National Grid will shortly launch an index-linked bond on the London Stock Exchange’s Order Book for Retail Bonds, a market set up to make bonds more transparent and accessible to investors (see attached complimentary research note).
The bond matures on 6th October 2021 and will pay a 1.25% coupon twice a year on 6th April and 6th October. Whilst this appears low, the coupon is adjusted to take account of the effects of inflation as calculated by the Retail Prices Index (RPI). With the RPI currently standing at 5.2%, that equates to a yield of 6.45%. Whilst the RPI can fall, potentially meaning that bond holders receive less than the previous payment or not receiving the 1.25% coupon at all, its 30 year average has been 4.4%. Also, like I/L gilts, the redemption value is linked to the rise in RPI over the period, the first of its kind in the corporate bond market. Unlike I/L gilts however, the bond will pay back the face value even in a deflationary environment.
The issue has a minimum denomination of just 2,000 (£2,000 at issue), which compares favourably with existing National Grid bonds which tend to have a minimum of 50,000 nominal. Thereafter, the bonds can be bought and sold in multiples of just 100. The issue has a BBB+ rating from Standard & Poors, making the bond “investment grade”.
We view this issue as a ‘strong buy’. Investors should note that there is credit risk but one that is acceptable within a well balanced portfolio. Index linked investments are very popular with investors (I/L gilts are expensive and NS&I had to recently withdraw their IL savings certificates due to demand). This leads us to believe that the bonds will trade higher in the secondary market.
The book building exercise runs until the end of the month for settlement the 6th of October so please submit any interest to us by 1pm the 28th of September if you would like to purchase the bond in the primary market.