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
RPI
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.
Inflation
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).
Corporate bond
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.
