Frankfurt “Cash is king” in the corona crisis – and companies continue to raise billions in the bond markets. According to Landesbank Baden-Württemberg, European companies issued bonds worth 65 billion euros in May alone. That is only 2.5 billion euros less than the previous record of September 2019.
This puts investors in a comfortable situation: The selection of corporate bonds is likely to be as large as never before. But for private investors who do not want to invest in corporate bonds through funds, there are many options only on paper. In fact, they are excluded from trading most bonds, as a recent study by the Stuttgart Stock Exchange shows, the most important stock exchange for corporate bonds in Germany. Of the almost 10,000 corporate bonds listed in Stuttgart, only around 2100 are tradable for private investors.
Jens Furkert, head of bond trading at the Stuttgart Stock Exchange, says: “It is a challenge for investors to find the products that can be purchased.” Those who want to choose specific terms or yields will quickly have only a few papers to choose from. “This is of course annoying for private investors,” says Furkert.
Companies shy away from effort
The main reason from the perspective of the Stuttgart Stock Exchange experts are two EU regulations that Germany must implement, Mifid II and PRIIP. The PRIIP regulation actually regulates the distribution of complex structured securities to private investors, such as derivatives. Nevertheless, simple bonds are often included if they contain certain clauses on early repayment penalties. Issuers must have a so-called “Key Information Document” (KID) drawn up for interest-bearing securities that fall under the PRIIP regulation. But most companies shy away from this effort. There are only five issuers in Germany that have created such a KID, according to the Stuttgart Stock Exchange experts.
Many bonds also come onto the market with a minimum denomination of EUR 100,000. This frees the issuers from the obligation to have a securities prospectus approved by the Bafin financial regulator. But it excludes many small savers from trading the paper, Furkert criticizes.
Under the Mifid regulation, companies that issue bonds must also define a target market. Here, too, some decide against making the papers available to private investors. “One of the intentions of EU regulations such as Mifid II or PRIIP was to strengthen the participation of private investors in the capital market,” says Furkert. “This is clearly not the case with corporate bonds.”
Alexander Lentz, an expert in capital markets law and partner at the law firm Latham & Watkins in Frankfurt, confirms that high-yield bonds in particular are tailored to institutional investors. “Small investors are not excluded from subscribing to these bonds per se, but due to the complexity of the transactions, they are not part of the target group of such bond transactions.” These securities would be regularly listed on the unregulated market, for example on the Luxembourg stock exchange. “In fact, the bonds are mostly traded” over the counter “(OTC) and not on the stock exchange,” says Lentz.
Huge demand from professional investors
On the other hand, a capital market presence, which is also aimed at private investors, is accompanied by information requirements, similar to the ad hoc obligations for listed companies. Given the tremendous demand for fixed-income securities from institutional investors, companies are not at all dependent on getting small investors on board. “In the current market environment, the issuer is under no pressure to make its bonds accessible to private investors,” confirms Furkert. With volumes ranging from 300 million euros to several billion euros for a single issue, the effort is far too high to collect the necessary number of small investors to manage such amounts.
The easiest and cheapest way for small investors to enter the bond market is through exchange-traded index funds, so-called Exchange Traded Funds (ETFs). This enables investors to invest in broader market segments or industries. A popular argument against bond ETFs, however, is that market capitalization-based indices give more weight to heavily indebted companies.
Investors who want to make their own investment decision but do not have millions in their portfolio have little choice but to deal with the artificially limited investment universe. After all: “Some companies consciously choose to make their bonds accessible to all investors,” says Furkert.
More: Interest instead of dividends: corporate bonds are again more attractive than stocks.