In recent weeks, a number of social organisations have launched unlisted retail bonds. Philip Secrett analyses the new trend.

There has been an emergence recently of several new unlisted retail bonds, most recently in the not-for-profit (NFP) sector, including a £15m bond from Nuffield Health.

Essentially retail bonds aren't anything new – they're just loans from places other than banks – but the fact that companies and NFP organisations are looking at them now in particular is as a result of three key demands.

First, in the current credit-starved market borrowers are continuing to find it difficult to find bank debt on terms that are sufficiently attractive to them in terms of interest costs and flexibility of covenants and security requirements. So, while not specifically looking for a replacement of bank debt, many borrowers are looking at ways to diversify their exposure to traditional lenders – bonds allow a diversification of funding sources away from high street banks, but not necessarily a replacement.

Second, retail investors who have money to invest are seeking out fixed rate investments that offer them a higher return in an investment opportunity that they trust, as opposed to just leaving the money in the bank. The current low interest environment is making high street banks a relatively unattractive option at the moment, equities continue to be volatile and property investment uncertain.

Finally, the concept of trust currently underpins the recent issues of unlisted retail bonds where investors are willing to trust a business that they are familiar with and this may feature high in their investment decision.

The fact that unlisted retail bonds are being issued by large, well-known brands such as John Lewis and Nuffield Health shows that we are likely to see many more follow this lead. We are in a fairly unique period where both the investor and borrower can benefit from an unlisted retail bond issuance.

From a NFP perspective, there are several reasons why charities might want to consider issuing an unlisted retail bond to raise funds:

• funds raised thorough a retail bond can be raised on more flexible terms (eg no security and light covenants) than a standard bank loan
• the issue of a bond to an investor allows for a very different conversation than would be ordinarily be held with a donor, ie 'lend me your money' is different from 'give me your money'. In today's difficult economic times, an investor lending money to a NFP with a financial return may elicit a more positive response as compared to a request to simply donate cash
• unlike other bond types such as listed wholesale and listed retail bonds, which are typically structured on normal 'commercial' terms, unlisted retail bonds allow for non-standard commercial terms (ie low interest rates or paying interest in good or services in lieu of cash) reflecting a social component enabling an investor to support the activities of a NFP while still receiving some benefit in return
• unlisted retail bonds can be structured in a variety of ways allowing for interest forgiveness or even the waiving of the bond principal in its entirety thereby turning a loan into a charitable gift
• a bond issue can also be tied to specific projects where the direct benefit from the bond issue can be shared with the bond investor providing a level of connectivity and ownership not typically associated with cash giving. Building up a relationship with a bond stakeholder in this way provides the opportunity for a NFP to expand and retain its relationship with a supporter.

The fact that the bonds are typically distributed directly by the borrower to its donors, customers or suppliers, bypassing the traditional arrangers and fundraisers of debt, will mean that this form of funding will almost certainly continue to attract a mixed reception from market commentators. However, the ability of a borrower to arrange and attract direct debt investment should be seen as a positive development and another unintended consequence of the on-going banking crisis.

Overview of relevant bond types

Publicly traded wholesale bonds

• listed on a recognised stock exchange
• targeted to the wholesale institutional investor market
• example: University of Cambridge

Publicly traded retail bonds

• listed on a recognised stock exchange
• targeted to the retail investor market
• example: Places for People

Unlisted retail bonds

• unlisted bonds
• targeted to a captive / defined investor pool
• example: Nuffield Health

Philip Secrett is a  partner in corporate finance at Grant Thornton UK