With a borrowing target of £220bn for fiscal year 2009/10 and around £102bn raised by the end of August, the United Kingdoms debt management office (DMO) still has a very big hill to climb.
However, according to Robert Stheeman, chief executive of the DMO, auction cover has held up well so far since an uncovered auction in March and funding is marginally ahead of target.
This year for the first time, the DMO has included syndication in its funding programme the two deals syndicated so far were spectacularly successful in terms of size, pricing and distribution, raising £12bn in a 25 year conventional and a 2042 index-linked bond.
The only slight hiccup in the process was the appointment of Barclays Capital, HSBC and Royal Bank of Scotland on the top line of both deals, with the addition of Goldman Sachs on the conventional and JP Morgan on the linker, which ruffled the feathers of some of the Gilt-edged market makers (GEMMs) left out in the cold.
But Stheeman told EuroWeek that the top line of the next linker will be different. Presumably the same will be true for the conventional bond launched in October.
The March 2050 linker is scheduled for launch the week of September 21 and a 50 year conventional for mid to late October. If these deals are as successful as the first two, the whole £25bn set aside for syndication could be raised before the end of the calendar year.
Despite the proven efficacy of syndication, Stheeman says there are no plans to increase the amount of Gilts to be syndicated this fiscal year.
"We want to ensure that the auction format remains by far the largest one for raising money overall during the year as we think it is the most suitable over the long term for us to get good value for money for the taxpayer," he says, perhaps referring to the fact that added together, the two syndications have cost the DMO £25.25m in fees.
But as the average size of auctions is £2bn-£3bn for a conventional and £1bn-£2bn for a linker and the syndications raised £7bn and £5bn respectively, most market participants said the cost was mitigated by the broader marketing syndication brings, the speedy and smooth execution process, larger size achieved and tighter pricing.
Stheeman is cagey about whether syndication as a percentage of overall borrowing will grow in the future, only saying it will fall when borrowings decline.
"We have introduced syndication in a year where we have a very large borrowing requirement but, because of our commitment to the auction process as our primary means of issuance, we do not want to push syndication too far," he says. "I imagine that, if at one point in the future there is a decline in the volume we issue, the syndication side of things may be the first part to see a decline in its use rather that the auction format."
As the 2009 Budget estimated the 2010-11 borrowing requirement to be £218bn and market estimates are more in the £230bn-£250bn bracket bankers can be assured of lots of business from the DMO next year.
The 25 year conventional, launched in June, garnered orders worth more than £15bn, allowing the size to be increased from £5bn to £7bn, making it the largest ever syndicated bond from a European sovereign. It also allowed the pricing to be set at 11bp over the 2032 Gilt, inside the original guidance of 12bp-15bp.
Crucially, 62% of the bond was sold to end investors, including pension funds, insurance companies and fund managers when typically most of an auctioned Gilt is taken up by the banking community.
"The syndication programme has been incredibly successful, both in terms of the volumes raised and the range of investors participating," says PJ Bye, head of public sector syndicate at HSBC in London.
"Larger fund managers have far greater certainty in securing sizeable allocations in a syndicated deal than they do in the auctions, whereas smaller accounts particularly international investors that dont typically play in the auction market at all, now have direct primary access."
The reception to the November 2042 linker, issued in July, was similarly ebullient. Orders of over £8bn justified an issue size of £5bn and pricing of 7bp through the November 2037 UKTi, against guidance of 4bp-7bp through.
"It is a great vote of confidence that the syndication route has worked so well in terms of pricing and size," says Myles Clarke, joint global head of RBSs frequent borrower group.
"Another benefit of syndication was that it engaged investors in the process for the first time. Many Gilt portfolio managers were not familiar with syndication so there was an education process involved. In auctions, they buy from the primary dealers if they like what they see. With the syndications, investors did not wait to see how the deals were going before participating. Not only were they in the book, but they were also vocal with feedback."
Stheeman agrees. "The dialogue that we have had as a result of syndication, both with end investors and with GEMMs has been more inclusive and that is a real positive. It has helped us to get to know our investor base better and we see things that we would not see as a result of a normal auction.
"Syndication has also enabled the DMO to issue more long dated inflation-linked and conventional Gilts than would have been possible via auction, which is in huge demand by the pension fund industry. That is by far the best benefit for us."