Davies calls for creation of a junk bond market

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The Independent Online
Howard Davies, the deputy governor of the Bank of England, called yesterday for the creation of a domestic junk bond market to help stimulate weak investment in Britain. He also blamed the Government for exacerbating this shortfall by cutting back publicly funded investment in the mistaken hope that the Private Finance Initiative would plug the gap.

Mr Davies told Britain's powerful fund managers at the National Association of Pension Funds' investment conference in Eastbourne: "The Government's plans for publicly funded investment to be replaced by privately-financed and managed projects have been over-optimistic.''

He said the Initiative has taken too long to get moving. "Construction companies have not been reticent in making that point to us, and no doubt to the Treasury'" he said.

One way of boosting the PFI, Mr Davies said, would be to develop an appropriate junk bond market. "The UK still lacks a high yield bond market, which could be particularly appropriate for technology-based companies, and perhaps for the Private Finance Initiative," he suggested.

"We would like to see a debt market complement to Aim. The Bank of England has no project to launch this, but would encourage it."

Pointing the recent launch of one PFI fund, he called for more to follow.

Instead of concentrating on routing the financing of PFI projects through the contractor or the consortium, more attention should be paid to exploring alternative opportunities. "Perhaps we should be looking at ways to finance the project itself, through an operating company raising its own finance. If that is to happen, then we shall need a secondary market in the financial assets of those projects. It may be that we need new instruments, perhaps on convertible form, which can reflect the varying risks and returns at different stages in a project's life cycle and offer strategic options to an investor exercisable over time to help balance an institutional portfolio."

A high yield bond market could also help address long-standing concerns of smaller firms, notably high technology startups, about their difficulties in raising finance.There has been some improvement, Mr Davies said, with a reduction in the reliance on overdraft financing in favour of fixed- rate bank lending. But the term rarely exceeds three years. It is only the big corporates that manage to access longer maturities via the Eurobond market.

Calling for increased financing innovation, Mr Davies said the Bank of England planned to investigate ways of plugging the financing gaps during the course of the year.

He berated the investment community for the fact that Britain's traditional weakness in corporate investment was continuing to drag on economic potential. "Indeed the bald figures would suggest that investment growth has been considerable weaker in this recovery than it was a decade ago," he said.

In the first three years of the 1980s recovery investment recovery grew by almost 20 per cent more than in the first three years of this upturn. Mr Davies offered several special mitigating factors - that economic investment did not fall as far in the last recession, and that capacity levels were much higher as the current recovery began.

Latest CBI survey evidence suggests that conditions are improving, and investment intentions remain strong, holding out the prospect of a pick- up in investment this year and next.

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