Retail bond

Bonds - retail.

Authors: Michael A Smith CFA, Winterflood Securities Ltd, James Leather FCT CGMA, Corium Treasury Limited.

"Retail bond" is a colloquial abbreviation for a smaller-denomination bond (usually from around £100 to £1,000 in practice, but under EUR 100,000 from a regulatory perspective) designed to attract retail (individual, rather than institutional) investors, that a bond issuer is allowed to offer for sale to non-professional investors.

They are generally issued in smaller denominations to enable individual investors to easily participate in buying and selling them.

They are generally unsecured.

Denomination sizes for such bonds in GBP markets might typically be around £1,000 or less.

In the UK, there are several different bond markets, but primarily, there is the London Stock Exchange's Main Market, which is the UK's principal regulated market for domestic and foreign bond issuance (including a number of sovereigns) and there is the London Stock Exchange’s International Securities Market (ISM), which was created in 2017 to compete with Ireland, for more exotic issuances.

The Main Market contains investment grade bonds, and the ISM contains more exotic and sub-investment grade bonds, which are only accessible to professional investors.

Pre-2005

Prior to 2005, the bonds issued in the LSE’s Main Market (i.e., investment grade bonds of domestic and foreign issuers) were available to all investors, providing they could afford the denomination size. Other than as implied by denomination size, there was no distinction between wholesale and retail bonds. At the time, 67% of all bonds listed on the Main Market had a denomination size of less than £2,000 (see "Enabling broader access to the UK bond markets" - Winterflood Securities - October 2023 - link in Other resources below).

2005-present

In 2005, the Prospectus Directive was implemented across the EU.

This resulted in the bifurcation of LSE Main Market bonds into two: wholesale bond issuance and retail bond issuance.

Retail bonds were defined at the time as being those with denominations of less than EUR 50k (later increased to EUR 100k) and wholesale, at least EUR 50k (later increased to EUR 100k).

In addition to the bifurcation by denomination, wholesale bonds were enabled with a lower form of disclosure whilst retail denominated bonds required what was considered more disclosure and a different way of presentation.

The unintended effect of this regulation was effectively to exclude retail investors from the LSE’s Main Market (apart from bonds on the secondary market that had been issued under the ‘pre-Prospectus Directive’ regulations), as its investment grade issuers moved to wholesale issuance to avoid the more onerous retail investor disclosure requirements.

In 2010, in response to growing private investor dissatisfaction with this situation, the LSE introduced the Order book for Retail Bonds (ORB) – which was a section of its Main Market.

This attracted a flurry of investment grade corporate issuance in 2012-13 in retail denomination size, but it dried up.

One of the key reasons was the disclosure requirements that set them apart from wholesale bonds in terms of format and content.

Subsequent revisions of the Prospectus Directive and particularly the introduction of PRIIPs in 2018 only added to the extra work needed when targeting retail investors.

By 2023, just 3% of sterling regulated bonds (by number) had a denomination size of less than £2,000, with the bulk having a denomination size of at least £100,000 (see "Enabling broader access to the UK bond markets" - Winterflood Securities - October 2023 - link in Other resources below).

To access most sterling investment grade bonds, retail investors generally have to invest in funds, for which they have to pay management fees (often around 50 basis points).

Many of these funds can be invested in unsuitable products or issuers and frequently such funds trade at a discount to their net asset value.

Regulatory reform movement and the future

Since 2005 retail investment managers have become increasingly vocal about being unable to invest directly in the primary and secondary investment grade bond issuance in the FCA regulated UK bond market.

Their wishes have been expressed through various channels such as the Investor Access to Regulated Bonds (iARB) Working Group, of which the ACT is a member.

In September 2023, the FCA released a consultation paper on the subject and published a summary of responses in December 2023 ("Engagement feedback on the new public offers and admissions to trading regime" link in Other resources below).

This showed that respondents “almost unanimously” supported the proposal to remove the dual disclosure prospectus standard in the UK regulated bond market and outlined key next steps towards the facilitation of broader access to listed bonds for retail investors.

One proposal, put forward by the FCA, is to replace the dual-disclosure standards that has incentivised wholesale-only issuance with a single-format disclosure regime irrespective of denomination.

A second proposal of the FCA is to reduce disclosure requirements (even from the current wholesale disclosure requirements) for seasoned (and repeat) investment grade issuers who elect to use retail-friendly (low) denomination sizes for their denominations when issuing plain vanilla bonds – the aim being to incentivise and accelerate the ’retail-enablement’ of bonds issued on the LSE’s Main Market.

If these proposals are implemented, the disclosure regime may more closely resemble the framework that was in place pre-2005 – i.e., one disclosure format applicable to all bonds and all investors, thereby removing the distinction between retail and wholesale bonds, so that the colloquial term "retail bond" may then fall away.

Implemented, these proposals ought to release access to a vast untapped pool of capital (about £2 trillion), in primary distribution and the secondary market.

This could potentially be of interest to issuers who wish to diversify their sources of finance, deepen liquidity, and reduce overall funding costs.

In addition, some issuers may value the opportunity to include a wider range of investors in targeted corporate-value offerings such as sustainability-linked and ESG bonds.

Improving access to retail bonds - Financial Conduct Authority

"The Government is in the process of finalising a new legislative framework that will replace the UK Prospectus Regulation...

We asked for views [about whether] stakeholders would welcome the removal of the dual disclosure standards in [bond] prospectuses.

The removal of the dual disclosure standards in prospectuses for retail and wholesale non-equity securities was almost unanimously supported [by respondents]. There was strong support to use the wholesale disclosure standard as a starting point...

Facilitating broader access to listed bonds: A scheme which would encourage the issuance by seasoned UK-listed corporates of simple standardised unsubordinated unsecured corporate bonds aimed at a wide range of investors, retail and wholesale, was largely welcomed...

However, there were nuanced and sometimes differing views on what types of issuers and securities should be within the scope of the scheme, with the majority of respondents asking that the scope be extended to encompass additional issuers and/or security features."

Engagement feedback on the new public offers and admissions to trading regime - Financial Conduct Authority - December 2023.

Facilitating broader access to listed bonds

"We are aware of calls among some UK market participants for measures to address what is seen as the exclusion of smaller scale investors from listed bond markets.

The removal of the dual standard of disclosure proposed above is one measure which we believe will assist here.

There remains, however, a question as to whether more might be done.

We think there may be an opportunity for a scheme which encourages the issuance by seasoned UK-listed corporates of simple standardised unsubordinated unsecured corporate bonds aimed at a wide range of investors, retail and wholesale.

... a product in which sophisticated institutional investors are keen to invest is likely to offer better terms for all investors, including retail investors, than a product aimed solely at retail investors, due to the additional scrutiny and pricing pressure institutional investors exert.

Such a scheme may be to the benefit of all participants, issuers and investors alike, giving issuers a new additional source of demand for their bonds and by giving investors better access to corporate credit."

Financial Conduct Authority - May 2023.

See also

• Admission to trading
• Association of Corporate Treasurers (ACT)
• Basis point
• Bond
• Corporate bond
• Corporate treasury
• Credit
• Denomination
• Disclosure
• Discount
• Dual disclosure standard (UK - FCA)
• Equity
• ESG bond
• Exotic
• Financial Conduct Authority (FCA)
• Foreign bond
• Framework
• Fund
• Green bond
• Institutional investor
• International Securities Market (ISM)
• Investment grade
• Investment manager
• Investor
• Issuance
• Issuer
• Liquidity
• Listed company
• London Stock Exchange
• Main Market
• Net asset value
• Offer for sale
• Order book for Retail Bonds (ORB)
• Plain vanilla
• PRIIPs Regulation
• Primary market
• Prospectus
• Prospectus Directive
• Regime
• Regulation
• Retail
• Seasoned issuer
• Secondary market
• Secured debt
• Security
• Sovereign
• Sovereign issuance
• Sub-investment grade bond
• Subordinated debt
• Subordination
• Sustainability-linked bond (SLB)
• Trillion
• Unsecured
• Wealth management
• Wholesale bond
• Wholesale markets

Other resources

• Engagement feedback on the new public offers and admissions to trading regime - Financial Conduct Authority (FCA) - December 2023

• Enabling broader access to the UK bond markets - Winterflood Securities - October 2023

• Opening up bond market will give corporates more flexibility - The Treasurer - September 2023

• Return of retail to bond markets on the cards - The Treasurer - August 2023

• Engagement paper - non-equity securities - FCA - May 2023