Sovereign: UK Debt Management Office

Issuer: UK Debt Management Office
Date of issue: Jun 16, 2009
Size: £7 billion
Pricing: 11bp over the 4.25% 2032 gilt

Bookrunners: Barclays Capital, Goldman Sachs, HSBC, Royal Bank of Scotland

June 2009’s £7 billion 25-year transaction represents the UK Debt Management Office’s inaugural nominal syndicated gilt; the first syndicated gilt since an inflation-linked deal in 2005 and the largest ever syndicated government bond from a European sovereign borrower. The transaction was the first tranche from the 2009/10 £25 billion syndication programme the UK Debt Management Office (DMO) announced in May 2009, later revised to £30 billion in December’s pre-Budget report.

The DMO’s financing remit for the current fiscal year has ballooned to £225.1 billion, compared to £146 billion in 2008/9 and £58 billion for 2007/8. To meet this funding requirement, the DMO introduced a programme of syndication to maximise the diversity of its funding sources and relieve pressure from the auction calendar.

“We wanted to limit the number of auctions, as these require primary dealers to take on risk by using their balance sheets whenever they take down our supply. There is a limit to how much you can ask the market to undertake,” says Robert Stheeman, chief executive at the DMO. “Syndication allows us to save holding a number of auctions by doing a multiple of the corresponding auction size in one transaction.”

A real GEMM

UK investors are used to Gilt-Edged Market Makers (GEMM) underwriting and completing the auction before deciding to participate, according to Myles Clarke, co-head of the frequent borrower group at Royal Bank of Scotland. Syndication is considered a more transparent procedure and allowed the DMO to engage more effectively with investors to determine the most suitable maturity, size and type of deal.

Syndication allowed the DMO to print a much larger transaction compared to an auction, which would have limited the size to around £2.5 billion. It also means a liquid benchmark size is achieved more quickly.

The transaction helped align the DMO’s supply more closely with specific pockets of demand at the long end of the maturity curve. “The primary focus of the deal was to answer a need from the UK domestic pension fund base,” he adds. “Syndication provides more certainty in the allocation process and is better suited to meet targeted investor demand.”

Ticket sizes from long-dated pension fund players can range from £200 million to £500 million, and the secondary market or auctions do not always offer enough liquidity to allow for orders of that size.

The DMO avoided pressure on its existing curve by targeting a specific gap at the 2034 maturity and announced an expected size around £3 billion-£5 billion with initial price guidance of 12 basis points to 15bp over the 4.25% 2032 gilt. Pricing was revised to +11bp after two hours of opening the book.

Significant investor interest saw the order book reach £7 billion within one hour, increasing to £15.25 billion from 130 accounts in just two hours. The book closed 30 minutes after price guidance was revised. Given the quality and strength of the orders, it was decided to increase the size to £7 billion and price at +11bp, the tight end of revised guidance.

Domestic accounts provided the main support for the issue, taking around 94% of the allocation. End investors, primarily including fund managers, pension funds and insurance companies, took 62% of the transaction and 38% was placed within the GEMM community.

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