteristics of this strange little market.
The retail bond ORB market offers private investors both advantages and disadvantages. On the positive side, it opens up a range of income based products that are easy to trade in and out of, especially for those seeking small parcels of stock. Crucially that means that private investors can actually be more nimble than bigger institutional investors who can’t easily fill big orders without really moving the price. But that relative lack of liquidity – which also produces chunky bid offer spreads – also comes at a massive cost. When small numbers of private investors want to sell their bonds, prices can collapse as market makers adjust their limited books. Which is precisely what happened a few weeks ago when even rock solid, charity based bonds traded below 70p in the £.
The much bigger challenge is that this ORB retail bonds market has atrophied. There have been a few issues in recent years but investors have never really got behind this structure as say the Italians have done. Volumes are still small and most big companies would much rather tap the wholesale capital markets.
What new issuance has emerged has usually been from slightly off the beaten track entities such as smaller charities, smaller housing associations, private businesses’ such as property developers and private schools – and the just plain ‘alternative’. Outfits such as Burford would struggle to pull off a conventional wholesale bond issue because of the lack of credit rating and unusual business model. Thus, retail bonds work for these ‘alternative’ businesses.
Overall, though this makes the retail bonds market really only one for the properly adventurous who are willing to do their homework.
But that doesn’t mean that there aren’t some interesting businesses with bonds on the market. Its just that you need to navigate around either the slightly complex (Burford) or the very obviously challenged (by macro conditions) – such as Premier Oil, which I hold in my portfolios.
Also, if I’m honest many retail bond prices have snapped back sharply in the last few weeks, moving out of the genuine bargain basement category into the boring ‘simply expensive’.
That said there are some bonds which I think remain interesting, but they are in certain focused areas. I’d draw attention to the following:
- Lender Paragon and in particular PAG3 PARAGON BANKING GROUP PLC 6.000% NTS 28/08/24, which are currently on offer at 97. Overall, the yield to redemption on this four year note is close to 6.5%. Obviously, Paragon will be challenged in the next few months, especially in the buy to let space, but there’s a huge chunk of equity to eat through before the bonds get hit.
- It’s a similar story at Lendinvest, the property fintech with a big property development and BTL loan book. My favourite is currently LIV2 LENDINVEST SECURED INCOME PLC 5.375% NTS 06/10/23, offered at 94. Again, the yield to maturity is, I think, a tad over 6% and if I’m right the issuer has also been buying back stock recently. There’s no equity from Lendinvest as such to protect the bond holders but 100% of the loans are first charge, with a Weighted average LTV ratio of the Portfolio of 67% and interest coverage ratio of 147%.
- Sticking with the property theme I also like Regional REIT and their bond: RGL1 REGIONAL REIT LD 4.5% BDS 06/08/24 offer at 92p. Again, I think the yield to maturity is now a bit over 6%. As with Paragon, you have a chunk of equity to burn through before this owner of regional offices and workshops starts to cut the final payment in four years’ time. It might also cancel its dividend before it cuts its loans payments.
- Last but by no means least I like retirement village specialist Belong. Ticker wise its BEL1 RETAIL CHARITY BONDS PLC 4.5% BONDS 20/06/26, offered at 94.50. Yield to maturity is above 5% for this very safe bond although it is obviously in a very challenged business segment at the moment, but one that isn’t going to go away even after Corona. You can find out more info about this ‘retail charity bond’ here :
One last observation, focused more on general market conditions.
One of my biggest holdings is the Schroder Asian Total Return IC which recently put out a more than half decent set of results for the 12 months through to 31st December last year. The following comment form the manager really stood out for me – this I think nicely sums up my own macro view for the next few years:
“.. we think the current crisis will mark a sea change in both popular attitudes and government policy making and will go down in history as potentially the end of the 1980 to 2020 period of relatively unhindered global capitalism. If we are correct that we ultimately move to MMT [Modern Monetary Theory] style policies, big government, financial repression and inflation – equities may be the least bad place to be. Within this Asian equities with much lower corporate gearing and less top down policy risk stack up reasonably well… ”
I’d completely agree with this assessment. Spot on.
Leave a Reply