Severn Trent has today launched a Retail Prices Index (RPI) linked 10 year Sterling bond, making it the UK first water company to offer retail investors an inflation-beating investment product.

The bond will pay interest semi-annually at a rate of 1.3 per cent every six months, adjusted to take account of changes in the level of the RPI. By being adjusted to take account of the RPI, customers are guaranteed to receive there mony back and to receive a higher capital repayment the higher inflation goes, guaranteeing that they will be at inflation at the end of the term in addition to receiving smaller regular dividend payments.

If someone invests £5,000 in this bond issue and inflation average just one per cent over the next ten years, the investor will receive £5,525. However, if inflation averages three per cent then the investor would receive £6,675. If there is no inflation, the investor will still get the full £5,000 back

At an inflation rate of one per cent the coupon or dividend will pay £13.20 every six months. If inflation is five per cent this will rose to £13.60.

Investors need to make a judgement about the future direction of inflation. If inflation is likely to be low then this is not a great investment, but of you judge that inflation is likely to remain stubbornly above the Bank of England's target rate of two per cent, then this could be a lucrative investment.

The product is tradeable and will be listed on the London Stock Exchange's Order Book for Retail Bonds (ORB).

On maturity, the amount due to be repaid will be the full face value of the bonds, adjusted to take account of any overall RPI increase. However on maturity, even if there is an overall fall in the RPI, the company will be required to repay the bonds at no less than their full face value.

Severn Trent is tapping into the retail bond market as part of a plan to diversify funding sources for its £2.5 billion capital investment programme. The water company has more than seven million customers in Wales and the Midlands.

Mike McKeon, the company’s chief financial officer, said: “We are pleased to be the first water company to issue a retail bond.

“With a large, inflation linked, investment driven, regulated water utility at the heart of our group, we are well suited for this product.”

Barclays Bank and Investec Bank have been appointed joint lead managers of the bonds, which are expected to be issued on July 11.