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National Grid launches first ever inflation-linked retail bond

New retail bond paying RPI plus 1.25% is good news for savers struggling to protect their money from the eroding effects of inflation.

 
National Grid launches first ever inflation-linked retail bond

National Grid today became the first ever company to launch an inflation-linked retail bond.

With inflation still rising and NS&I index-linked bonds now off the market, the news will come as a welcome respite to savers struggling to protect their money from the eroding effect of inflation.

The 10 year sterling bond requires a minimum investment of £2,000 and pays an interest rate of RPI plus 1.25% (before tax) twice a year on 6 April and 6 October. When the bond matures – which is expected to be 6 October 2021 – investors will get no less than the face value of their bond back plus an additional amount depending on increases in inflation. The bond is also eligible to be held in a tax-free individual savings accounts (ISA) or Sipp but investors will need to check first with individual providers.

The UK power supplier aims to raise between £50 million and £140 million, which will contribute to the £3 billion or so National Grid is required to raise on an annual basis for maintenance of the network.

'The reason National Grid has kept the target quite broad is because it has never done this before and is waiting to see how it executes,' a spokesperson for National Grid said. 'If the bond is a success, National Grid will most likely issue a repeat of the bond,' he added, but stressed that it is early days.

The offer ends on 29 September – though it may close earlier if demand is high. Bonds are on sale through stockbrokers and financial advisers and available to trade on the London Stock Exchange’s newly set up retail bond platform.

Malcolm Cooper, global tax and treasury director at National Grid, said: ‘National Grid is a relatively low risk business due to the demand for what we do and our highly regulated nature’.

‘There is evidence of strong demand from retail investors for inflation linked products to protect them from certain effects of inflation, and we hope that this product will address some of that demand,’ he added.

When asked how safe it is to invest with National Grid, which is triple B rated, Henrietta Podd, of Evolution Securities, which is marketing the issue, said: 'National Grid runs the transmission and distribution for gas and electricity for the country - I'm not sure the country would function without it. It's an essential infrastructure'.

Mark Glowrey, a bond analyst at Stockcube, meanwhile said he views the new linker from National Grid as 'a strong buy'.

‘The first point to consider is that National Grid is not a bank – and it is important to diversify one’s bond portfolio on an industry basis in these troubled times,’ he explained.‘The next point to consider is the rarity of high-quality inflation-protected investment vehicles – index-linked gilts are expensive, and NS&I have recently withdrawn their enormously popular index-linked saving certificates’.

‘The new National Grid bonds will be available for subscription in the primary market through a number of the major retail brokers. That’s good news for us investors, many of whom will be able to subscribe without paying commission (the broker is paid a distribution fee).There’s no stamp duty and investors holding to maturity will be able to get in and out of the bond free of all charges,’ Glowrey added.

In August inflation rose to 5.2%, up from 5% in July, according to the retail price index (RPI). The government’s preferred consumer price index (CPI) meanwhile, which does not include housing costs, shows UK inflation up 0.1% to 4.5% – far above the Bank of England’s target of 2%.

11 comments so far. Why not have your say?

David Evershed

Sep 13, 2011 at 18:58

Are they realy aiming to raise 22billion?

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ian k

Sep 13, 2011 at 19:36

Having just looked the documentation

http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf

Page 6 shows a sample calculation based on a £2000 investment. The first dividend payment is £12.80 and assming inflation remains the same for the second half that makes 2 payments for the year at total of £25.60. That does not work out to be Inflation (currently around 4.5%) plus 1.25% as suggested above or have I misread / interpreted it wrongly?

I hope to be corrrected.

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ian k

Sep 13, 2011 at 19:41

The link I listed above has not posted well so I will try agaiin

http://www.nationalgrid.com/NR/rdonlyres/C7555550-52CD-4CDD-9833-7023554AEE80/49009/10199_1_NG_retailbond_brochure_v6_Final_Singles.pdf

I you follow the citywire link its the top one from the "Retail bond documentation" list.

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john_r

Sep 13, 2011 at 20:21

Ian , I've not followed your link but I understood the article to mean that you will receive only 1.25% pa and then after 10 years you receive the additional RPI amount. Seems not very good for an immediate income seeker but ok if you are some way off retirement.

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ian k

Sep 13, 2011 at 20:38

HI thanks John.

I guess the way I read the Citywire article "requires a minimum investment of £2,000 and pays an interest rate of RPI plus 1.25%" was incorrect.

I know the RPI is in the bond price but maybe maybe someone from citywire could clairfy the coupon.

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Franco

Sep 13, 2011 at 21:48

Be careful dudes, inflation is better measured by the RPI which is running at 5.25% while the government and these jokers are trying to cheat people by taking the CPI which is much lower. Also note that during the 10 years they have your money, they pay you zilch income.

I can get 5.5% on income unit trusts with increases every year.... Unless Mr Cameron finds another country to spend our money destroying.

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Mark22

Sep 13, 2011 at 22:53

Ian k: If you look at the figures, they pay you 1.25%*RPI each year in two lots (the £25.60 you mention) and then pay you your capital * (1+RPI) over the 10 years.

But you pay income tax (even if its in an ISA?). I suppose the problem is the risk that National Grid can't pay up in 10 years time.

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Anonymous 1 needed this 'off the record'

Sep 14, 2011 at 00:42

What do they need a loan of £22 Billion for..... to buy Greek Bonds?

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ian k

Sep 14, 2011 at 08:01

Thanks for the relpies above.

To answer my own question.

Fixed income investor (.co.uk) says. The bond price is RPI linked. The coupon is 1.25% and that is also index linked.

"bond is issued at par with an 1.25% coupon. This coupon will be adjusted by the RPI going forward (on a 8-month lagging basis). Thus, if over the next five years the RPI increases by 20%, the coupon will creep up to 1.5%."

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Chris Hayes

Sep 14, 2011 at 12:52

For anybody wondering what some of the posters are on about, this article has been considerably revised since yesterday - as I found out when I hit "refresh" to see if anybody had commented....

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Trevor Woodcock aka Grey Squirrel

Sep 15, 2011 at 18:27

I was on the point of investing, but ,having read the brochure, I'm not so sure. An annual income of approximately 1.25% and the RPI change reflected in the 10-year redemption value is not what I was looking for. I've no previous experience in investing directly in corperate bonds, only via funds. Does anyone know if the RPI change is likely to be reflected in the bond selling price on the open market.

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