The Greater London Authority (GLA) has launched the
first consumer price index (CPI) linked sterling bond. It could
provide a framework for future local government fundraising
throughout the country.
The £200 million ($308 million) deal, which
shunned the traditional retail price index (RPI) linked model,
is also one of the UK’s first local
authority-issued bonds in decades. The last was also issued by
the GLA in 2011, to provide part-funding for the Crossrail
Due to a legislation quirk which prevents local
authorities from benefitting from the typical quoted eurobond
exemption, the GLA was required to enter into a loan agreement
with an issuing vehicle – in this case, Community
Finance Company – which issued the bond on behalf of
"It was a matter of moss having grown over the
local authority market, as so few have been issued in so long,"
said a banker who worked on the deal.
This made the presence of a UK local authority on
the capital markets significant in itself. Historically, they
borrowed from banks under traditional loan agreements, or from
the Public Works Loan Board (PWLB), a subsidiary of HM
However post-crisis, banks are increasingly wary of
lending on a long-term basis, which has given rise to local
authorities diversifying their sources of funding.
"We’ve seen a similar trend in the social housing
market," said Geoff Fuller, partner at Allen & Overy, who led advice to dealer
- On May 11 the GLA issued the UK’s
first CPI-linked sterling bond;
- Providing access to low-cost funding, the
issuance is expected to save the GLA £40 million over
the next 25 years;
- The index is becoming increasingly attractive and
sources expect to see a trend of CPI-linked, and potentially
local authority-issued, bonds following this
"The grant is being squeezed by local governments.
They need money to build houses, and the sterling bond market
at the moment is a very cheap source of finance, with these
instruments commonly regarded as very attractive," said
This shift towards capital market funding was
further exacerbated by the coalition government’s
attempt to ration credit by hiking up the cost of loans
obtained from the PWLB.
The GLA claims that this deal will save it
£40 million over the next 25 years compared to the rate
it would have received from the PWLB. The bond issue will pay
the investor a CPI-linked coupon of 0.34% over 25 years.
sure this will lead to more CPI-linked debt
Consumer price index
Although the UK government has been tracking a CPI
figure since 1996, it has only recently begun overtaking RPI as
a common reference point. The main difference between the two
is what they contain: for example, while the RPI includes the
cost of housing, CPI does not.
Now that CPI is creeping ahead in terms of
prominence. A lot of corporate pension liabilities are now
linked, and the Bank of England bases its targets on it.
"You’re starting to see a pent-up
demand for people with CPI-linked liabilities," said the bank
source. "They’re willing to have a positive
conversation; they recognise that it’s not quite
the right balance between assets and liabilities if
you’re solely buying RPI-linked bonds."
CPI generally comes up a little lower than RPI,
making it ever so slightly less attractive to investors
– though it is of course still preferable to a flat
"I’m sure this will lead to more
CPI-linked debt instruments. I’m surprised
it’s taken this long, to be honest, but I suspect
people were waiting for the government to move first, to
provide a reference point," added Fuller.
While sources agree this almost certainly signifies
the rise of CPI-linked instruments, they are divided over what
it means for public sector funding.
"I know there’s a lot of interest
among local authorities in borrowing in the capital markets,
it’s just that people are trying to ascertain what
the best way to do it might be," said Fuller. "But the
structure we used here works: it’s very efficient
for local authorities, and investors are comfortable with
However, the banker suggested the reason why this
is one of the first issuances is because most local authorities
just don’t have the funding requirements to
"In terms of a CPI-linked trend, I
don’t think it’s a one-off, but
it’ll come from different sectors. The larger
volumes will surely come from the energy industry –
nuclear plants, or offshore wind generation, most likely," he
Community Finance Company issued the £200
million bond on behalf of the Greater London Authority on May
Proceeds of the bond will be used by the GLA to
partially fund an extension of the London Underground, to serve
the Battersea area. The European Investment Bank is planning to
lend £480 million loan to the GLA to part-fund the
Allen & Overy advised Lloyds Bank as dealer.
Pensions insurance firm Rothesay Life was sole lender.
UK corporates’ debt preferences
investors’ letter unpicked
UK project bond solves negative