By Mark McSherry
The Scottish Government believes that a Scottish bond could represent better value for money than its current borrowing arrangements for both fiscal and economic reasons.
In November last year, Deputy First Minister Kate Forbes revealed the Scottish Government was pressing ahead with its plans to go directly to the international bond market for the first time in its own right.
Bonds are debt securities and are a routine form of borrowing for sovereign and sub sovereign governments around the world.
Forbes told the UK Investment Association’s Scottish Investment Conference in a November speech that she believes there is a very strong investment case for a Scottish bond.
“Plans have been progressing over the course of this year and you’ll soon start to see an increase in activity about the bond,” said Forbes in November.
Asked this week about the progress on Scottish bonds, a Scottish Government spokesperson said: “The initial phase of due diligence has concluded that a Scottish bond could represent better value for money than the Scottish Government’s current borrowing arrangements for both fiscal and economic reasons.
“Details of the next stage of due diligence, including around external financial advice, will be published during the 2025-26 financial year.”
In 2017, Aberdeen City Council launched a successful £370 million bond issue. The bond issue was oversubscribed and was a first for a Scottish council. The £370 million was used to support a £1 billion capital programme for the city.
The Scottish Government recently published an update on its borrowing policy and progress towards a future bond issuance, saying that after the initial phase of due diligence was completed, it concluded firstly that the right market conditions, a bond could represent better value-for-money than borrowing through the UK National Loans fund in net-present-value terms.
It concluded, secondly, that bond issuance, and the associated increase in “investor engagement” also has the potential to deliver indirect economic benefits. This means that a bond issuance “may still represent a value-for-money proposition” even in less favourable market conditions.
“The first point relates to the profile of borrowing repayments,” said the update.
“The Scottish Government cannot access the traditional government borrowing structure – maturity repayment – through the UK National Loans Fund. Accessing this, or alternative, structures allows short-term cash savings subject to the prevailing UK interest rate environment, the spread which a Scottish Bond attracts, and other market considerations.
“The second point relates to the Investor Panel recommendation on investor engagement in their report for the Scottish Government.
“The Panel recommended that ‘Although it will involve additional costs, Scotland’s profile could be significantly raised in the international capital markets by using existing devolved powers to issue debt. This will provide a motivation for regular engagement by investors and an opportunity to market Scotland’s investment story. It would also allow the development of relationships with providers of debt, a track record and credit rating’.”
The update said: “As with all borrowing decisions, a bond issuance is subject to HM Treasury approval. The Scottish Government will work closely with HM Treasury through this process.
“The Scottish Fiscal Commission supports the Scottish Budget process through the production of economic and fiscal forecasts and its assessment of the reasonableness of the Scottish Government’s borrowing plans.
“The Scottish Government will ensure the Scottish Fiscal Commission, as the independent fiscal institution for Scotland, plays its role in assessing the plans for bond issuance as the due diligence work is developed further.”