Since raising its maximum maturity to 60 years in late 2012, the UK debt management office has issued three times beyond the 50-year mark.

By 2068, the UK is expected to have at least 500,000 citizens aged 100 or older, with many more in their 70s, 80s and 90s. For pension funds and other institutional investors, the country's ageing population will have at least one clear consequence: a growing need for long-dated assets to match their projected requirements for retirement income.

So it is not surprising that the UK Debt Management Office (DMO) has begun, in recent years, to receive requests from investors for exceptionally long-dated gilts.

“The UK has been a regular issuer of gilts with maturities out to 50 years since 2005, but occasionally we received representations from investors looking for even longer maturities,” says Robert Stheeman, chief executive of the DMO. In response, the DMO consulted with investors to gauge appetite for what the office termed ‘super-long’ or even perpetual gilts.

“We found that there may be demand for gilts up to 60 years but there appeared to be very little interest in issues longer than that and almost no demand for perpetuals at a price which would have been cost effective,” says Mr Stheeman.

Risky assets

Until 2012, the UK government had had an unofficial maturity cap of 50 years on gilt issuance. Once this was lifted, the DMO said it would consider issuing gilts with a maturity of up to 60 years in the April 2013/2014 financial year.

The first such deal – a £5bn ($8.05bn) 55-year gilt – was launched in June 2013, followed by a £5bn index-linked transaction. But the DMO sensed that demand remained for more ‘super-long’ gilts, so Mr Stheeman told the market he would look to re-open the 55-year gilt in the second half of October, subject to market conditions.

Most UK gilts are issued via auction, where the gilt-edged market makers (GEMMs) bid for paper and sell it on subsequently. In long-dated transactions, the DMO prefers to use a book-building or syndication process so the GEMMs are less exposed.

“We reserve syndications for long-dated and index-linked debt issuance as we feel that this distribution method is particularly well suited to riskier assets. And these are duration risk-heavy issues,” says Mr Stheeman. “Syndication is a more iterative process. It allows the book-runners to assess specific investor demand and build an order book matching demand to supply. In that way, they don’t have to take positions unless they want to.”

No surprises

The DMO has 19 GEMMs focused on the institutional market and is quite particular about its choice of book-runners for syndicated issues. In June, Barclays, Lloyds Banking Group, Nomura and RBS led the 55-year gilt. In October, the book-runners were Credit Suisse, JPMorgan, RBS and Société Générale.

“We have a long and careful selection process when it comes to choosing our lead managers. It is largely based on market activity in the primary and secondary market,” says Mr Stheeman. “We also maintain a close dialogue with our GEMMs and end investors so we can make a judgement about who is best suited to particular deals at particular times. And we aim to let as many GEMMs as possible have a bite of the cherry.”

The DMO does not believe in surprises, so investors knew the deal would be some time during the week of October 21, 2013. On October 22, the transaction was launched. The initial target was a £3.75bn issue priced at a spread of 2.5 to 3 basis points above the 4% January 2060 gilt.

Books opened at 8.30am London time and by 9am, the lead managers had received orders worth £9bn. Price guidance was tightened to 2.5 basis points but the book kept growing, hitting £12bn by 9.30am. Public sector net borrowing figures were due out at that time so the DMO chose to keep the books open a few minutes longer to see if the data had any impact on investor demand. No reaction of note was forthcoming, and at 9.35am the books closed with 96 orders totalling £12.5bn. The issue size was set at £4.5bn, with 94% of the paper going to domestic investors.

Vote of confidence

“We were very pleased with the way the deal went. We are the only sovereign in the world that regularly issues at these very long maturities, and indeed across the entire yield curve,” says Mr Stheeman. “Our average maturity – at close to 15 years – is far and away the longest average maturity of any sovereign issuer in the world. We see it as a vote of confidence in the gilt market. It has become a very deep and liquid market and a highly efficient one too.”

Looking ahead, further long-dated issuance is highly likely. “It is in the nature of DMO gilt issuance that we very rarely embark on a new line of gilts without some expectation of building them into strong liquid benchmarks,” says Mr Stheeman. “That is the strongest hint I can give that we would be looking, if and when demand materialises, to continue issuing at these maturities.”

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