- The Guardian, Tuesday 27 February 2007 09.11 GMT
Tesco, Britain's biggest supermarket group, has tapped into pension funds' thirst for long-dated assets by issuing a landmark 50-year corporate bond - the first sizeable issue of its kind.
The £500m of debt, which is not due to be repaid until Tesco chief executive Terry Leahy is clocking up a century and the chain itself will be 138 years old, was four times oversubscribed.
Managers selling the bonds had to close the book after just two hours following the clamour of pension funds desperate to match their long-term liabilities with long-dated assets.
"The demand has been exceptional because this is a one of a kind bond," said Frazer Ross, from the new issue syndicate team at Deutsche Bank, which was one of the lead managers on the bond.
The 50-year bond is a striking example of how cheap it has become to raise long-term finance in the sterling bond markets. It offers cheap borrowing for the supermarket chain thanks to yields on long-dated bonds being close to all-time lows.
Investors could see other UK companies follow suit now that a benchmark has been set. The Tesco bond has a yield of 5.23%, compared with 4.06% on the equivalent government bond.
Such debt issues could meet the needs of pension funds, which have to satisfy regulators they hold enough of the right assets to pay out future benefits. They have been snapping up the small amount of ultralong UK government debt in issue. That is despite the fact that equities usually return more over the long-term.
Since 1900, the average annual return on equities has been 5.6% in real terms. For UK government bonds it has been 1.3%, according to the annual returns report by the London Business School and the investment bank ABN Amro.
But pensions experts point out that buyers of equities still risk losing money over the short term.
Robert Gardner, a pensions consultant at Redington Partners, said funds were changing the way they manage their money.
"What pension funds are now doing is not seeking the best return on a standalone basis but looking for a portfolio of assets that best match the risk profile of their liabilities," he said.
Not all companies are likely to find investors willing to lend them money for half a century. Two of the main attractions of Tesco as a bond issuer are its strong balance sheet and a property portfolio that analysts value at up to £20bn.
"If it was easy, it would have been done before. Has it opened the floodgates? The answer to that is no. You have to be very well rated, you have to have name recognition and you have to have credit quality that the market will like," said Deutsche Bank's Mr Ross.
One bond market investor said: "Your risk is that supermarkets go out of business, but Tesco has an awful lot of assets and as a bondholder you have a pretty good claim on those assets should something happen."
Mr Gardner also pointed out the relatively stable nature of Tesco's business. "You are looking for businesses that have stable cashflows. People are always going to need food," he said.
Rival supermarket Wal-Mart, owner of Asda, sold a 32-year £1bn bond in December, one of the largest sterling corporate bonds. Medical research charity the Wellcome Trust issued a 30-year bond last summer.
Retailers that have survived
Tesco's landmark bond invites the question: who else would lenders trust to be in a position to pay up in 2057? Experts stress the best candidates will not be subject to the pitfalls of a cyclical sector. "The best firms to issue long-dated bonds are those companies whose products the public use come rain, hail or shine," says Frazer Ross, at Deutsche Bank.
Retail seems to have a pretty good survival record. Sainsbury's, Boots and Marks & Spencer have all been around since the 19th century, Austin Reed started in 1900 and Tesco in 1919. It is rare for a company to disappear; it would usually merge with a rival. According to Thomson Financial's data, the UK's top 20 retail bankruptcy deals include: Powerhouse, Lewis's Stores, Carpetland, Phone People and Sock Shop International.
