The London Underground transport delays are not just a headache for commuters. Last week's suspension of Northern Line services threatened to cause a hiccup in the public/private partnership contracts held by Tube Lines Limited. At the heart of the dispute is the safety breach issue - London Underground said that, due to safety problems, it had suspended services on the line, but Tube Lines said the delays were a direct result of driver action.

If a safety breach is found to have caused suspension of service, Tube Lines would risk losing the contracts under which it manages the Northern, Jubilee and Piccadilly lines of the London Underground. Tube Lines launched a defense against negative press reports in relation to talk that the Northern Line suspension was a direct result of safety problems as stated in an emergency directive issued by the London Underground. Tube Lines said that this emergency directive did not provide the basis for moving toward a mandatory sale of the contract.

Fitch Ratings analyst Philip Walsh said the agency believes there was no safety breach, adding that Tube Lines stepped in immediately to say that trains were available and that the disruption in service resulted from driver action. The rating agency issued a statement last week saying that there are no immediate credit concerns for the contractual arrangement.

But a prolonged dispute between the London Underground, which employs the drivers, and Tube Lines - which by contract is responsible for the trains - could result in a significant effect on the performance of the Tube Lines securitization transaction, which is backed by the Tube Line assets. Fitch said that while there were no immediate credit concerns in respect to any of the Tube Lines Finance Notes, the complexity of the transaction's legal documentation, combined with the untested regulatory framework and the reliance on the successful interaction of the parties involved, represent a considerable political risk, as well as risk to reputation. This could ultimately affect the transaction ratings, particularly of the Class B, C and D notes that do not all benefit from the guarantee of Transport for London (see ASR 7/18/2005).

The events highlight a misalignment in penalty clauses between the Tube Line consortium and Alstom, the prior contract manager. According to Fitch, the latest dispute arises from an apparent failure by Alstom to maintain the Northern Line trains under a contract inherited by Tube Lines at the time of the partnership contracts, which was originally signed between Alstom and London Underground.

Tube Lines could suffer lost revenues as a result of the disruption to its four-weekly service charge. "Tube Lines could be penalized because of this underperformance although in the normal course one would expect any such abatements to be capable of being on-charged to Alstom under the maintenance contract," explained Walsh. "However, there is a misalignment between the penalty' clauses under these contracts such that while Tube Lines could suffer abatement Alstom would have no penalty under its contract." Walsh said that the next step for Tube Line was to realign these clauses.

"[This] is yet another manifestation of the ongoing political divide between the proponents of [partnership] and its opponents - the latter including the Mayor of London, the Commissioner for Transport for London, London Underground and Transport for London," said Fitch analysts.

Last week, the Financial Times reported that Secretary of State for Transport Alistair Darling said he could prevent any attempts to renegotiate the tube partnerships, stating that the renegotiating and undoing of the present contracts would create even more difficulties.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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