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Stockbrokers have had little reason to cheer in the past year. Several industry players have been taken over by larger groups – making it harder for those remaining to win the confidence of new clients – and UK equity trading volumes have remained depressed.
But the UK’s nascent retail bond market is providing several brokerages with some respite.
Since the London Stock Exchange launched its Order Book for Retail Bonds (Orb) platform two and a half years ago, brokers have been among those benefiting from its growth by handling companies’ smaller debt issues.
Orb was set up to allow private investors to buy into individual corporate bonds in small denominations and give UK companies a way of diversifying their debt financing.
So far, £2.5bn has been raised through the issuance of dedicated retail bonds, as investors have snapped up opportunities to earn interest coupons of 5 per cent or more from companies ranging from Tesco Bank to Severn Trent.
Even the LSE itself has issued retail bonds, with its first £300m tranche – the biggest UK retail bond issue yet – starting its first full day of trading on Monday.
For brokers, the development of the market has brought a much-needed alternative revenue stream. Fees for arranging issuances, distributing issues and executing trades have helped to offset weakening revenues from equity trading.
According to Mark Glowrey, head of retail bond sales at Canaccord Genuity, lead managers on retail bond issues – such as Canaccord, Numis and Investec – generally earn about 1 per cent of the amount raised.
Lead managers will also appoint a distribution group, typically comprising wealth managers, advisory brokers, discretionary managers and execution-only firms, and these will receive a distribution fee ranging from about 0.25 to 0.5 per cent of the amount distributed.
“We were just on the equity side of the balance sheet – now we are equity and debt and I think that will grow and grow,” says Oliver Hemsley, chief executive of Numis. “In this sort of environment, every [revenue stream] is welcome.”
In the first half of 2012, Numis reported a 12 per cent drop in revenue year on year to £23.3m, and said trading in main market stocks was down 9 per cent by value on the same period of 2011. However, it has forecast a 20 per cent recovery in these revenues in the second half.
Its earnings from retail bonds remain relatively small, according to Mr Hemsley – he does not give a precise figure – but he sees them “growing significantly” as the broker establishes its reputation.
Numis acted with Investec as joint lead manager on the recent retail bond issue by property developer St Modwen, which offered investors a 6.25 per cent interest coupon and raised £80m for the company.
Rival broker Peel Hunt says revenues from retail bonds cannot be not considered as a replacement for equity market earnings – partly because the margins on bond transactions are smaller than those on equities – but does recognise the potential for growth.
“Revenue from pure retail bonds is relatively new for us and should be seen as incremental to the equity side of the business, which for all brokers is under continued pressure,” says Matthew Armitt, Peel Hunt’s head of debt capital markets.
How much more it can grow will depend on investor appetite, which in the past three years has been fuelled by record low interest rates. However, the LSE believes that demand can be sustained even when savings rates rise again.
Gillian Walmsley, head of fixed income products at the exchange, says that while low interest rates have been one of the conditions facilitating the market’s growth, another has been the risk/return profile of recent retail issues.
She says the range of companies issuing bonds on Orb “fits in very well with what we’re looking to do with the market ... to provide a wider range of retail bonds to investors who are looking for diversification.”
But brokers would be unwise to pin all their hopes on the bond market. “The question is at what rate [will Orb grow]?” asks Mr Glowrey. “The rate of growth is unlikely to be stratospheric.”
Additional reporting by Jonathan Eley