Fitch: U.S. Nonbank Financial Retail Bond Volumes To Increase
Some nonbank financial companies have begun to rely more heavily on long-dated, unsecured retail notes as a critical source of funding, and issuance volumes are likely to rise again in 2013, according to Fitch Ratings.
Retail notes, targeted specifically at yield-hungry small investors, are marketed with lower face values (often as low as $25) and offer a coupon premium on bonds with maturities that can be 30 years or more. Despite the higher coupons, we believe that many U.S. nonbank financial firms, including business development companies (BDCs), broker-dealers, and traditional asset managers, will continue to tap retail bonds as a source of ample unsecured financing that may prove to be a good alternative to variable rate, short-term funding in a rising rate environment.
BDCs, including Pennant Park, Solar Capital, and Fifth Street, have issued retail notes over the past few months with coupons generally in the 5.75%-6.75% range. Among broker-dealers issuing retail bonds last year were Stifel Financial and Raymond James.
In all, nonbank financials issued approximately $1.5 billion of retail notes in 2012. Assuming a continuation of the low-rate environment through 2013, we expect issuance levels to approach or exceed that amount this year. For many of the smaller BDCs, this appears to be a good way to ensure liquidity in an inaugural bond offering.
Retail notes provide a source of funding diversification for nonbank issuers, extending maturities and lowering refinancing risk while offering an important source of unsecured funding for many 'BBB' category financials that want an alternative to secured revolvers and the need to encumber assets. In some cases, larger issuers with higher ratings may also look to retail note issuance if pricing and/or tenors are very attractive. This week's offering of 30- and 40-year retail bonds by GE Capital, with coupon rates under 5%, serves as an example.
Funding flexibility of financial issuers relying heavily on the retail bond market could weaken if small investors incur losses in a rising rate scenario. Investors clearly face elevated duration risk, and issuers could potentially confront market access challenges if liquidity in the retail bond market dries up. This in turn could restrict growth opportunities for some financial issuers if funding sources are more constrained in the future. Still, on balance, we believe the reduction of refinancing risk for issuers -- resulting from the long tenor of the bonds -- contributes to a more stable long-term funding profile.