By Simon Miller

The UK domestic bond market needs to be developed to improve non-bank funding vehicles for small to medium companies (SMEs) according to a report headed by Lloyds TSB chief executive Tim Breedon.

The report - written for the Department for Business, Innovation and Skills - Boosting Finance Operations for Business, found that despite the sophistication of the UK's capital markets and the concentration of international banking activites in London, "the UK's domestic capital markets remain under-developed relative to those of other advanced economies".

In its research, the report found that only 61% of FTSE 100 companies issued public bonds but suggested that there were no fundamental; barriers to entry and that the choice between bank debt or the public bond market was driven by the relative price and flexibility of the two types of finance.

However, because of the need for insitutional investors to invest in liquid securities, there was a restriction of the size of the majority of wholesale bond issuance to greater than £150m.

As a result, mid-sized busienss could only issue public bonds "only if they can find investors who do not have concerns regarding lilquidity, credit rating, or size of issue".

As a result, the report recommended the launch of a feasibility study to explore the creation of an aggregation agency to lend directly to SME's and /or to pool SME laons to facilitate SME access to the public corporate bond markets.

Secondly, there should be an increase in the number of UK-based Private Placement investors.

Finally, there should be an increase in UK retail investor appetite for corporate bonds though launching electronic retail-dedicated gilt products available through registered stock exchanges and to introduce additional tax incentives for investing in SMEs.

The full recommendations can be read here.

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