The British government's plan to revive the country's railway system through the non-profit-making Network Rail will fail unless it is prepared to provide the necessary financial guarantees for the new company to raise the billions it needs from the capital markets, bankers and analysts said last week.
An announcement on March 25 said that the government would provide a controversial GBP500 million sweetener to bring the Railtrack administration to an early end and enable Network Rail to take over the assets.
The new company disclosed that a syndicate of banks was working on raising GBP9 billion from the capital markets to enable it to buy Railtrack and pay off its debt.
Although the government has had to deal with the doubtless embarrassment of the accusations that it performed a U-turn in handing over GBP300 million of taxpayers' money to the Railtrack shareholders despite earlier assurances that it would not bail them out (the other GBP200 million is coming from a government-backed loan), it is adamant that Network Rail will not require government guarantees for its borrowing.
Instead, the Strategic Rail Authority (SRA) - through which the government subsidies to the train-operating companies to meet their track charges - will supposedly provide the necessary assurances and meet any shortfall in debt-servicing requirements from a special fund.
"If there's any deterioration, they will be able to draw on this special fund held by the SRA," said Mike Wilkins, managing director of infrastructure finance at Standard & Poor's. "However, they haven't told us how much that is."
Wilkins said that provided the government's support for the SRA was unambiguous and irrevocable, it should be able to raise money via the capital markets - including a mooted securitization. "If the commitment is firm, there's a good chance of it achieving its aims. At the moment, they're trying to structure this so that it will be off-balance-sheet for the government."
But the investment banks involved - and virtually all of them are in the frame - insist that however the government plays around with the semantics and intermediary bodies it will have to provide guarantees for any debt raised as bonds - corporate or structured.
"I think that's a reasonable assumption," said Richard Bartlett, head of corporate securitization at Royal Bank of Scotland, one of the lead managers for the GBP2 billion structured bond for the non-profit Glas Cymru water company last year.
Another senior investment banker said any financing for Network Rail would have to follow the example of the London Underground, where - despite impressions to the contrary - "the government has basically backed 100% of the debt."
