Sunday 23 November 2014

Stock Exchange and Government plan bond finance for Irish SMEs

Published 10/07/2014 | 02:30

Deirdre Somers
Deirdre Somers

The Irish Stock Exchange (ISE) is working with the Government to create a market in bonds backed by Irish SME debt.

It will mirror a new structure pioneered by Germany where mid size companies are now able to bypass banks to borrow through the capital market.

"We are working with the Department of Enterprise, Enterprise Ireland and the Department of Finance to see is there a credible - or on what basis could we have - a credible bond market for mid sized enterprises in Ireland," ISE chief executive Deirdre Somers said in an interview with the Irish Independent.

Germany's Deutsche Borse has already developed a market that allows investors to buy into securities made up of - and backed by - incoming generating SME debt.

The decline in bank lending since the financial crisis is now seen by policy makers across Europe as a long-term feature prompting the need to develop alternative funding models.

In Ireland the National Pension Reserve Fund has pumped hundreds of millions of euro into a number of loan funds for SMEs, but with a so far limited impact on real lending.

In contrast, the bond market backed by cash from pensions and insurance funds, recovered much faster from the financial crisis than Europe's banks and is now providing debt to countries and large companies at record low prices.

Unlike bank loans most bonds do not involve ongoing repayment of capital, something that appeals to business owners keen to retain cash flow.

Instead, bonds involve regular payment of interest and a single "bullet" repayment at the end of the borrowing term.

However, most bond investors will only buy into large scale securities so the debt is beyond the reach of even mid size borrowers.

Structure

While the ISE is moving ahead with its plans, Deirdre Somers said setting up a structure is only part of the process.

Key to a successful market will be convincing brokers to add any new product into their distribution platform for investors.

"Its been interesting working with the Government on this because they kind of came in with an 'if you build it they will come kind' of mentality. Markets don't work that way," she said.

"You have to look at both finding the companies that have the ambition to want the capital and matching that with the companies that want to invest," she said.

The ISE hopes to have concrete proposals in place by the end of the year.

The exchange has just signed off on an "aggressive" four year business strategy, Ms Somers told the Irish Independent.

Its target is to become the number one player in Europe for listing fixed income securities and funds including exchange traded funds, as well as for Irish shares, she said.

The ISE has been "relentlessly profitable" throughout the down turn.

Growth in earning last year was 25pc and the trajectory is set to continue, she said.

A radical overhaul of its corporate structure earlier this year means a group of Irish stockbrokers including Davy and Goodbody who were the "guarantors" for the Exchange under the old rules are now shareholders - free to trade in and out of their holdings, and carrying the value of their stakes on their books, she 
said.

Despite that new structure and a wave of consolidation in the sector there is no plan for the ISE to be sold or merged with any rival, she said.

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