Bonds – The Private Investor perspective
www.fixedincomeinvestor.co.uk
APCIMS Balanced Portfolio
Why Bonds?
•
•
•
•
•
Defined outcome
Income
Lower volatility
Diversification from equity
Trading & speculation Directly investing in bonds
•
•
•
•
•
Information & awareness
Market access
ECP and minimum piece
Tax shelters – ISAs and SIPPs
Bonds vs bond funds
Investor activity
• Preference for medium‐to‐high quality corporates (BBB to AA)
• Also high yield, PIBS, prefs
• 5‐10 year maturity
• Modal target YTM 5‐6%
• Typical deal size £5,000‐£10,000
Recent opportunities
• New issues – Lloyds, Prov Fin, Tesco bank
• High yield – e.g. Ecclesiastical Insurance prefs
8.5%
• Speculative “punts” – e.g Dixons at 9.5%
• Index‐linked bonds – e.g. Gilts, National Grid, RBS
Summing up
•
•
•
•
A whole new asset class to explore
Gross coupon payments + SIPPS & ISAs
Good value new issues
Growing participation
www.fixedincomeinvestor.co.uk
Fixed Income Investor and Investors Intelligence are divisions of Stockcube Research ltd, which is authorised and regulated by the FSA. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.
Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and investors may lose more than their initial margin requirement. Some foreign currency instruments are also featured and if investors decide to acquire any investment denominated in a currency different from their own, they should recognise that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.
Stockcube ltd and/or its subsidiary companies may from time‐to‐time provide investment or other services to, or solicit such business from, any of the entities referred to in this service. Accordingly, information may be available to Stockcube ltd that is not reflected in this material and Stockcube Plc and/or its subsidiary companies may have acted upon or used the information prior to or immediately following its publication. In addition, the directors and employees thereof and/or any connected persons may have
an interest in the securities, warrants, futures, options, derivatives or other financial instrument of any of the entities referred to on the website and may from time‐to‐time add to or dispose of such interests. Stockcube Plc does not accept any liability whatsoever for any loss or damage of any kind arising out of the use of all or any of this material.
Copyright © 2007‐2011 Stockcube Research Limited
A presentation for Journalists and Investment
Professionals only
Differences Between Listed Bonds
and Savings Bonds
Ben Board, Structured Retail, RBS Global Banking &
Markets
RBS Bonds
• RBS serves institutional clients, professional and private investors, and savers
• RBS issues:
– Benchmark bonds into the wholesale markets
– Bonds on the LSE’s Order Book for Retail Bonds (ORB) for professional and self-directed
investors
– Savings bonds on the high street
• These are all designed to help customers in their respective markets
• They all have the shared feature of being an IOU with capital to be paid back at a fixed point in
the future
• They have differences in terms of size, delivery and additional protection available
2
RBS Benchmark Bonds
• RBS regularly issues bonds into the institutional market
• These typically have:
–Denominations in excess of GBP50,000
–Issue sizes in excess of GBP1 billion
• As with most major banks and institutions these are standard fund raising instruments
• The priority of bonds can vary in seniority
• Buyers tend to be other major institutions
3
RBS Listed Bonds on the LSE’s ORB
• RBS regularly issues listed bonds on the ORB
• These bonds have a much wider range of payouts versus benchmark bonds and are tailored to
the needs of professional and self directed investors
• They are always senior unsecured debt of RBS Plc
• RBS bonds on the ORB typically have:
–Denominations of GBP100
–Liquid secondary market
–Can be bought through a stockbroker
• Payouts linked to inflation, rates and ‘step-ups’
• ORB bonds help diversify RBS’s funding profile but are not a key part of its funding schedule
• RBS was the first issuer of a bond on the ORB in February 2010 and is a major supporter of the
LSE’s initiative
4
Savings Bonds
• RBS Savings Bonds can be found in RBS branches across the UK
• Savings Bonds give savers the ability to potentially earn a higher rate of interest in return for
lending the bank money for fixed period of time
• Savers do not need a stockbroker to access a savings bond
• Savings bonds are not corporate bonds listed on the LSE
• Savings bonds are deposits
• Deposits of up to GBP85,000 are covered by the Financial Services Compensation Scheme
(FSCS)
5
Key Points and Risks about Listed Bonds on the ORB
• Listed Bonds issued by RBS on the ORB can provide attractive rates of return but they are
corporate bond investments rather than deposits
• Multiple and potentially attractive pay-outs
• The price of the bond can move between issue and maturity dates
• The price paid may be higher than the price at which investors sell or the par value at maturity
• There is also a credit risk associated with corporate bonds. Issuers need to be solvent in order for
investors to receive their money back at maturity. If the issuer defaults or goes bankrupt investors
could lose some or all of their investment
• Corporate bonds are not covered by the FSCS
6
RBS Listed Bonds on the ORB – an example
Inflation
Inflation Linked Bond
• Product code: RBPI
• ISIN: GB00B4P95L57
• Fixed 3.9% per year income payment paid quarterly
(gross) or the year-on-year change in the UK RPI
(Retail Price Index) whichever is higher
• Coupon paid quarterly
• 12 year term
• Capital is 100% protected at maturity (subject to the
risk of RBS defaulting or going bankrupt)
7
Inflation Linked Bond
Key Features
• Flexibility to buy or sell at any time during trading hours without redemption fees under normal
market conditions
• Daily pricing at rbs.co.uk/markets, the LSE and brokers under normal market conditions
• A 1.00% bid/offer spread under normal market conditions
Key Risks
• In the unlikely event that The Royal Bank of Scotland plc (‘RBS’) were to default or go bankrupt,
investors may lose some or all of their investment and will not be eligible for compensation under
the UK Financial Services Compensation Scheme
• The price of the Bond will rise and fall during its life and if sold before maturity investors may get
back less than the Issue Price
• The annual interest is calculated on the Issue Price which may be less than the price paid for the
Bond.
Subject to any technical problems, RBS will endeavour to offer a secondary market in line with LSE rules and market making
obligations. However, RBS may be the only market maker in the Listed Bonds, which may affect liquidity.
8
RBS Listed Bonds on the ORB – an example
Rising Interest Rates
UK Rates Plus Bond
• Product code: RBRP
• ISIN: GB00B42SH312
• Quarterly coupon (gross) calculated on the basis of
an annual interest rate equal to 3 month GBP LIBOR
plus 2%
• Maximum interest rate (gross) capped at 8% per year
• Coupon paid quarterly
• 6 year and 2 weeks term
• Capital is 100% protected at maturity (subject to the
risk of RBS defaulting or going bankrupt)
.
9
UK Rates Plus Bond
Key Features
• Flexibility to buy or sell at any time during trading hours without redemption fees under normal
market conditions
• Daily pricing at rbs.co.uk/markets, the LSE and brokers under normal market conditions
• A 1.00% bid/offer spread under normal market conditions
Key Risks
• In the unlikely event that The Royal Bank of Scotland plc (‘RBS’) were to default or go bankrupt,
investors may lose some or all of their investment and will not be eligible for compensation under
the UK Financial Services Compensation Scheme
• The price of the Bond will rise and fall during its life and if sold before maturity investors may get
back less than the Issue Price
• The annual interest is calculated on the Issue Price which may be less than the price paid for the
Bond.
Subject to any technical problems, RBS will endeavour to offer a secondary market in line with LSE rules and market making
obligations. However, RBS may be the only market maker in the Listed Bonds, which may affect liquidity.
10
RBS Provides Opportunities for Private Investors
• RBS is the leading issuer of LSE listed investment products
• All easily traded like a share, through a stockbroker
• RBS has been providing investment opportunities for self-directed investors in Europe for over a
decade
• RBS aims to remove the barriers to investing through:
–Low denominations
–Tight spreads
• Freephone 0800 121 6286
• www.rbs.co.uk/markets
11
Disclaimers
The contents of this document are indicative and are subject to change without notice.
This document is intended for your sole use on the basis that before entering into this, or any related transaction, you will ensure that
you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given
your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such
advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act
and has not acted as your legal, tax, accounting or investment adviser nor does it owe any fiduciary duties to you in connection with
this, or any related transaction and no reliance may be placed on RBS for advice or recommendations of any sort.
RBS makes no representations or warranties with respect to the information, and disclaims all liability for any use you or your
advisers make of the contents of this document.
Where the document is connected to financial instruments you should be aware that such instruments can provide significant benefits
but may also involve a variety of significant risks. All financial instruments involve risks which include (inter-alia) the risk of adverse or
unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex
character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the
event that appropriate internal systems and controls are not in place to manage such risks.
RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described
in this document and/or in related financial instruments. Such interest may include dealing, trading, holding, acting as market-makers
in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or
financial instruments referred to herein.
RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority,
in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the
Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS
Licence No.241114) and in the US, by the New York State Banking Department and the Federal Reserve Board.
The financial instruments described in the document are made in compliance with an applicable exemption from the registration
requirements of the US Securities Act of 1933, as amended. The Royal Bank of Scotland plc is an authorised agent of RBS N.V. in
certain jurisdictions. © The Royal Bank of Scotland plc. All rights, save as expressly granted, are reserved.
Reproduction in any form of any part of the contents of this brochure without our prior written consent is prohibited unless for
personal use only.
13
What is a Bond?
The Emerging Retail Corporate Bond Market in the UK
Simon White
Group Corporate Treasury, Lloyds Banking Group
DISCLAIMER
This presentation has been prepared by Lloyds TSB Bank plc (“LTSB”) and is for information purposes only. Neither this presentation nor any other statement
(oral or otherwise) made at any time in connection herewith is an offer, invitation or recommendation to acquire or dispose of any securities or to enter into
any transaction.
This presentation may not be suitable for all types of investors. Potential investors should review independently and/or obtain independent professional advice
and draw their own conclusions regarding the suitability of any transaction including the economic benefit and risks and the legal, regulatory, credit, tax and
accounting aspects in relation to their particular circumstances. Figures quoted herein are indicative only and past performance is no guarantee of future
results. Any investment may involve economic and market risks, and the value of any investment may go down as well as up.
LTSB does not make any representations as to any matter or as to the accuracy or completeness of any statements made herein or made at any time orally
or otherwise in connection herewith and all liability (in negligence or otherwise) in respect of any such matters or statements is expressly excluded, except
only in the case of fraud or wilful default.
LTSB may from time to time have a long or short position in, or buy, sell or offer to buy or sell securities, commodities, futures and/or options identical to or
related to those described in this document as principal or agent. Distribution of this document does not oblige LTSB to enter into any transaction. The
information in this presentation is subject to change without notice and may be amended, superseded or replaced in its entirety by subsequent documents.
LTSB’s registered office is at 25 Gresham Street, London EC2V 7HN and it is registered in England and Wales under no. 2065. LTSB is authorised and
regulated by the Financial Services Authority.
2
INTRODUCTION
There are a number of reasons why a retail bond market has not developed in the UK
1.
There was a bond culture in the UK in the 18th, 19th and early 20th centuries:

2.
E.g. Consols, War loans, Railway bonds
Dominant late 20th century investment themes:

Austerity post WWII

Property (MIRAS and CGT breaks)

Equities (1980’s privatisations, PEPS and ISAs)

Inflation
So why the change of heart?
3
SO WHAT HAS CHANGED?
1.
Inflation (largely) under control
2.
Boom / bust cycle of equity markets
3.
Boom / bust cycle of property markets
4.
Low base / short term / money market rates
5.
Positive, upward sloping yield curves / quantitative easing
4
AS A CONSEQUENCE
1.
Market demand – highlighted by the Association of Private Client Investment Managers
(“APCIMs”)
2.
Launch of the Orderbook for Retail Bonds (“ORB”) by the London Stock Exchange in February 2009
3.
Opportunities for larger borrowers to diversify their investor bases
4.
Opportunities for smaller borrowers to access a new source of funds as an alternative
to the bank market
5
WHAT IS A CORPORATE BOND?
A Corporate Bond is:
 A financial instrument, essentially a promise (or IOU) by a borrower to repay money to an investor, normally
with interest paid periodically
 Can also be called a Fixed Income security – regular “coupon” payments allow an investor to receive a known
and stable income from their investment
 A tradable instruments that can be bought and sold at any time during the life of the security – assuming there
are buyers and sellers (“liquidity”)
 Earns a “yield” that may differ from the “coupon”
6
TYPES OF BONDS
 Government Bonds – examples include:
- UK Gilts
- US Treasuries
- Bunds
 Corporate Bonds – examples of issuers include:
- Banks
- Insurance Companies
- Utilities
- Corporates
Different types of Corporate Bonds:
 Senior
 Secured Bonds – RMBS / Covered bonds
 Subordinated – Lower Tier II / Upper Tier II / Tier 1
 Contingent Capital
 Preference Shares
7
CORPORATE BONDS
NOT TO BE CONFUSED WITH…
…a myriad of products in the retail market that are also called “bonds”, such as:
 Insurance bonds
 With profits bonds
 Premium bonds
 Savings bonds
 E-bonds
 Online bonds
 Property bonds
 Holiday bonds
None of the above are tradable securities!
Corporate Bonds do not benefit from any protection under the Financial Services
Compensation Scheme or by the Lending Code
8
THE UK RETAIL BOND MARKET
There has always been some demand for bonds from UK retail investors, but it has never been mainstream
In addition to the historic factors outlined earlier, it has been inhibited by:
 Issuers’ easy access to other bond markets
 Smaller issue sizes associated with the retail bond market
 Restrictions around retail targeted bonds – e.g. a requirement for greater disclosure when issuing bonds with less
than £100k minimum denominations
 Short subscription periods making it harder for retail buyers to get involved
 Lack of pricing transparency
So what is needed?
 More retail supply from a variety of different high street names across different structures
 Increased awareness of the product across investors, brokers, market makers, other intermediaries and the
financial press
 Easier access to the market – online dealing & lower dealing fees
9
BOND FEATURES
Feature
Institutional Bonds
Retail Bonds
Denominations
Minimum £100,000 with £1,000k increments
Typically minimum £1,000 with £100 increments
Bookbuilding Period
Launch and priced over 1 or 2 days
Typically have a 5-10 day book building period
Pricing
Priced after book build period
Priced before book building
Pricing Convention
Priced to three decimal places with coupon
rounded to nearest 1/8th percent
Priced at Par with coupon rounded to nearest 1/8th
percent
Underwriting
Typically a best efforts basis
Often underwritten to guarantee a minimum deal size
Settlement
Settle via Euroclear / Clearstream
Also settled via CREST
Documentation
Standard EMTN
Additional disclosure required – prospectus must be PD
compliant & contain additional risk factors
Listing
LSE Regulated Market
LSE Regulated Market & LSE Order Book for Retail
Bonds
Trading
Over the Counter
OTC and via ORB
10
RISKS
A bond is an investment in the issuer (or Guarantor, if applicable) and is subject to the following risks:
Type of Risk
Consequences
Credit Risk
If the issuer fails or becomes insolvent an investor may lose some or all of their
investment
Bonds are not covered by the Financial Services Compensation Scheme
Market Risk
Changes in interest rates will affect the value of the investment and the price at
which bonds can be bought/sold
Liquidity Risk
Market conditions will affect what the bid/offer spread will be for a bond and
whether or not there will be a market
Credit ratings are opinions on the current (& predicted future) creditworthiness of an issuer
and may not reflect the potential impact of all risks related to the bonds
11
CASE STUDY: THE LLOYDS 5.500% RETAIL BOND
Issuer
Lloyds TSB Bank Plc
Issuer Credit Rating
Aa3 (Moody’s) / A+ (Standard & Poor’s) / AA- (Fitch)
Status
Senior, Unsecured, Unsubordinated
Offer Period
12 business days commencing 8th March 2011
Principle Amount
GBP 150,000,000
Coupon
5.500% payable semi-annually
Tenor
5 ½ years
Settlement Date
25 March 2011
Maturity Date
25 September 2016
Denominations
£1,000 plus increments of £100 thereafter
Issue Price
100.00% (Par)
Redemption
100.00% (Par) on the maturity date
Settlement
Euroclear / Clearstream
Crest Eligibility
Yes – via the issue of Crest Depositary Interests (CDIs)
Listing
London Regulated Market & the London Stock Exchange ORB System
12
CASE STUDY: THE LLOYDS 5.500% RETAIL BOND
THE LLOYDS RETAIL DISTRIBUTION MODEL
Issuer
Joint bookrunners
Roles: Coordinate the selling group, guarantee a minimum
size transaction via underwriting and provide liquidity in the
secondary markets
Authorised Distributors – a selected group of retail brokers
Roles: To sell bonds to retail end investors & smaller retail
brokers (Authorised Sub Distributors) for further distribution.
ADs are paid a fee for this where applicable (subject to
MiFID rules)
Authorised Sub Distributors – Selected by the ADs for
further distribution of bonds
Roles: Further sale of bonds to retail end investors
Retail End Investors
Retail investors can either hold their bonds in Euroclear form
or CREST via CDIs in a broker account or in a SIPP or ISA.
They are free to trade the bonds at any point during their life
13
When is a bond not a “bond”
Why do borrowers want to issue retail bonds?
2
Evolution Securities
Debt Advice & Origination
A new Target Investor Base
Collectively forming a major segment of the savings market
With different investment requirements
Who see value differently from wholesale investors
Meeting their requirements means
3
Evolution Securities
Debt Advice & Origination
Retail Corporate Bonds
... the form, settlement , distribution
mechanism and price making differ from
the wholesale bond market
4
Evolution Securities
Debt Advice & Origination
Who are these investors?
 New Investors
- Onshore with small portfolios - “Mid market” savers
- with shares, funds and bank deposits
- fed up with equity and fund performance, depressed by low cash rates
- looking to invest in business they can understand and management they trust
- Looking for predictable income and tax efficiency as tax rates go up
- maximising use of SIPPs and ISAs
-Average subscription <£10k
-Need for price visibility and ease of execution
5
Evolution Securities
Debt Advice & Origination
This drives the Distribution Mechanism and Price Making Platform
 Authorised and regulated retail distributor
At present
- Retail Stockbroker
- TX Only Broker/ investment
- Wealth manager
- Private Bank
Potentially
- Greater use of proprietary channels and networks
- European style access at Banks
 Advertising
- Newspapers, Web, Own Website
 Timetable
- Decision making period
- Account opening – KYC, AML
6
Evolution Securities
Debt Advice & Origination
Transparency and Price Making
 Tradability
- more buying than selling but still very important
- flexibility and efficiency
Sell a Bond from an S&S ISA and you keep cash protected
Not the same in a cash ISA
 Visibility
- Ability to value very important even for buy and hold investors
 Important for Brokers
- No surprises
7
Evolution Securities
Debt Advice & Origination
So who is going to use this market?

Potential to serve a wide range of borrowers as a source of consistent, medium term
funding

With special appeal for
 Supranationals, public sector entities, utilities
 Retail sensitive businesses with good name recognition
 Companies looking for diversity of funding source – alongside bank lending and
wholesale bonds
........... Not forgetting
8
Evolution Securities
Debt Advice & Origination
So who is going to use this market?
the Banks...
.
9
Evolution Securities
Debt Advice & Origination
100 Wood Street
London EC2V 7AN
Tel: 44 (0)20 7071 4300
Fax: 44 (0)20 7071 4457
Email: [email protected]
This document is issued by Evolution Securities Ltd (ESL) (Incorporated in England No. 2316630), which is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA) for designated investment business and is a member of the London Stock Exchange.
This document is for information purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Expressions of opinions are those of the authors only and are subject to change without notice. No representation or warranty, either expressed
or implied, is made nor responsibility of any kind is accepted by any Evolution Group company, its directors or employees either as to the accuracy or completeness of any information stated in this document.
ESL and/or its officers, directors and employees may have or take positions in securities mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). ESL may sell or buy from customers on a principal basis and may also perform
underwriting services for or relating to those companies.
The stated price of any securities mentioned herein is as at the end of the business day immediately prior to the publication date on this document unless otherwise stated and is not a representation that any transaction can be effected at this price. No personal recommendation is being made to you; the
securities referred to may not be suitable for you and should not be relied upon in substitution for the exercise of independent judgement.
ESL shall not be liable for any direct or indirect damages, including lost profits arising in any way from the information contained in this material. This material is for the use of intended recipients only and only for distribution to professional and institutional investors, i.e. persons who are authorised
persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom, or persons who have been categorised by ESL as professional clients under the rules of the FSA.
This document is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose.
The material in this document is not intended for distribution or use outside the European Economic Area. This material is not directed at you if ESL is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you.