Severn Trent launches inflation-linked bond

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Utility company Severn Trent has launched a 10-year inflation-linked corporate bond.

The bond, which will pay interest twice a year, pays a rate of 1.3% adjusted for changes in the Retail Prices Index (RPI).

On maturity, if RPI has fallen, Severn Trent will repay the bonds at no less than their face value. The retail bonds will be available in denominations of £100 and available from stockbrokers and wealth managers.

The RPI had a measure of 3.1% in May, falling from 3.5% in April. The measure of inflation, which includes mortgage interest payments and council tax, has fallen for eight consecutive months, down from a high of 5.6% in September.

The water company aims to raise £2.5 billion from the bond issue.

Investor demand

Mike McKeon, chief financial officer at Severn Trent, says the new bond will diversify the company's traditional funding sources, as well as meeting investor demand for inflation-linked products.

The offer period for the bond will close on 4 July, and the bonds will be issued on 11 July. They are expected to list on the London Stock Exchange's Order Book for Retail Bonds (ORB).

Despite a slowing rate of RPI, investor demand for these products hasn't waned. In December, Tesco Bank launched an inflation-linked bond that raised £60 million in just a week. Then in May, the retail bank unveiled a fixed-rate bond paying 5%.

National Grid, property company Places for People and Provident Financial also listed retail bonds on the ORB last year.

This article was written for our sister website Money Observer