CPI-linked bond ‘could provide model for local government borrowing’

20 May 15

A £200m inflation-linked bond issued by the Greater London Authority last week could provide a template for other local authorities looking to borrow from investors, according to a senior figure in the banking sector.

A £200m inflation-linked bond issued by the Greater London Authority last week could provide a template for other local authorities looking to borrow from investors, according to a senior figure in the banking sector.

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After the GLA raised the funds on May 11 as part of moves to construct the Northern Line extension to Battersea, Glen Forbes, managing director of debt capital markets at Lloyds Bank Commercial Banking, told Public Finance the deal could be replicated as there was investor demand for local government bonds.

He said the GLA deal, developed by Lloyds, was the first ever Sterling bond issuance to link repayments to the Consumer Prices Index, which was forecast to save the GLA as much as £40m over the next 25 years.

Usually, bonds were either fixed or variable rates, based on the Bank of England interest rates, or linked to the retail prices index measure of inflation.

However, investors were increasingly looking for assets linked to CPI – which has gone into negative territory for the first time – as many liabilities such as pensions had moved to being uprated by the same measure, Forbes said.

In addition, the GLA wanted to link its repayments to CPI as it will retain business rates from the enterprise zone around the extended line to repay the borrowing – an income stream that is CPI linked.

‘They wanted to do some element of inflation-linked funding,’ Forbes said.

‘This particular element of funding was to partly finance the extension of the Northern Line, and the revenues the GLA has been granted in order to facilitate this borrowing are business rates, which will grow with inflation. Therefore it made sense for this piece of funding to have inflation-linked debt.’

Investors were now anticipating further issues form local government, including from the LGA-backed Local Capital Finance Company as town halls look for alternatives to the Public Works Loan Board, he stated.

It was ‘certainly the case’ that any issuances from town halls or a collective municipal bond agency could meet the need for CPI-linked investments, Forbes added, which could also match repayments to locally retained business rates income.

‘The appetite for local authorities in general and the appetite for inflation-linked bonds is strong in both cases, and I would say any appropriately structured transaction should get a good reception.

‘Local authorities are very well positioned to satisfy that demand, because the demand for inflation-linked bonds tends to be focused on very good quality credits. If you look into existing issuers inflation-linked bonds it is either government or in the corporate space it only goes down to regulated utilities. ‘As very high-quality borrowers, local authorities are well positioned to take advantage of demand for inflation-linked debt.’

Announcing the bond issue, Mayor of London Boris Johnson said the deal showed he was prepared to ‘draw on every possible source of funding in order to ensure the mega infrastructure projects we need to continue to thrive are able to move off the drawing board and into reality’.

The entire issue was bought by pensions insurer Rothesay Life.

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