The Church of England Pensions Board (CEPB) – the £1.8bn (€2.5bn) scheme for 35,000 of the Church’s clergy and church workers – has issued £100m worth of index-linked bonds to finance the purchase of houses to be rented to retired clergy and their spouses.
The bonds – the first-ever sterling issue with the coupon but not the principal linked to the consumer prices index (CPI) – are repayable in tranches between 2038 and 2048.
The bond’s coupon of 3.126% increases annually with CPI, subject to a 4% cap and a floor of zero, and is intended to provide a good match for the rental income.
Part of the proceeds will be used to acquire 196 additional properties for the Church Housing Assistance for Retired Ministers (CHARM) scheme, which provides houses at subsidised rents.
The properties were previously owned by the Church Commissioners, and the purchase forms part of a long-term strategy to keep or acquire suitable properties, giving retiring clergy a wider choice of accommodation.
The bonds were issued by a special purpose vehicle, CHARM Finance, since the CEPB, as a charity, cannot issue listed bonds directly.
Of the total, £70m of the bonds were placed with Pension Insurance Corporation, with the remaining £30m retained to provide quick access to the capital markets if required in the future.
Ian Theodoreson, CFO at the National Church Institutions of the Church of England (which include the CEPB), told IPE: “The CEPB was seeking longer-term funding to replace the short-term bank funding that was put in place in 2010 to manage interest rate risk and to give funding certainty for the next 25-plus years.
“As a charity, it is not in a position to raise finance in other ways.”
The CEPB runs a number of pension schemes and also a charitable arm, accounted for separately.
The bonds will be included on the balance sheet of the charity.
Theodoreson said the bond would be repaid through monies generated by the business model and by profits on selling surplus properties.
He added: “The investors considered the bond to be investment grade and have taken a view on the support that the CEPB is able to generate from the wider Church of England family.
“The structure of the bond is unique, but we understand there is a growing interest among pension funds for CPI-linked investment products.”
Alan Fletcher, chair of the CEPB’s housing committee, said: “This new long-term financing arrangement will bring greater certainty over borrowing costs by taking advantage of the current low-interest-rate environment.”
The bond was structured and arranged by TradeRisks, the CEPB’s corporate finance advisers.
Ben Fry, managing director at TradeRisks, said: “This is a groundbreaking transaction, which represents a new step forward in the CPI-linked bond market.
“We worked with CEPB and investors to develop an innovative and bespoke solution for CEPB that combines a low all-in cost of funding with structured indexation tailored to match CEPB’s cash flows.
“The use of standardised bond documentation allowed the addition of retained bonds, which will provide funding flexibility in the future.”