Wessex Water is considering entering the sterling inflation swaps market to hedge its next bond issue. The U.K. water company has issued both fixed-rate and inflation-linked notes, but may swap its next fixed-rate issue to receive a floating rate linked to the retail prices index. U.K. water companies are required by regulators to raise prices in line with inflation, so they have natural inflation exposure.
Mark Watts, treasury manager in Bath, explained issuers of inflation-linked bonds pay a premium over fixed- or floating-paper in the current market conditions because of the distortion of the U.K. inflation curve. To avoid paying this premium, Wessex Water would look to enter an inflation swap. "The next time we come to the market we would look seriously at inflation swaps," said Watts.
Wessex Water issued its last bond in October last year. Watts said it will likely make its next issue in around a year.