This week sees the launch of the first index-linked bond in the resurgent sterling retail bond markets by National Grid. Most investors are broadly familiar with this company, which was privatised in the 1990s, distributes gas and electricity in the UK, and operates utilities in the US.
The company plans to raise around £100-200m from the new security, offering a new retail-targeted 10-year bond with both the coupon and the redemption proceeds linked to retail price inflation. From NG's point of view, an index-linked bond makes sense. The company operates in a tightly regulated environment with forward revenues linked to inflation. Thus, an index-linked source of funding for the company is a good match on an asset-liability basis.
Structurally, the NG issue mirrors the "old style" index-linked gilts. The bond is issued at par with an 1.25 per cent coupon. This coupon will be adjusted by the RPI going forward (on an eight-month lagging basis), so if if over the next five years the RPI increases by 20 per cent, the coupon will creep up to 1.5 per cent. Perhaps more importantly, the value of principle is also protected by the RPI linkage. If RPI remains at or near its current rate, you could be looking at a total return well above what you could expect on a conventional issue.
| National Grid index-linked Oct 2021 (ISIN: XS0678522490) | |||
|---|---|---|---|
| Issue price | 100 | Yield to redemption | See text |
| Coupon | 1.25% linked to RPI | Piece | £2,000 initial, then £100 |
| Payable | Semi-annually | Credit rating: | BBB+ |
| Redemption date | 6 Oct 2021 | Issue size | Up to £200m |
One other interesting point to note with this new bond is that the indexation also has a "floor". If the UK's economy tips over into deflation for a ten-year period (admittedly, a fairly unlikely scenario), holders will be insulated against such an event, with the bond returning no less than par at maturity.
Credit-wise, the bonds are senior obligations of the company issued from the PLC, the same part of the organisation that issues the shares. Standard & Poor's rate the issue BBB+, a notch lower than some of the existing bonds (which are issued out of NG's operating subsidiaries), but still within the "investment grade" band.
The new bonds will be available for subscription in the primary market through a number of major retail brokers, allowing investors a cost-free entry (and, if they hold to maturity, cost-free exit too). The issue will likely be viewed as a "qualifying corporate bond" by HM Revenue & Customs, and the maturity is long enough for it to be placed in an individual savings account.
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