Scotland to launch government ‘kilt’ bonds

The Scottish government announced plans on Thursday to issue its first sovereign bonds in 2026/27, as it looks to raise funds for infrastructure investments.

It will be the first issuance in a planned £1.5 billion ($1.97 billion) bond program that’s set to be rolled out over the next parliamentary period, which begins with elections in May next year. However, officials noted that the plans were subject to the outcome of the government elections.

Scotland is part of the U.K., but operates as a devolved nation, which means it has its own government. While the Scottish parliament has certain limited powers over income tax and parts of the economy, decisions on macroeconomic policy are reserved to the U.K. government.

On Wednesday, S&P Global and Moody’s gave the Scottish government its first credit ratings, with agencies awarding Scotland ratings equivalent to the U.K. – and higher ratings than the governments of Spain, Italy and Japan.

“The Scottish Government’s high credit ratings are testament to Scotland’s strong institutions, track record of responsible fiscal management and pro-business environment,” Scotland’s First Minister John Swinney said in a statement on Thursday.

He argued the issuance of Scottish government bonds — which have become colloquially known as kilts — are a step toward “a prosperous future where our country takes responsibility for its own decisions.”

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“Whilst specific issuance plans will be subject to market conditions closer to the time, we will shortly commence engagement with banks to act as joint lead managers to enable the next Scottish Government to proceed without delay,” Swinney added on Thursday.

Scotland’s government was granted the power to issue its own bonds almost a decade ago, but until now has borrowed money using the U.K.’s National Loans Fund.

In 2023, the Scottish Government’s Investor Panel recommended floating sovereign bonds on the public market as a means of raising the country’s profile and attracting inward investment.

Scotland’s credit rating would help the country make progress toward these ambitions, said Angus Macpherson, chairman of financial advisory firm Noble and Co, and former co-chair of the Investor Panel.

“This is a positive step forward and demonstrates they are serious about becoming a more investor friendly destination,” he said in a Thursday statement.

Accounting giant EY is advising the Scottish government on its bond issuance.

Both Moody’s and S&P Global stressed this week that the credit rating given to Scotland were granted to the country as a devolved U.K. nation.

“We could … lower the rating if Scotland took material steps toward independence from the U.K.,” S&P Global said on Wednesday. “Our rating on Scotland reflects our view of the U.K.’s supportive and clearly defined institutional framework for devolved regions (nations), as well as Scotland’s prudent financial policies.”

The agency noted that Scotland will continue to receive a large grant from the U.K. to cover most of its spending, including infrastructure investments.

“Limited borrowing requirements and gradually maturing liabilities will result in very low total debt at only 10% of operating revenue through 2027,” S&P Global added.

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Meanwhile, Moody’s said a downgrade to the U.K.’s sovereign rating would likely have similar implications for Scotland.

“Difficulties in balancing its budget either as a result of rapidly rising expenditure pressures or large reductions in the block grant would also put downward pressure on the rating,” the agency said as it explained the rationale behind its rating for Scotland.

“Although not our baseline scenario, Scottish independence could exert downward pressure on the rating by introducing heightened uncertainty about the institutional framework and potentially raising financial stability risks.”

Scotland’s electorate narrowly voted against breaking away from the U.K. in a 2014 referendum, but Swinney’s government has insisted the country should continue to pursue independence.

“Scotland is a wealthy country with enormous potential, yet too many people in Scotland today are finding it difficult to make ends meet,” he said in a paper that made the case for independence when it was published last month.

“That is because standards of living in the U.K. have barely improved in over 15 years due to decisions taken by Westminster, like the imposition of austerity and the disastrous decision to leave the European Union.”

U.K. economic growth slowed to a lower-than-expected 0.1% in the third quarter of this year, data released on Thursday showed. Later this month, U.K. Finance Minister Rachel Reeves is widely expected to raise the country’s tax burden as the country reels from a cost of living crisis that took hold in the wake of the Covid-19 pandemic.

The U.K. currently has the highest long-term borrowing costs of any G-7 government, with its 30-year government bond yield trading well above the critical 5% threshold.

— CNBC’s Hugh Leask contributed to this report.