Transpower seeks NZ$100m in first corporate CPI linked bond (Update 1)

By Gareth Vaughan In a first for New Zealand’s capital markets, Transpower is looking to raise up to NZ$100 million by selling inflation index linked bonds. (Updated to clarify how the interest is paid). In an offer that opened this week and is being managed by Westpac Institutional Bank, the national grid operator is the first kiwi company to offer investors' bonds linked directly to the consumer price index.  The 10-year bonds will pay interest of 4.115% on the principal on each quarterly payment date with the principal ratcheting up by reference to CPI meaning, therefore, the cash interest amount payable is also increased. The bonds will be issued on May 17 with the offer likely to close on May 14. They mature on May 15, 2020. Rod Smith, head of debt capital markets at Westpac Institutional Bank, told there had always been investor appetite for CPI bonds. The problem had been getting hedging products in place for companies that might issue CPI bonds to make sure they weren't overly exposed to what the CPI actually did. Westpac had been working on this for the past couple of years. "We're the only bank to have done a CPI swap where we've paid somebody what we think is going to happen to inflation over a certain time period and they'll pay us a fixed amount," Smith said. Transpower wants to raise at least NZ$75 million but if demand is strong, will seek up to NZ$100 million.It has an AA credit rating from Standard & Poor's. Although the offer is aimed solely at institutional investors, Smith suggests CPI bonds could appeal to mum and dad investors too. "If you get a steady, fixed income and the inflation protection on top of that, I think that would resonate quite well, particularly with retirees." However some tax uncertainty from the retail investor's perspective needed resolving. This included whether tax would have to be paid on quarterly increases in the principal investment. Meanwhile Fergus McDonald, Tyndall Investment Management head of bonds and currency, said CPI linked bonds should be attractive to institutions with long-term, inflation adjusted liabilities. A classic example would be the Accident Compensation Corporation. “It may have a 20 year-old who is incapacitated, but has a life expectancy of another 50 years and will be having an indexed pension or something like that,” said McDonald. ACC investment manager Phil Newport declined to comment, saying the ACC won't discuss individual investments. McDonald suggested pension funds, obliged to pay pensioners a fixed income plus a CPI adjustment, could also be interested in inflation linked bonds. However they wouldn’t necessarily appeal to Tyndall because the firm would need to be confident the long duration CPI bonds would outperform a more conventional, shorter term bond. With long life bonds there were questions to ask such as will the issuer be around for the full duration of the bonds to repay you, will the issuer significantly change its business strategy, and will the company’s management change. Furthermore, because of the long term of CPI bonds, the issuer’s credit ratings needed to be very good. McDonald suggested the most natural corporate CPI bond issuers were infrastructure owners such as Transpower. But given there were few such New Zealand companies and limited natural investors, McDonald doesn't foresee a rush of firms issuing CPI linked bonds. Nonetheless Smith said Westpac had received a lot of inquiries this week from companies "intrigued" by the nature and structure of the Transpower deal. “I wouldn't be surprised if there's some more [CPI] deals this year," Smith said. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.

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