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Aberdeen City’s Scottish independence proxy bond

By Craig McGlashan
14 Mar 2017

The Scottish city of Aberdeen may be long past its 1980s heyday — when it was the hub of the burgeoning North Sea oil industry and its football team was one of the most feared in Europe — but it could soon find itself being a useful capital markets bellwether for the latest constitutional crisis to hit the UK.

In November — aside from making headlines as the owner of a business in surrounding Aberdeenshire won a keenly followed presidential election — Aberdeen City Council sold the first ever bond from a Scottish local authority.

Other than its size — at £370m, it was larger than the combined volume of 2015 trades by the Greater London Authority and Warrington Borough Council — it was a pretty typical UK public sector bond. Linked to the retail price index measure of inflation, long dated and all of that good stuff.

But dig a little deeper and one can find a few terms and conditions that make the issue highly relevant to this week’s news that the Scottish National Party (SNP), which leads the Scottish government, will seek a second referendum on independence.

The offering circular for the issue includes a reference to an “Independence Event”, where Scotland leaves the UK.

Aside from highlighting that an ear for catchy names is not among financial lawyers’ talents, the inclusion of the clause means that bondholders would have two months after such an event to redeem the bonds early. As the bonds are not due to mature until 2054 and the Scottish government wants to hold a second referendum between autumn next year and spring 2019, that could be a very early redemption indeed.

So far, we do not know if the UK government will allow the second referendum to take place. Nor do we know if Scots would vote for independence at the second time of asking.

The first referendum returned a strong ‘no’ vote of 55.3% — from an even stronger turnout of 84.59% — in 2014 and since then, the price of oil has plunged. Black gold had been at the forefront of the SNP’s economic plans for independence, meaning that its leader Nicola Sturgeon would have to perform some pretty remarkable alchemy to state the case for going it alone in those terms once again.

But the other major change since the first vote in 2014 is that the UK voted to leave the European Union. Scots, meanwhile, voted to stay by 62% to 38% — a higher proportion than voted to remain in the UK in 2014 — which has changed the political outlook and offered the SNP its opportunity to attempt another independence push.

So, a lot of variables and moving parts to consider.

But for anyone wondering what the market might be thinking about the likelihood of an independent Scotland — and its credit strength — Aberdeen City Council’s bond issue could be well worth keeping an eye on.

While it is unlikely to be highly traded — as an inflation linker, buy-and-hold investors like pension funds probably snapped it up — checking where it is marked against the UK sovereign may provide one of the best indicators of sentiment towards the unfolding independence debate.

And where is Aberdeen City — at the heart of the SNP’s once grand oil plans — in that debate and that of Brexit? In 2014 it voted 58.61% in favour of staying in the UK — slightly higher than the Scottish average. On EU membership, it opted last year to remain by 61.1% — just a smidge below the average in the rest of Scotland.

Like its football team, enjoying its best period of success since the 1980s, Aberdeen may well be regaining its importance — this time as a bellwether for how the new battle over the future of the UK will play out.

By Craig McGlashan
14 Mar 2017