Newspaper article The Evening Standard (London, England)

SMEs Need Help, Not a New Bond Market

Newspaper article The Evening Standard (London, England)

SMEs Need Help, Not a New Bond Market

Article excerpt

Byline: Anthony Hilton CITY COMMENT

[bar] T IS now almost a month since Chancellor George Osborne told the Tory Party conference that Government was working on a plan to help small-to-medium sized businesses access the bond markets.

Since then there has been little new to report and even less to dispel the widespread scepticism that such a plan could be made to work.

Indeed Governor of the Bank of England Sir Mervyn King added to the scepticism yesterday by saying the idea would need at least 18 months to work up.

His comment is the equivalent of burying the idea. But then, as the Governor understands, there is a reason why small companies don't issue bonds. Investors don't want to buy them, because they are thought of too risky.

Size does not just matter; size is everything.

Big companies can issue bonds because insurance companies and pension funds will buy the debt and hold it. They regard big companies as a good risk.

The moment you drop below the FTSE 100 the mood changes, though contrary to widespread belief, bond issues are not impossible for mid-cap businesses. However, it is helpful to distinguish between public and private offers. It is true that mid-cap brokers such as Evolution have recently invested a great deal of blood and treasure to try to make the public bond market relevant to mid-caps but thus far with only a limited degree of success. What is less appreciated is that a large number of the top 350 companies have in fact done bond issues. It is just that they have not done them publicly.

The money comes mainly from America.

Investing institutions in the United States are much more willing than their British counterparts to hold privately issued corporate debt, so much so that the private placement market is the major source of funds for mid-sized companies there. It is also, although this is a little-reported fact, a useful resource for companies over here and it is surprising how many British companies tap into this American market. Advised by Royal Bank of Scotland, Dairy Crest, a well-known company but nobody's idea of a giant, only last month raised $85 million ([pounds sterling]53.1 million) of seven and 10-year money at a coupon of less than 4%. It was one of a crowd which in the past few months has included Logica, Serco, Capita, Whitbread, Northumbrian Water, Great Portland Estates and British Land. Add in those advised by banks other than RBS and you find on a rough measure that around a third of the top 350 have issued bonds privately.

It is a criticism of the City that British companies can find American insurers to buy and hold their debt but they can't get British insurers or pension funds to do likewise. With the notable exceptions of M&G, owned by the Prudential, and Aviva Investors, British institutions are not really interested. …

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