On November 29, 2016, the United Kingdom Debt Management Office (UK DMO) syndicated a new 40-year maturity inflation-linked bond. The well-executed, successful transaction contributed to meeting the government’s annual financing needs at low cost due to significant demand from institutional investors. What’s more, the transaction was executed in a relatively volatile market environment and only days after the Chancellor of the Exchequer announced a significant increase in the UK’s fiscal deficit and borrowing requirements.
The UK DMO’s transparent market communication program and well-honed process deserve some of the credit for the success of the syndication. This kind of transparency and predictability are critical for successful public borrowing programs.
In its 2016-17 funding program, the UK DMO announced the share of total funding it would raise through syndications. Investors can check quarterly issuance calendars for the approximate timing of syndications and more details on the specific bond (e.g. maturity bracket) to be issued. In the weeks leading up to the syndication, the UK DMO announced lead managers and other details, including the week of issuance and specific bond choice.
Internally, the syndication followed a tried and tested process, including pitch calls with interested primary dealers, a meeting of the Debt Management Committee to discuss the appointment of lead managers, bond choice and timing, as well as regular market updates. Analyses and frank discussions helped the team weigh their options and ultimately decide on the structure of the bond issuance.
On Assignment in the Field
From August to November, 2016, I was working at the UK DMO on assignment from the World Bank Treasury and had the chance to help coordinate this syndication. My role included preparing the recommendation on the choice of bond maturity, the appointment of lead managers, and the timing of the issuance.
While I was in London, two colleagues from the UK DMO took turns on assignment to the World Bank Treasury. Another part of my assignment was a similar posting to the National Treasury of South Africa in Pretoria.
South Africa and the UK have sound and well-developed debt management practices. Debt managers in World Bank client countries across the world can draw lessons from the experiences of both countries. As someone who works hands on with countries to help them improve and enhance debt management practices, these two posts presented invaluable opportunities to learn from and better understand debt management practices in these two countries.
Here are the top three things I took away from each of my assignments:
South Africa’s National Treasury stands out for its approaches to asset-liability management, portfolio benchmarking and contingent liability management:
- National Treasury’s Asset Liability Management (ALM) department permits institutional integration. ALM can manage both liabilities, primarily government debt, and assets, primarily the government’s shareholdings in state-owned corporations, more holistically. For example, ALM coordinates bond issuances between state-owned enterprises and the government, to manage the timing of supply of securities to capital markets.
- The National Treasury clearly defines benchmarks for the portfolio composition of government debt. Benchmarks make the government’s risk preferences explicit and contribute to transparent communication with market participants. These debt portfolio benchmarks have been developed on a sound analytical basis – in a project supported by the World Bank Treasury’s Government Debt and Risk Management (GDRM) Program – and are monitored regularly.
- Over the years, National Treasury has developed sound processes and analytical capacity to assess and help manage contingent liabilities stemming from guarantees to state-owned enterprises (See Breakout 5 from the 2014 Sovereign Debt Management Forum). They are using a proprietary credit scoring methodology and developing analytical approaches (Merton model and scenario analysis) in another GDRM supported project.
The United Kingdom Debt Management Office leads by example with its strong relationships with market players, robust risk management culture and proactive and analytical approach for adapting to change:
- The UK DMO is an agency of HM Treasury. The institutional set up contributes to the UK DMO’s strong relationship with market participants in the UK’s deep capital markets and beyond. Located in the City of London, the UK DMO is in regular contact with market participants, including investors and market makers. Formal consultations with primary dealers and investors are paired with ad hoc meetings, and informal relationships.
- Operational risk management pervades the institution on all levels. The UK DMO operates under formal guidelines and a regular risk management committee reviews risks. The DMO is implementing a strong operational risk management framework (see the Dec. 2016 webinar on “Operational Risk Management for Public Debt Managers”). Most importantly, a culture of strong risk management is instilled in staff.
- The market environment in the UK is undergoing important changes that impact the DMO’s operations. The DMO’s policies allow it to identify, evaluate, and proactively react to these changes. First, teams from across the organization collaborate on generating alternative options to respond to changes. Then, they conduct rigorous analyses before consulting external stakeholders. Ultimately, the UK DMO has a high bar to meet to change its operations, placing a premium on predictability and transparency vis-à-vis market participants.
As I continue serving World Bank clients to support them in improving their debt and risk management practices, I strive to apply lessons I learned during my assignments. As the environment in client countries often differs significantly from those in South Africa and the UK, these lessons learned need to be tailored to take into account the specific challenges our clients are facing.