Many utility finance officers and treasurers are re-thinking the way they fund ongoing operations and network upgrades.
Today, larger businesses tend to source funds predominately in the bond markets, and smaller companies complement bonds with bank financing. Most power and energy corporates have substantial inflation-linked needs, and have satisfied these by borrowing on a nominal basis while entering into a swap with a bank to convert the debt into inflation-linked payments.
Changes in the banking industry are making long-term swap arrangements more costly than in the past, so the increasing opportunity to tap private debt markets for inflation-linked borrowing is generating interest.
Investor demand is there. UK institutions such as pension funds have long been attracted to utility companies, particularly regulated entities, thanks to their robust revenues and protection from normal business cycles. Their own liabilities – payments to scheme members – tend to be index linked.
Companies reap benefits from private debt. Investors execute on pre-agreed terms irrespective of market conditions on the day of issuance, whereas with public bond markets, spread and rate risk is taken up to the last minute. Companies can also tailor maturities to meet their requirements, issuing tranche sizes and drawdowns to fit their debt profile. They can also take advantage of structures such as inflation-linked debt in BBB-rated or subordinated entities.
Moody’s has recognised that long-dated inflation-linked securities can effectively match cashflow profiles and finance regulatory asset value expansion.
With the next regulatory periods for water and electricity firms starting in 2015, we estimate that water companies will have an inflation-linked debt demand of £800 million, and electricity and gas utilities will require £300 million, alongside an extra £900 million of annual refinancing over the next four years. Private debt markets are an increasingly relevant option for utility borrowers.
James Wilson, chief executive, Macquarie Infrastructure Debt Investment Solutions