The University of Cambridge broke new ground in the credit markets in June when it priced a £600m dual-tranche bond that included £300m of 50-year amortising debt linked to the consumer price index.
That tranche made history as the first-ever publicly syndicated corporate CPI-linked bond in the UK.
Clever structure aside, the deal had strong appeal with demand of £1.7bn.
The two-tranche bond also included £300m of conventional debt with a 60-year maturity.
The university has a policy of only raising debt to fund revenue-generating projects, and this deal was no different.
It was the second bond sold to raise money for Cambridge’s ambitious new North West project in the town, which will include accommodation for staff and post-graduate students.
But this time around, leads Barclays, HSBC and Morgan Stanley tailored the structure to deal with future inflation, with Rothschild advising.
The linker format matches expectations of CPI-linked rental income from the staff accommodation to be built using the funds, while recognising that academics shouldn’t be subject to the extremes of inflation.
To reduce risk on that front, bankers capped inflation on the CPI-linked tranche at 3% and floored it at 0% – a collar structure that, in this format, was also a market first. Collars are usually structured at 4% and 0%.
Given there is no CPI reference Gilt, pricing was based on RPI-linked Gilts with the estimated long-term wedge (the difference between RPI and CPI) at 90bp.
“We were trying to solve for the unknown and encapsulate that in a bond document,” said Charlotte Weir, head of corporate DCM for the UK and Northern Europe at Barclays.
“It was a big fact-finding mission for us.”
The three-day marketing effort involved a lot of leg work from leads to educate investors – and to make sure that the innovative structure wouldn’t put off any key accounts.
The deal’s £300m 60-year nominal bullet hit a key investment point for pension funds, which were also trying to manage their CPI-linked liabilities. The CPI tranche was exclusively placed with insurers and pension funds.
Demand included four orders of over £100m and allowed leads to aggressively tighten pricing from IPTs, landing the deal at the tight end of guidance on both tranches.
“I think Cambridge’s sole aim on this deal is to print inside Oxford’s plus 85bp level, given that historically Oxford was just a beta test for Cambridge,” an investor said at the time.
The university managed just that, launching at plus 77bp on books of £900m. The CPI bonds, which printed at plus 182bp, commanded slightly less attention, with orders of £800m.
“Cambridge’s first transaction was a seminal moment, and opened the floodgates for university finance,” said Daniel Shane, managing director at Morgan Stanley. “This deal will also be a key step to look back on.”