Update: Bond spies financial opportunity20 July 2006 |
The Wellcome Trust's bond issue left financial markets stirred but not shaken...
In July 2006, the Wellcome Trust became the first UK charity to receive a top credit rating, and issued a bond in a bid to improve further the performance of its investment portfolio, valued at £12.3 billion as at 30 September 2005.
In effect, the Wellcome Trust is using the bond to borrow money from other financial institutions, such as insurance companies and pension funds, undertaking to pay a guaranteed return to the lender over the 30-year period of the bond. The money borrowed is reinvested and any returns over and above those passed on to the lender provide additional funds for the Trust to use to support its charitable activities. The Trust is paying annual interest of 4.625 per cent, while real annual investment returns over the past ten years have been 7.7 per cent.
The Trust received an Aaa bond credit rating from Moody's and an AAA rating from Standard & Poor's – the highest credit ratings available. In the UK, only the Government has a AAA rating: no UK companies are rated as highly. The AAA credit rating meant that the Trust is able to achieve very low borrowing costs.
The bond issue proved highly popular, with extensive and very supportive media coverage. Institutions applied for over £1bn of bonds, enabling the Trust to increase the bonds issued from an initial £500m to £550m. These additional funds will supplement the Trust's investment portfolio, which generates almost all the funds to support innovative and high-risk biomedical research and other important projects within its areas of interest.
The Trust has a long-term target rate of return for its investments of 6 per cent a year in real terms, and aims to distribute, on average, around 4 per cent of its assets each year.
This innovative step, originally proposed by Danny Truell, the CIO, and his investment team, raised complex issues for the Trust. Governors, Investment Committee members, Executive Board members and the Investment, Finance, Legal and Communications teams worked together to ensure a streamlined, sophisticated and, ultimately, very successful outcome.