Severn Trent inflation-linked bond launched

| June 21, 2012
Severn Trent inflation-linked bond launched

Severn Trent has become the first utility company to issue a retail bond, in an effort to raise £2.5 billion.

The 10-year, inflation-linked bond is being issued to the general public rather than professional investors.

It is available in denominations of £100 and will pay interest twice a year at a rate of 1.3 per cent adjusted for changes in the Retail Prices Index (RPI).

When the bond matures, Severn Trent will repay no less than the face value, even if the RPI has fallen.

The RPI has been falling steadily since September 2011 when it hit 5.6 per cent.

With many savings products offering very low interest rates, investment bonds are proving popular with savers.

Last year, Tesco, John Lewis and the National Grid all launched bonds and the Tesco bond proved so popular it had to be withdrawn two days ahead of the scheduled closing date.

Commenting on the Severn Trent bond, Mike McKeon, the utility company’s chief financial officer, said: “This retail bond issue diversifies our funding sources while also seeking to meet demand from retail investors for inflation linked products.”

The Severn Trent bonds will be available from stockbrokers and wealth managers until 4 July.

They will start trading on the London stock exchange on 11 July.

Investors should be aware that their market value could fall and that investment in the bonds is not protected by the Financial Services Compensation Scheme.

This means that if Severn Trent defaulted on the repayments, investors would lose their savings.

Investors who do not wish to put all their eggs in Severn Trent’s basket may consider investing in collective corporate bond funds or investment trusts instead, as this offers a greater degree of diversification and a spread of risk.

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