This article highlights how the adjusted capital price (ACP) of the Sydney Airport 2030 capital indexed bond (CIB) changes with the release of the quarterly consumer price index (CPI) by the Australian Bureau of Statistics (ABS)
Inflation corrects lower
Readers may recall that the September 2012 CPI was much higher than expected, coming out at 1.4% for the quarter, partly as a result of the influence of the carbon price legislation implemented by the Commonwealth government. Many market participants had feared the worst; a continuation in higher inflation. However, those fears were not realised and the release in December came in under expectations, meaning that inflation remains well within RBA tolerance, thereby allowing a more detailed consideration of an easing in monetary policy, probably towards the end of 2013.
CPI uplift for September 2012 quarter
In January 2013, the official December 2012 CPI data was released, which indicated that the headline CPI rose 0.20% in the quarter, and 2.2% for the year (as published by the Australian Bureau of Statistics (ABS)). The way in which the CPI data impacts the adjusted capital value of CIBs is shown below. This procedure is generally known as the “uplift” to the adjusted capital price.
The Australian Office of Financial Management (AOFM) define the way the uplift of most capital indexed bonds works, as follows:
(rounded to two decimal spaces), where
- CPI(t) is the Consumer Price Index for the second quarter of the relevant two quarter period
- CPI (t-2) is the Consumer Price Index for the quarter immediately prior to the relevant two quarter period
First, investors need to define the relevant CPI dates and values. This information is available from the RBA website, as shown in the first column of Figure 1 below. Here,
- CPI(t) in December 2012, which corresponds to the CPI index value of 102.00
- CPI (t-2) in June 2012, which corresponds to the CPI index value of 100.40
Then insert these values into the above formula, so the formula is as follows:
P is then used to increase, or ‘uplift” the capital price of the bond to the new adjusted capital price, as shown below in Table 1.
Using this formula, you can then determine a series of capital uplifts, as follows:
Note: The CPI Index was reset to 100 for the 2012 calendar year. Data prior up to and including December 2011, uses index data before the reset. Data subsequent to the reset is quoted from March 2012.
Table 1
In this case, the ILB outcome means that the adjusted capital price of the bond goes up by 0.80%, as shown in the third column of Figure 1. Hence the old adjusted capital value, of 118.75 (the blue number in the right hand column) is multiplied by 1.0080 (or 1+.0080, as specified in the capital uplift column, rounded to 4 decimals), to obtain 119.70, rounded to 2 decimals, (the red number in the right hand column of Figure 1). This means that the ILB issuer now has an obligation to pay 119.70, not 100, or the prior 118.75, to the investor, upon the maturity of the bond. Also, the coupons are now based on the new capital price of 119.70, so the 3.12% coupon is now multiplied by 1.1970, which means that the new coupon effectively increases from 3.71% to 3.73%, rounded to two decimal places. While the coupon payment stays the same, at 3.12%, the increase in the adjusted capital price effectively lifts the coupon payment in line with the new repayment commitment of the issuer, which has grown with inflation. Within each quarter, the ILB has a stable adjusted capital value, which can then be priced like any other bond.
Conclusion
Lower than anticipated inflation has now made the job of the RBA somewhat easier, and has fed through to the adjusted capital price of the Sydney Airport 20130 CIB, as described above.