Severn taps new funding stream
Severn Trent has dipped its toe into the retail bond market as it became the first water company to tap private investors for cash.The group, which supplies eight million customers across the Midlands and the heart of England, is hoping to raise up to £100 million with the launch of a 10-year retail bond linked to inflation.
Severn Trent has a five-year investment programme worth £2.5 billion to finance and is hoping to diversify its sources of funding by capitalising on demand from ordinary investors for inflation linked products.
It represents a growing trend among firms to use retail bonds as an alternative to the traditional institutional investor market.
Tesco Bank has launched three well-received retail bonds, while luxury boutique hotel booking company Mr & Mrs Smith also announced in April it was seeking to raise cash from the retail market with a fixed rate bond.
Debt advisory partner Clive Gibbard at KPMG, which advised Severn Trent on its bond, said firms were using retail bonds as alternative funding sources at a time when banks were reining in their lending.
He said: "We expect more companies will follow Severn Trent's lead and the market will continue to grow. The range of borrowers in the market will widen into new sectors and this will provide important alternative funding options for borrowers, especially as the bank debt markets look likely to remain under some stress in the future."
Severn Trent will pay interest semi-annually at a "real" rate of interest set at 1.3% a year - meaning that it will be adjusted to take account of changes in the Retail Prices Index (RPI) measure of inflation.
Even if there is an overall fall in RPI, Severn Trent will repay the bonds at their full face value. It hopes to raise between £50 million and £100 million from the move and may launch further bonds if it proves successful.
Severn Trent said its business model, which is linked to inflation, fitted well with the bond. Mike McKeon, chief financial officer at the firm, said: "We are pleased to be the first water company to issue a retail bond. With a large, inflation linked, investment driven, regulated water utility at the heart of our group, we are well suited for this product."
Debt advisory partner Clive Gibbard at KPMG, which advised Severn Trent on its bond, said firms were using retail bonds as alternative funding sources at a time when banks were reining in their lending.
He said: "We expect more companies will follow Severn Trent's lead and the market will continue to grow. The range of borrowers in the market will widen into new sectors and this will provide important alternative funding options for borrowers, especially as the bank debt markets look likely to remain under some stress in the future."
Severn Trent will pay interest semi-annually at a "real" rate of interest set at 1.3% a year - meaning that it will be adjusted to take account of changes in the Retail Prices Index (RPI) measure of inflation.
Even if there is an overall fall in RPI, Severn Trent will repay the bonds at their full face value. It hopes to raise between £50 million and £100 million from the move and may launch further bonds if it proves successful.
Severn Trent said its business model, which is linked to inflation, fitted well with the bond. Mike McKeon, chief financial officer at the firm, said: "We are pleased to be the first water company to issue a retail bond. With a large, inflation linked, investment driven, regulated water utility at the heart of our group, we are well suited for this product."
© 2013 Press Association