RPT-Investors ignore "Corbyn risk" to grab UK power grid debt

Britain's National Grid Electricity Transmission (NGET) drew heavy demand with its 700 million pounds ($864 million) bond issue on Monday, as investors rushed to grab the low yield despite nationalization worries.

National Grid, a parent company for the main national power distributor, is earmarked for nationalization by the Labour Party led by Jeremy Corbyn if it wins an election expected later this year. Lawmakers are for now blocking Prime Minister Boris Johnson's request for an early election, but only until they are satisfied they have stopped a no-deal divorce with the European Union, after which a vote looks inevitable.

NGET acknowledged in the bond's prospectus that potential nationalization could have a "material" impact on operations. Yet with rates and government bond yields at some of their lowest levels ever, it had double demand for its target. In the end, it issued a 1.375%, 300 million pounds, seven-year bond and a 2%, 400 million pounds, 19-year bond, said a lead manager. Pension funds starved of long-dated assets came in for the long bond in particular.

"This is a fantastic time to issue debt given the really big drop in the underlying rates and the potential for more central bank stimulus," said the source, who asked not to be named. National Grid did not immediately reply to a request for details.

Central banks around the world have been easing policy in response to a darkening outlook for the global economy. Most notably, the European Central Bank is likely to announce corporate bond purchases this week, an expectation that has already pushed nearly half of European corporate debt into the negative-yielding territory.

The Bank of England is also expected to cut rates in the event of a disruptive outcome from Brexit negotiations, and perhaps most significant rate cuts from the United States are being priced in as well.

"FORGIVING INVESTORS"

As a result, there has been a record amount of corporate bond issuance over the past fortnight or so, bankers say. Last week, there was 34 billion euros of corporate bond issuance in Europe and $75 billion in the United States, a new record by one estimate. "Investors are very forgiving at the moment," said one banker who has managed National Grid's debt issuance in the past, though not this deal.

"I think the Corbyn risk is substantial with a general election likely, but the market is not trading on credit fundamentals. It is a market pumped up on central bank stimulus." In May this year, the Labour Party unveiled plans to take the National Grid into public ownership, saying it wants to create a National Energy Agency for transmission infrastructure.

In its bond prospectus, the company warned of the potential downside of nationalization for operations, cashflows, and opportunities to develop businesses. But this did not mean National Grid or the National Grid Group would be unable to comply with obligations, it said. However, Gordon Shannon, portfolio manager at TwentyFour Asset Management, said nationalization would put serious doubts over National Grid plc's debt repayments. "A Corbyn-led government is not as remote a possibility as investors might hope," he said in a note on Friday.

He also highlighted that National Grid faces a potential fine from energy regulator Ofgem of up to 140 million pounds after Aug. 9 blackouts. ($1 = 0.8098 pounds)

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