UK retail bonds get alternative rating system

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Retail bonds are an incredibly popular funding source for medium-sized companies in the UK. That may soon change, however, as a new, more detailed retail bond ratings system is set to launch in the country.

The market for retail bonds is relatively immature compared to other investment mechanisms. Investors have no centralised access to credit ratings or other information, making it difficult for them to make educated choices.

More protection for investors

The new retail bond system will see several independent research firms offering information about companies. This independent credit research will be a huge step forwards for the retail bond market. The Order Book for Retail Bonds (ORB) launched in 2010 and since then 20 companies have made use of the system, launching 26 bonds and raising more than £3 billion.

The ORB is a young market

The ORB was a boon for UK based CFOs, allowing them to access a source of liquidity at a time when other options were unavailable to them. However, not all investors appreciated the market.

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Many of the companies requesting bonds had no credit ratings with the major agencies, yet the ‘official’ appearance of the ORB may have led some inexperienced investors to believe that their investments were far more protected than they actually were.

The good news is that those issues are not insurmountable and a new rating system will go a long way towards protecting investors who are not well versed in the differences between retail bonds and other asset classes.

The new system will, most likely, use a traffic light system to rate key performance metrics for companies on the ORB. Those metrics will include profit and loss, management and the general risk of the sector. Each metric will be rated on a scale of one to 10, giving even novice investors a way to quickly and easily understand the health and risk factor, of each company.

A small step

Ratings will be a big help in guiding novice investors, but the market still has a long way to go before it will be as trusted as other trading instruments. It will take several years for retail bonds to be accepted as an asset class and the market will need to see much greater diversification.

According to many analysts, once the retail bonds market has 30 or 40 issuers (instead of the current 20), it will be in a stable enough position to survive a default by one issuer without the reputation of the entire asset class being damaged. The hope is that the market will reach that status by the end of the year.

Now is a good time to join the market. As it matures and becomes more accessible and acceptable to wary investors you can expect to see more money flooding in to the market. Those who are early adopters will be in a good position to cash in on that ‘rush’ and enjoy good return on their investment.

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