£200m Northern Line bond a model for local authorities

A £200m CPI-linked bond issue by the Greater London Authority could provide a model for other local authorities, according to an expert.

The GLA this week announced that it had successfully issued the bond to help fund the £1bn extension of the Northern Line to Battersea.

It said that the bond is the first ever consumer price index linked Sterling bond, with similar previous issues having been linked to the retail prices index.

Mike Jensen, chief investment officer at Lancashire County Pension Fund, told Room 151: “This is certainly something to think about for any authority which holds CPI contracts in road building or other areas. In the long term, this could be a significant development. There are substantial CPI liabilities out there, and this could be a very good way of covering them.”

Specialist pension insurer Rothesay Life was the only lender on the bond, although Jensen said there could be interest in CPI-linked bond investments from local government pension schemes in future.

“It is a logical step – virtually all funds have got CPI liabilities, but this one was a little short dated for us. This one matures in 2040 and most of ours are 2045 to 2050.”

Ian Dixon, from the debt capital markets team at bank and asset manager Investec, said: “Any public body issuing this kind of bond needs to look at what their revenue streams are and whether they are CPI or RPI linked. With government policy moving more to measuring contracts using CPI, there is certainly lots of potential for more of these issues.”

The bond, which will pay the investor a CPI-linked coupon of 0.34%, was developed by Lloyds Bank Commercial Banking.

The GLA said that it would enable them to save up to £40m over the next 25 years, compared to the rate offered by the Public Works Loan Board.

James Garvey, managing director and head of capital markets at Lloyds Bank Commercial Banking, said: “The bond was structured to meet the financing requirements of the GLA drawing on demand from the growing volume of CPI-linked liabilities in the UK pension industry.”

The bond forms part of the tax increment finance scheme which would see increased business rates income from new development in the Battersea area repaying borrowing.

A policy paper published by the GLA last year said that the bond would provide it with some protection if inflation remains low and receipts from business rates from the zone are lower than anticipated.

Photo (cropped): R/DV/RS, Flickr