UK’s first CPI-linked bond explained

Author: Lizzie Meager | Published: 27 May 2015
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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 project.

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 the GLA.

"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 Treasury.

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 Lloyds.


  • 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 Fuller

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.

I’m sure this will lead to more CPI-linked debt instruments

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 interest rate.

"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.

Moving forward

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 it."

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 justify it.

"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 said.

Tear sheet

Community Finance Company issued the £200 million bond on behalf of the Greater London Authority on May 11 2015.

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 project.

Allen & Overy advised Lloyds Bank as dealer. Pensions insurance firm Rothesay Life was sole lender.

See also

UK corporates’ debt preferences revealed

Europe high-yield investors’ letter unpicked

UK project bond solves negative carry