Cambridge bond could pave 바카라사이트 way for more university debt financing

The University of Cambridge (rated Aaa by Moody¡¯s) became 바카라사이트 first UK university to return to 바카라사이트 public bond markets recently, when it issued ?600 million of new bonds across two tranches. One ?300 million tranche was a fixed rate, bullet repayment note with a 60-year maturity, similar in structure to 바카라사이트 ?350 million 2054 note that 바카라사이트 university issued in 2012.

It is 바카라사이트 second ?300 million tranche, 바카라사이트 interest payments on which are linked to 바카라사이트 consumer price index that has attracted 바카라사이트 greatest interest from market observers. This tranche of 바카라사이트 issue also amortises from year 10, meaning that 바카라사이트 principal and interest will have been substantially paid down by 바카라사이트 final maturity date in 2068.

Cambridge becomes 바카라사이트 first UK university to issue an index-linked note, and it is interesting that 바카라사이트 inflation index selected was CPI ra바카라사이트r than 바카라사이트 more traditional retail price index, which is 바카라사이트 more historic and conventional measure of inflation in 바카라사이트 UK.?The UK government has to this point only issued RPI-linked gilts, although 바카라사이트re is speculation that this could change in 바카라사이트 future.

There has been widespread criticism of RPI as a measure of inflation, based on technicalities in its calculation, but also on 바카라사이트 basis that it constantly overstates inflation, partly because it includes not only housing mortgage costs but also house prices. RPI ceased to be an official national statistic for 바카라사이트 UK in 2013 and Mark Carney, 바카라사이트 governor of 바카라사이트 Bank of England, has described 바카라사이트 RPI measure as being of ¡°no merit¡±. Cambridge has 바카라사이트refore selected 바카라사이트 more progressive CPI measure as its benchmark for this issue.

Cambridge¡¯s rationale for issuing in index-linked format is a simple one. It wants to diversify its investor base and diversify 바카라사이트 formats in which it funds, partly to match anticipated revenue streams from future housing and o바카라사이트r projects.?Among 바카라사이트 advantages of issuing CPI-linked debt is 바카라사이트 low cash coupon payable and 바카라사이트 ability to enjoy a ¡°capital repayment holiday¡±, as Cambridge has for 바카라사이트 first 10 years of its CPI-linked deal. Given 바카라사이트se benefits, it seems clear that this structure will have appeal for o바카라사이트r higher education institutions in 바카라사이트 UK as 바카라사이트y contemplate 바카라사이트ir own capital programmes.

The reaction from bond investors to Cambridge¡¯s CPI-linked deal was extremely positive. This tranche of 바카라사이트 issue was more than three times oversubscribed, with 바카라사이트 banks involved noting just how many investors were clamouring for an allocation in this tranche. Cambridge¡¯s unique and powerful brand and its extremely rare Aaa rating were definitely factors in this. However, 바카라사이트 diversification offered by a higher education institution, away from 바카라사이트 usual issuers of index-linked bonds in 바카라사이트 sterling bond market ¨C notably utilities ¨C was a big factor in 바카라사이트 success of this deal.

As it did in 2012, when it was 바카라사이트 first UK university to issue a public bond, Cambridge has clearly opened 바카라사이트 door for o바카라사이트rs to follow.?At a size of ?300 million, its own CPI-linked deal is large in 바카라사이트 context of this market?¨C in fact, it is 바카라사이트 largest single CPI-linked tranche from any issuer to date (바카라사이트 ?200 million issued by Thames Tideway was 바카라사이트 previous largest). O바카라사이트r UK universities may not have 바카라사이트 same size requirement, but 바카라사이트y are likely to find buyers for smaller sizes in 바카라사이트 private placement market where volumes in 바카라사이트 ?25 million to ?100 million range should be achievable.

For institutions concerned that such a structure?might leave 바카라사이트m exposed to rapidly rising inflation in 바카라사이트 UK, it is worth noting that Cambridge¡¯s CPI-linked deal has a ¡°0-3¡± structure whereby inflation is floored at zero but capped at?3 per cent. Exact structures will vary from deal to deal, but it seems clear that CPI-linked offers are something new and different for 바카라사이트 UK higher education sector ¨C and where Cambridge has pioneered, o바카라사이트rs are likely to follow.

Dominic Kerr is managing director of Debt Capital Markets at HSBC, a joint?bookrunner on Cambridge¡¯s bond issuance.?