Scottish Mortgage borrowings near £1bn as it issues first debt in euros

James Anderson’s investment trust lands cheap coupon on long-term debt issue

Gearing in the Scottish Mortgage Investment Trust is nearing £1bn as it turns to cheap euro-denominated debt for the first time in its latest private issue.

The £8.7bn investment trust issued the mixture of sterling and euro-denominated debt to maintain the relative level of gearing as market movements and share issues see the closed-ended fund’s assets soar.

Gearing on James Anderson’s portfolio is currently 8%, according to the Association of Investment Companies. Its net borrowings were £691m at the end of December meaning the latest £188m issue, which represents 2.2% of net assets, takes total borrowing to £879m.

The euro-denominated debt offers a more competitive coupon with a 25-year note, worth €18m, enjoying a 1.65% coupon while a 30-year note, worth €27m has a coupon of 1.77%.

By comparison the £150m issue of sterling-denominated debt has a coupon of 2.30% for a 20-year note.

Prudent for global investment trusts to diversify gearing

Winterflood Investment Trusts head of research Simon Elliott described the borrowing rates as “really attractive” given the potential growth prospects within Scottish Mortgage’s portfolio.

The research house’s annual review of investment companies, published this week, highlighted Scottish Mortgage’s growth in assets over the last decade with it holding £1.4bn assets in 2010 compared to £8.4bn at the start of 2020.

Unlike RIT Capital Partners or the Personal Assets Trust, Scottish Mortgage is not the type of investment trust to make macro calls, said Elliott, instead focusing on future earnings. The diversification of debt was comparable to other global equity investment trusts that take a similar bottom-up approach, he said.

Henderson International Income issued €30m worth of debt in April 2019 at a rate of 2.43% for 25 years, according to Numis.

Scottish Mortgage has previously described its exposure to both US dollar denominated assets and liabilities as a “long-term structural hedge”.

Its latest annual report showed US dollar investments totalled £5.8bn while it had £297m worth of US dollar-denominated debt, for the period ended 31 March 2019. It represented 8.9% of the trust’s net assets at the time.

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