56. Even though the GGBs were not eligible for the Index and enjoyed no DMO privileges, they could still be structured so as to trade as similarly to Gilts as possible. Most Gilts have semi annual coupons and are redeemed in full on a single date ("bullet repayment"). A complex or non conventional bond structure will generally add to the spread. Therefore, if it was the aim to issue the GGBs at the tightest spread achievable, we believe that it was correct to issue the GGBs as a series of fully paid, bullet repayment bonds even if this meant more complex cash management within LCR. AAA rated bonds with complex cashflow schedules, such as annuities, trade at material discounts to bullet repayment bonds (Figure 35).
57. One suggestion to ensure the bonds were a quasi Gilt was to make the GGBs convertible into Gilts. This was rejected and in our view would have added a complexity to the bond which would have been detrimental to the pricing. The table below compares the structure of the GGBs with that of a Gilt and another government guaranteed bond for GEFCO, a finance vehicle established by the Export Credits Guarantee Department.
| GILT | GEFCO | |
Issuer | Usually HM Treasury | GEFCO | LCR Finance plc |
Guarantee | Charge on National Loans fund with recourse to consolidated fund of United Kingdom | Secretary of State for Trade and Industry | SoS for Environment, Transport & Regions |
Interest | Semi annual in arrear Actual/Actual | Semi annual in arrear A/A | Semi annual in arrear A/A |
Repayment | Bullet, callable | Bullet | Bullet |
Optional Early Repayment | None | None | Spens |
Form | Registered | Registered/Bearer - quoted Eurobond | Quoted Eurobond - Bearer with Registered option |
Pricing | Quoted in decimals | Quoted in decimals | Quoted in decimals |
Denomination | 1p | 1p | £1,000 |
Settlement agent/Registrar | Central Gilts Office (CGO) | CGO + paying agent | Various |
Tax call | None | None | None |
Tax gross up | None | None | In certain circumstances |
Net or gross payments | Gross | Gross to non UK holders | Gross to non UK holders |
AAA rating | Implicit | Implicit | Explicit |
Repo/strip | Possible on some Gilts | No | No |
GEMM privileges | Yes | [yes] | [No] |
Sales method | Price auction (nowadays) | Underwritten | Book built |
Sales restrictions | None | Standard | Standard + 144(A) option |
58. The differences set out in this table seem to be small. Most major investors now find it easier to deal in Eurobonds than in domestic bonds and some attempt appears to have been made to avoid the difficulties of US selling restrictions on Eurobonds by introducing a 144A option.
59. Eurobond form may, however, make the issue less user-friendly for the UK retail investor. Firstly, Eurobonds listed on the London Stock Exchange through the concessionary method of placing, can only be sold initially to professional investors. Secondly, the £1,000 minimum denomination and multiple is high in comparison with Gilts. Lastly, investors can only hold this type of Eurobond if they have a nominee account with access to a Eurobond clearing system. Retail demand for the long issues might have been fairly limited, but there could have been interest for the 2010 issue.