45. This section considers why the GGBs were issued at a margin to Gilts, whether attempts were made to minimize it and whether the margin was justified. The three bond issues were launched at the following risk margins to Gilts:
Issue-Closing Date | Nominal Amount | Coupon | Issue | Maturity Date | Risk Margin |
10-18 Feb 99 | £1,225,000,000 | 4.5% | Guaranteed bonds | 2028 | +0.33% |
10-18 Feb 99 | £425,000,000 | 4.5% | Guaranteed bonds | 2038 | +0.28% |
17-25 Feb 99 | £1,000,000,000 | 4.5% | Guaranteed bonds | 2010 | +0.375% |
46. Tradeable Obligations issued by Central Governments, such as Gilts or US Treasuries, tend to be the most liquid securities in all markets. Schroders, correctly in our view, advised that the GGBs would be sold at the best price if they could be treated as a Gilt. There were a number of features of the GGBs, which inevitably distinguished them from an issue of gilts and resulted in a cost differentiation. Most of these features were unavoidable given the constraints imposed by the structure of the project and time.
47. Annex 3 summarises the pricing of a fixed rate sterling bond. Given that the credit risk on a GGB is the same as that for a Gilt, the additional cost can be explained by illiquidity and performance risk. Features (described in more detail below) which influence these risks include:
■ size of issuer;
■ universe of investors;
■ maturity;
■ administration and settlement;
■ index eligibility;
■ method of sale.