Tesco Bank inflation-linked bond raises £60 million
The Tesco Bank Retail Price Index (RPI) Bond, which has a maturity date of eight years, pays a bi-annual coupon of 1% adjusted for changes in the inflation index.
The capital value will also be uprated in line with the RPI, which had a reading of 5.2% in November. This means at the end of the eight-year term, investors will get back the capital value of the bond plus any increases in RPI over the term.
It went on sale on 9 December and began trading on the London Stock Exchange's bond platform, the Order Book for Retail Bonds (ORB) on 16 December.
Since launch in 2010, total fundraising on the ORB has reached £1.3 billion, with 153 bonds available for private investors.
The index-linked bond, which was specifically chosen by Tesco to offer inflation protection, follows Tesco Bank's previous 5.2% corporate bond issue in February, which raised £125 million.
Moving from strength to strength
Pietro Poletto, head of fixed income markets at the LSE, says the ORB continues to go from "strength to strength", demonstrating the platform's prominence as an alternative source of funding for bond issuers.
"Providing simple, transparent access, the ORB offers private investors the chance to participate in the corporate bond market and today's listing demonstrates the strong appetite for this type of issue," he says.
Benny Higgins, CEO at Tesco Bank, adds: "Although we are principally funded by retail deposits, the success of our second retail bond, which once again exceeded our target, shows the keen interest of a broad customer base in both Tesco Bank and in the range of savings and investments that we offer."
Intermediate Capital Group (ICG) has also closed its subscription period for its corporate bond paying 7%, raising £35 million. It will begin trading on the LSE on the 21 December.
Investors should remember that corporate bonds are not covered by the Financial Services Compensation Scheme (FSCS). If Tesco Bank or ICG defaulted, the income payments and capital could be at risk.
This article was written for our sister website Money Observer
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).