USS announces innovative inflation-linked financing to Affinity Water

The UK-based Universities Superannuation Scheme Limited (USS) has provided £95m of 20 year, class B inflation-linked financing to local firm Affinity Water Programme Finance Limited, via the private placement of an index linked note.

USS was established in 1974 as the principal defined benefit pension scheme for universities and higher education institutions in the UK. It is the second largest UK pension scheme with assets of £36bn as at 31 December 2012.

The financing was arranged by USS Investment Management Limited (USSIM), USS’s principal investment manager and adviser, which has a dedicated Infrastructure team managing some £1bn in infrastructure assets for USS, with a mandate to invest up to 7% in infrastructure over the medium term.

A statement said long-term inflation-linked infrastructure debt is attractive for USS given that it shares similar characteristics to USS’ pension liabilities. “In a period where government bond yields are low, infrastructure debt provides an attractive premium to current bond yields as well as providing inflation protection for USS,” the company said.

Gavin Merchant, senior Investment Manager Infrastructure at USSIM, said the firm’s investment philosophy is based on building strong relationships with a select number of core infrastructure companies. “In doing so, we hope to be able to work with the management team of these companies to offer a unique and flexible source of long-term financing. We see these relationships as long-term partnerships, where we can potentially provide capital for future financing requirements of the business.”

Affinity Water Limited is the largest water-only company in England and Wales in terms of customers and revenue. It provides 900 million litres of water a day to a population of 3.5 million people in the South East of England.

Rob Horsnall, investment manager Infrastructure at USSIM, added, “This was a unique situation, where we were able to work with Affinity Water to structure a long-term class B instrument which created significant value for the company by providing certainty of pricing and funding in advance of the whole business securitisation”.

Richard Bienfait, CEO of Affinity Water, said his firm was “delighted to borrow long-dated and index-linked Class B debt from such a high quality institution as USS”.

“Their long-term belief in our company, alongside that of the investors who provided our Class A debt, means we can focus our efforts on our vision to be the leading community-focused water company in the UK.”

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