July 3, 2009 / 2:32 PM / 10 years ago

European firms tap into retail investor bond rush

* Retail investors catch corporate bond fever

* A new source of funds for companies

* Search for “yield” drives retail investor demand

By Jane Merriman

LONDON, July 3 (Reuters) - King of Shaves, a British shaving products firm, has invited customers to invest in a 5 million pounds ($8.21 million) bond, showing companies are capitalising on a surge in retail investor demand for such fixed income assets.

Institutional investors have already gobbled up some 200 billion euros ($280.4 billion) of corporate bonds issued in the first half of the year and now retail investors have worked up an appetite too.

King of Shaves’ bond is tiny, but a string of big European companies, including oil company BP (BP.L), car maker Volkswagen (VOWG.DE), Italian oil company ENI (ENI.MI) and France’s EDF (EDF.PA) have issued several billions of euros in bonds, partly aimed at small investors and more issues of this kind are expected.

BP’s 500 million pounds bond last month, for example, saw strong retail investor demand.

“Some 40 retail intermediary accounts placed orders, mainly UK and Swiss,” said Mark Lewellen, a managing director at Barclays Capital.

“When you get close to zero on savings and can buy an AA1 rated company bond with a 4 percent coupon it makes sense for retail investors,” he said.

France’s EDF plans to close a retail bond issue earlier than expected on July 6 after raising more than 2.5 billion euros in the past two weeks. [ID:nL1903215]

In Britain, retail flows into corporate bond funds, for example, made up nearly half of total retail flows into investment funds in May, according to data from the Investment Management Association.

Retail flows into bond funds in the UK so far this year totalled nearly 6 billion pounds, more than the total flows for the whole of 2008 and also more than the total for every year since 1999, according to IMA data.

CHASING YIELD

Retail investors like bonds for their attractive returns versus lowly rates on offer for cash.

This gives big European companies another class of investors to tap for funds, which are still scarce because banks are not lending much.

“The companies look for retail bond investors in order to diversify the investor base,” said a treasurer of a major European company.

But retail investors need to be aware of what they are buying.

“It’s easy to get burned,” said David Painter, chair of the product selection and investment committee at Tenon Financial Services. “A bond is a very different beast from cash.”

A bond usually has regular fixed coupon payments and investors get the money they invested back when it matures.

Many retail investors buy them for the income and hold them to maturity.

But in a recession there is a higher risk that a company could default.

Standard & Poor’s, the credit rating agency, said last week there had been 160 corporate defaults globally so far in 2009, more than four times the number of defaults at the same point in 2008.

“Our message is you’ve got to be selective and remember that when defaults happen the recovery rates are low,” said Alasdair MacLean, investment director, fixed interest at Standard Life Investments.

“The wider problem down the track is, for example, General Motors had a large chunk of bonds with retail investors and the recovery was little more than 10 cents on the dollar,” he said referring to the U.S. car company which filed for bankruptcy protection on June 1.

Retail investors can gain exposure to bonds by buying into a corporate bond fund and many investors take this route because the funds are managed by specialists in corporate credit.

But it is possible to buy individual bonds via stockbrokers and some bond issues are now sold in small enough parcels of 1,000 euros or pounds to attract retail buyers.

“We’d like to see a lot more of smaller retail size denominations,” said Patrick Gordon, market strategist at private client stockbroker Killik & Co.

“As (interest) rates have gone lower, clients look to get income and one way is through the corporate bond market.”

A corporate bond fund rather than holding four or five individual bonds provides greater diversification.

“In a precarious environment for defaults, we would not recommend individual bonds,” said Gavin Haynes, investment director at independent financial adviser Whitechurch Securities.

“Investors have to realise the reason you are getting a higher return is that there is a higher risk.” he said.

$1=.6093 pounds Editing by Mike Nesbit

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