Commentary

24th Jun

ORBIG Predicts Green Light for Independent Ratings

Following its campaign to ensure that investors are provided with sufficient information to allow them to make informed investment decisions and objectively weigh the merits of the retail bonds on offer, Retail Bond Expert (RBE) is delighted to learn that Richard Tice, Chairman of ORBIG, is confident that there will soon be an independent source of research in the rapidly-maturing sector. 

ORBIG was established to represent the interest of those companies that have chosen to use the Order Book for Retail Bonds (ORB) as a source of funding, and quoted in CFO Insight, Tice says that he believes that at least one independent research company will launch dedicated retail bond analysis in the coming months.

Although not directly involved in setting up the retail bond credit research, ORBIG is committed to promoting "the merits and understanding of retail bonds". 

Independent credit research would be an important step for the UK retail bond market which has provided access to funding at attractive rates for UK companies at a time when bank lending has been scarce. 

RBE has been at the vanguard in terms of warning retail investors of the potential risks to which they are exposing themselves and that in the absence of recourse to the Financial Services Compensation Scheme (FSCS) in the event of the default of the issuer, their entire investment could be wiped out. 

The lack of a credit rating has been seen as a core hindrance to the development of the sector, particularly as discretionary wealth managers are typically unwilling to be exposed to anything more than 3% of the value of any one issue.  

Whilst the problem may seem clear, the solution has never been so clear cut as with relatively small issue sizes there is the fear that a significant investment in achieving a rating will render the available coupon unattractive. 

Tice holds little truck with those demanding compulsory ratings for all issues on ORB, believing that they are primarily self-seeking interest groups such as bond fund managers and IFAs, and he is equally strident in his belief that any requirement to secure a rating from one of the ‘big three’ would kill the sector. 

Despite the fact that he heads an interest group of his own, Tice’s motivation is to safeguard ORB as a source of funding and one which he used to great effect when as CEO of property developer CLS Holdings he successfully raised £65 million with a seven year bond launched in August 2012.

Details of the predicted research system remain unclear, but Tice expects an "extended traffic light" system that will rate about five key metrics, possibly including profit/loss, management and sector risk, on a scale from 1 to 10.

The new rating system is intended to eschew the complexity of the formats employed by Moody’s, Fitch and S&P and is expected to be designed to be understandable to retail investors.

As with traditional credit ratings, the issuers would pay for the research, but the simplified model should reduce the cost and go some way to reducing any anxiety around investing in retail bonds.

ORBIG aims to lead the retail bond market to a state of maturity whereby the number of issues, the quality of issuers, the availability of investor money and the liquidity of trading all reach a level that establishes retail bonds as a separate and accepted asset class.

According to Tice, creating a "dedicated retail bond analysis" system is an "important next step" towards that goal; he is optimistic that this is achievable in the short-term, predicting that there will be around one hundred issuers in three years’ time from a diverse range of industry sectors – sufficient diversification to allow the retail bond market to survive without severe reputational damage in the event of the default of an issuer.

As ever, Retail Bond Expert welcomes your input and asks what criteria you would like to be considered if a simplified form of ratings were adopted to allow the objective comparison of retail bonds. 

Add Your Comment

Comment*