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Investors have told the Scottish government to steer clear of longer-term bonds or face a hefty “independence premium” on its borrowing costs as Edinburgh gears up for its first debt issuance since the 17th century.
Scotland announced last year the plan to sell £1.5bn of bonds — nicknamed kilts — kicking off later this year or in 2027, as the ruling Scottish National Party seeks to build credibility with investors in its push for independence from the UK.
But fund managers say the possibility of a second Scottish independence referendum will be a key risk overhanging the new debt, and they would favour shorter-term bonds to minimise the chance of a constitutional change before any lending is due to be repaid.
“We welcome a Scottish government debut in principle, but investors will need to balance implied UK support today with the uncertainty around future constitutional arrangements,” said Aaron Rock, head of rates at Aberdeen.
The risk premium attached to independence “would need to increase the further out the curve you travel [in terms of bond maturities]”, he added.
Holyrood has previously acknowledged that Scotland will pay higher borrowing costs than the wider UK — a premium investors say should reflect the lower liquidity of the market, compared with the nearly £3tn in UK government bonds in circulation, and the questions over the long-term backing for the debt.
On an investor call with the Scottish government on Friday hosted by the Investment Association trade body, the bonds’ maturity was discussed, according to two people familiar with the discussion. One person said some investors were pushing for shorter-term debt.
A spokesperson for the Scottish government said part of its preparations for the debt sale “include meeting representative industry bodies and their members which will help inform policy and structuring decisions going forward”. The IA declined to comment.
Fund managers told the FT that Edinburgh should avoid issuing any debt with a maturity above 10 years, arguing they would be more comfortable lending for closer to five years. In a January presentation on its plans, the Scottish government said the planned tenor of the debt had been “deliberately left open to maximise pricing value and flexibility”.
“Shorter-term kilts are likely to trade close in yield to gilts given the well-defined structure of Scotland’s finances under devolution, and the identical credit ratings north and south of the border,” said John Stopford, head of multi-asset income at Ninety One.
But investors would be “wary” of longer-dated Scottish bonds that could “end up being liabilities of an independent Scotland, which could turn out to be a less creditworthy borrower”.
Scotland was last year handed a credit rating by two big rating agencies that was equivalent to that of the wider UK, paving the way for the planned issuance.
First Minister John Swinney said at the time that the debt sale would be the nation’s “latest step in building the institutions and tools Scotland needs for a prosperous future where our country takes responsibility for its own decisions”.
The nation, which currently receives most of its funding from the UK government, has been able to issue bonds since 2015, under legislation that followed the previous year’s independence referendum. Edinburgh has previously said the first £300mn bond is due in late 2026 or early 2027.
