Retail corporate bonds will soon come with credit ratings to help investors shop with confidence.
Investors looking for an off-the-shelf bond are attracted by high interest rates, but often have little idea of the financial standing of the firm backing the deal.
Now, bond issuers are keen to introduce a credit rating to clear up confusion in the market.
The simple credit rating will give 10 out of 10 to companies with the best credit ratings, which will slip to one for those with poor credit.
The aim is to identify the financial strength of companies floating the bonds.
Richard Tice, of Orb Issuers Group, is drafting the rating scheme for companies with bonds registered with the London Stock Exchange.
Risk black hole
The issue for investors is only around 25% of companies issuing corporate bonds are flagged by credit rating services like Moody’s or Standard and Poor’s.
So this leaves a black hole for gauging financial risk for many investors.
The Orb rating will scrutinise cash flow, balance sheets and business performance across standard criteria to deliver a rating for firms wanting to raise cash from issuing bonds.
“The current complicated rating system will change in a few months thanks to independent research,” said Tice.
“Investors will see a clear numerical rating for companies offering retail bonds, so they can compare companies and judge the risk.”
The rating will not include buy or sell information.
Another factor that investors can consider once the rating is launched is why a company has no rating.
Bonds offer 6% return
One of the current reasons is cost. Companies pay around £100,000 for a rating, which is expensive for a company turning over £30 million a year if analysts and the media rubbish the rating as a junk bond.
The new Orb rating will cost far less, says Tice, and should encourage firms to buy in to the system.
If they don’t, investors may want to consider why the firm is holding back from allowing corporate bond comparison.
However, companies without an Orb rating will not be barred from raising finance from a retail bond issuance.
Many big name firms look to raise finance from issuing bonds because traditional funding routes, like the bank, have withdrawn from the market.
Typical corporate retail bonds pay investors around 6% interest over a typical five year term. Wrapping the investment in a stocks and shares ISA means no tax on income and no capital gains tax if the bond is traded before the end of the term.