A boutique capital markets firm launched by ABN Amro alumni, Independent Debt Capital Markets, is using its niche expertise to enable mid-tier companies to access debt capital markets in new formats.

Until recently, smaller European companies could only press their noses wistfully against the windowpane of the debt capital markets (DCM). But today they are beginning to gain access, helped by boutiques such as Independent Debt Capital Markets (IDCM), whose innovations include the UK’s first, and the world’s first listed, solar power bond.

IDCM was set up in London three years ago by its two managing partners, Stuart Bell and Justin May, both former ABN Amro debt specialists. Mr Bell was head of European DCM and syndicate and Mr May was global head of DCM at the Dutch bank, until its ill-fated takeover by an RBS-led consortium. With the big investment banks all looking punch drunk, there was no shortage of boutique start-ups at the time, but IDCM stood out with its exclusive focus on the primary market and on corporate-only clients.

“At the time of the banking crisis a lot of new boutiques set up, believing investment banks would encounter much tougher trading conditions going forward,” says Mr Bell. “But they nearly all focused their business models on the secondary market space.”

Predictions of the bulge bracket’s demise might have been premature, but their world was definitely changing. “We wanted to do things differently,” says Mr May, “using our skill sets and our relationships to provide effective funding in a different manner from the large investment banks.”

Life without ratings

Ratings and liquidity have always been the missing ingredients that have kept smaller European corporates out of the capital markets. The partners recognised that Europe was going to start closing the gap with the US, where small and medium-sized enterprises rely less on bank lending and issue bonds as a matter of course. Investors were changing their attitudes, putting less trust in ratings agencies and more in their own analysis. With low yields on government and investment grade corporate bonds, they were more inclined to adjust their behaviour, if it would bring higher yields at acceptable risk. At the other end of the chain, the corporates were finding it harder to borrow from the banks and were more amenable to alternatives.

“IDCM is a primary debt market boutique, providing companies with alternative sources of finance across the debt spectrum,” says Mr May, by way of definition. “That is principally, but not exclusively, as an alternative to bank finance.” The limited liability partnership is the appointed representative for fixed income of Mirabaud Securities, which provides a regulatory umbrella, together with compliance, IT and back-office services. IDCM in turn provides its suite of debt services to Mirabaud’s clients, mainly those in the energy and natural resources sectors.

Energy and natural resource companies make up one of the firm’s four client pillars. The others are UK and European mid-caps, real estate, and what it calls “retail names”. This covers bond issues targeted at retail investors, specifically via the London Stock Exchange’s order book for retail bonds (ORB) service.

Healthy response

IDCM’s most recent ORB deal illustrates the kind of new ground that the firm is breaking. It took the form of £75m ($121.9m) in 5.375% unsecured seven-year retail bonds for Primary Health Properties (PHP). This was ORB’s first unsecured bond as well as its first unrated mid-cap issue. While not exactly a household name, PHP is a dedicated healthcare real estate investment trust which leases its properties to general practitioners and health organisations. It has good access to secured bank funding, but the tight pricing it can achieve in that market would not appeal to retail investors. PHP was, however, prepared to be more generous in return for the flexibility of unsecured funding. Retail investors seem to have liked the product – the deal size was at the high end of the target range, and the issue was closed only six days into the 10-day offer period.

IDCM is interested in the property sector partly because banks are becoming less so. Banks have over-lent to it, and Basel III is penal on property lending. If new regulation is causing banks to edge away from the sector, Solvency II provides insurance companies with more of an incentive to lend to the real estate sector – and IDCM is clearly happy to be the middle man. Companies such as PHP fit the IDCM profile because they have long-term stable cashflows. “Bondholders like boring, plodding stability,” says Mr Bell. “So we are constantly on the lookout for sectors and businesses where the cashflow has just that.”

Ray of sunshine

Solar energy is one such sector. IDCM notched up another first by structuring and placing the world’s first unrated listed senior secured solar bond. It was a small transaction, as bond issues go, and it all went to a single investor – the Pension Corporation, a specialist insurance company. But it was an important advance in opening up the bond markets to renewable energy companies.

The issuing vehicle was Solar Financing 2012-1, but the assets were owned by private individuals who were looking to refinance their equity investment in two UK solar farms with a combined capacity of nearly 10 megawatts. Their alternatives were bank debt – expensive, if available – or, more likely, sale. In the event, the owners raised £40m via a 24-year, Retail Prices Index-linked bond, with a coupon of 3.61%. Key to the deal was the fact that the solar parks were 'accredited', which is to say they have guaranteed, premium feed-in tariffs for 25 years.

There was not much direct precedent on which to base the pricing. “It had never been done before,” says IDCM partner Jean-Christophe Oberto (the firm has a total of five partners, all ABN Amro alumni). “So we looked at where other energy companies in the UK were trading, and considered what additional spread would be required, given a new asset class and a perception of lower liquidity.” Another reference point was a February issue from Berkshire Hathaway-controlled Mid-American Energy Holdings, which raised $850m for 27.5 years at 380 basis points over Treasuries for a solar project in California.

IDCM repackaged the Solar Financing deal and ring-fenced the cashflow, so that the investors have bought the future cashflow of the assets at a discount, and linked to inflation. “The feed-in tariff is inflation-linked, so it makes sense to have an inflation-linked bond,” says Mr May.

The Solar Financing execution was very like a private placement, though its listed nature has meant more disclosure. Given their typical size, many of IDCM’s deals are private placements, away from public view. Its approach has been to work with investors to educate them on a particular sector. “We spend a lot of time working with investors to get them comfortable with a sector, and only then do we talk about different credits,” says Mr May. “It takes time and patience.”

The solar transaction has attracted the attention of other renewables owners and developers, as well as from the investment world, and IDCM is already looking at other projects that it hopes to bring to market in the first half of 2013. As Mr Oberto notes, subsequent clients should be able to move more speedily. “The terms and conditions, base documentation and disclosure requirements for a listed bond have now been established and create a precedent,” he says. “So it will be more straightforward for future borrowers to access this market.”

Her Majesty’s Treasury is very interested in what the likes of IDCM are doing, Mr May notes. “It is trying to help companies find alternatives to bank finance,” he says. “We sit between those companies and other sources of finance.”

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