Tesco Personal Finance, the banking subsidiary of the UK's largest supermarket, has already issued a couple of bonds into the growing sterling retail bond market. I covered last year's issue, the Tesco Bank 5.2% 2018 a couple of weeks ago. Now, it has another stablemate, as Tesco is lining up a further issue into the retail market- and it looks a good one.
The new bond offers a 5 per cent coupon and maturity of November 2020 (8.5 years). With a launch price at 100, that offers a yield to redemption of 5 per cent, some 3.3 per cent more than gilts of an equivalent maturity.
The details of the new issue are as follows:
|TESCO PERSONAL FINANCE 5% 2020 (ISIN: XS0780063235)|
|Issue price||100||Yield to maturity||5%|
|Coupon||5 per cent||Rating|
|Payable||Semi annual||Issue size||£60-100m|
|Maturity||21 Nov 2020||Min piece||£100*|
*subject to initial £2,000 investment.
(The full details can be found on the information booklet.)
The bond has a number of things going for it. Firstly, with over eight years to maturity, it's eligible for inclusion in an individual savings account (Isa) and can also be put into a Sipp. The denominations are reasonable and because it's a new issue, it's possible to buy the bonds at zero commission from any of the brokers participating in the capital raising (the issue closes on 21 May).
Like other retail issues, demand looks likely to be robust. There will also be demand for the new bonds from the holders of the existing Tesco Bank bonds, who will look to switch out of the older premium-priced issue. I note that the market has marked down the prices of existing Tesco Bank issues in anticipation of this move.
Tesco's brand recognition is reassuring for investors, and the personal finance subsidiary has been performing well operationally. Given that the average yield to maturity for sterling corporate bonds of seven- to nine-year maturities is 4.1 per cent, I expect to see strong demand for this 5 per cent coupon. This demand is likely to be given a further boost by the rally seen in the gilt market since the bond was priced last week. Buy.