ESB delays plan to borrow €150m
PROPOSED PENSION fund rules have forced the ESB to hold off on plans to borrow €150 million from the capital markets.
The State-owned energy group confirmed yesterday that it was delaying plans to issue an inflation-linked bond because proposed new funding standards for retirement schemes had made trustees “cautious” about investing in the instrument.
Group head of treasury Paul Stapleton explained that the proposed rules require pension funds to balance risks associated with most investments by carrying additional reserves.
The rules apply to all assets except sovereign bonds – that is, debt issued by national governments.
“We had been engaging with a lot of Irish pension funds and there was plenty of interest, but trustees were understandably cautious because of the new funding standards,” said Mr Stapleton.
He added that, as a result, the company decided to put the bond issue on hold until the situation had been clarified.
Mr Stapleton indicated that it was not concerned at the impact of the delay in its latest bid to raise cash.
“We have plenty of other funding options,” he said.
He also said that consultations between the various players in the pensions industry are likely to result in a change to the new rules.
He added that fund managers and the Pensions’ Board recognise that the rules are too narrow. The board, which is the regulator, is reviewing them along with fund managers and actuaries.
Inflation-linked bonds are popular with governments and utilities. In July, British water company Severn Trent raised more than €90 million from retail investors through the issue of such bonds.
The returns are tied to consumer price indices and they are generally issued for periods of five, 10 or 20 years.
As power and water companies’ prices are generally tied to inflation and government returns from sales taxes such as VAT are closely linked to consumer indices, such bonds are a low-risk means for these organisations to raise cash.
Investors see them as a defence against recession. Wealth management firm Smith Williamson recently predicted that as many governments are likely to “inflate” their way out of the current slump, the bonds could prove popular with Irish savers and fund managers.
Last month the ESB borrowed €600 million from European institutions to refinance existing bank debt and credit facilities. That was through a five-year bond with a 6.25 per cent interest rate.