Blog & Reports

Recent inflation forecasts have been proved to be inaccurate. Investors are increasingly concerned as to whether their investments will beat inflation and whether they will be able to match their own inflation linked obligations in the future. Index-linked bonds can provide a solution to this uncertainty by linking the principal amount owed to inflation.

Increasing demand from investors for this type of product may increase the issuance of index-linked debt from organisations that have inflation linked income streams, such as local authorities, utility companies, and housing associations.

The Covid-19 crisis has increased costs for UK local authorities while revenue from property related taxes and from fees and charges is falling.  This will put many UK local authorities under greater financial pressure with an increased risk that some may run out of money.  The crisis has increased financial uncertainty for local authorities and highlighted some of the shortcomings of existing fiscal arrangements.

The UK government recently announced more than £600 billion of infrastructure spending over the next five years.  The proposed spending signalled a change of direction following the austerity measures taken in the years after the Global Financial Crisis.  This spending, however, may now be under threat as government finances are hit by the covid-19 crisis..

The heightened risk of sovereign ratings downgrades in response to the COVID-19 crisis is likely to have the consequential impact of lowering the ratings of government related entities where there is deemed to be on-going support and extra-ordinary support from government.  It may also lower the ratings of financial institutions where there is deemed to be systemic support provided by government and lower the ratings of structured transactions that are underpinned by instruments supported by financial institutions.

Hybrid bonds may have a useful role to play in the capital structures of not for profit entities that have exposure to commercial risk. Not for profit entities, such as housing associations, are non-distributing and therefore traditional hybrid products such as convertible bonds (where debt is converted into equity) are not suitable. It is possible, however, to issue bonds that have equity like features such as the ability to miss payments for periods of time, but which do not convert into equity. There needs to be a sufficient degree of “equity like” features, however, for such a hybrid bond to be considered as a “non-debt” instrument.