The evolution of the Order Book for Retail Bonds (ORB) is continuing into its fourth year with news that the London Stock Exchange (LSE) is working on enabling companies to issue paper in foreign currencies through the market.

The ORB currently only allows sterling bonds, but Pietro Poletto, the LSE’s head of fixed income markets, told Shares that this could change. As part of the exchange’s drive to increase the number of products it offers companies and investors, non-sterling debt could soon trade on the UK’s retail bond market.

‘We are testing the appetite for diversification in terms of currency,’ Poletto says. ‘Every day we are talking with the brokers and the advisers and there is a growing interest in having currency diversification in the market.’

Any such move would be welcomed by Michael Dyson, managing director, head of fixed income products at Numis Securities. ‘It would be a good step in making the ORB a more international market,’ he says.

Pros and cons

By allowed non-sterling denominated bonds UK investors could get access to a much wider array and greater number of companies. The downside of investing in such a product is that they are liable to capital gains tax and exchange risk. The beauty of a sterling issue is that you can get your money back when it matures or you decide to cash-out, whereas with a non-sterling bond you are also taking a view on the currency market.

The move could also help further broaden interest in the ORB market as such paper might prove attractive to fund managers, banks and financial advisers and other people and organisations that have to build diversified portfolios. And it could improve the market’s appeal to potential issuers, including UK companies which might choose to take on an amount of non-sterling debt.

Issuing debt in, for example, dollars or euros has always made sense for British companies operating in global markets. Names such as utility National Grid (NG.), mobile phone giant Vodafone (VOD) and car maker Jaguar are a few that issue in foreign currencies as well as in sterling.

The waiting game

More than 40 bonds have been issued specifically to retail investors since February 2010, but the market has been hit by a lack of fresh issuance. Only three bonds started trading on the ORB in the past seven months after raising £425 million combined, and that included a second visit to the market for buy-to-let financier Paragon Group of Companies (PAG), with its Paragon Group of Companies 6.125% 2020 (PAG2:ORB) bond.

ORB might have become a victim of its own success. Demand for yield in a low interest rate environment means that companies will have to pay around 6% for lending from private investors, which means companies could find better value elsewhere.

Indeed, regeneration specialist St Modwen Properties (SMP), whose paper St Modwen Properties 6.25% 2019 (SMP1:ORB) trades on the platform, decided against a return to the market last week (26 Feb) by instead offering a £100 million convertible bond to institutions on a 2.875% coupon to repay its debt and strengthen its balance sheet as the property market improves. Any move to expand the appeal of the ORB would be welcomed.