GNER parent company slips deeper into financial crisis

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The Independent Online

Sea Containers, the owner of the East Coast Mainline train operator GNER, slipped further into financial crisis yesterday after admitting it may not be able to pay back a $115m (£61m) loan due in mid-October.

The beleaguered Bermuda-registered company also disclosed that it was in talks with the Department for Transport over a significant shortfall in revenues from GNER, which operates the flagship Inter-City route between London and Edinburgh.

The warning indicates that Sea Containers could collapse inside the next two months unless a restructuring plan being put in place by its new chief executive, Bob MacKenzie, is successful.

GNER took over a new 10-year franchise on the East Coast route in May last year, agreeing to make £1.3bn in premium payments to the Government. But in the first 14 months of the franchise, revenues undershot by £33m while electricity charges were £11m a year higher than expected.

Sea Containers blamed GNER's under-performance on the terror attacks in London a year ago, a slowdown in the UK economy, and an improvement in Network Rail's performance, which meant that it was having to pay the infrastructure operator more than it had budgeted.

The group said GNER would be further affected by the Rail Regulator's decision to allow increased competition on the east coast route from two rival train operators. Mr MacKenzie, who took over the running of GNER last month after removing its chief executive, Chris Garnett, said it appeared the original financial projections for the franchise "now appear optimistic".

GNER suffered a $33m cash outflow in the first six months of this year, said Sea Containers, which is now in discussions with the DfT in an attempt to recover some of the lost revenues under the force majeure mechanism in the franchise agreement.

But the claim has not yet been settled and Mr MacKenzie said that GNER would not be able to make dividend payments to the parent company in the "short to medium term". This has increased the financial pressure on Sea Containers which only had $42m of free cash available at the end of June and is facing the added burden of a $110m deficit in its pension funds.

Mr MacKenzie said the anticipation was that Sea Containers would not be able to pay the $115m note maturing on 15 October unless it had adequate working capital and could be sure of being able to repay other bonds maturing in the following six years. "This puts a critical time pressure on restructuring process. Although the seas are rough, we are navigating a way through this," he added.

For the first 14 months of the new east coast franchise, passenger revenues rose by only 3.3 per cent against a projection of 9.9 per cent when GNER won the franchise. GNER said that more than half the shortfall was due to the impact of the London bombings in July last year, because of its greater dependence on long-distance travel to and from the capital and the fact that the bombers had entered the Tube network at King's Cross - GNER's main terminus. Under the original franchise agreement, it had been projected to make a pre-tax profit margin of 3.75 per cent.

Sea Containers is continuing to provide financial guarantees for GNER. These include a £15.3m performance bond, which rises to £28.7m next May, a £30m standby credit and a £10m overdraft facility. None of these has been drawn on.

The financial crisis at Sea Containers has led to speculation that GNER may be up for sale. Mr MacKenzie refused to comment on this but said the company's business plan included "strategic and financial alternatives". These include a potential refinancing or permanent restructuring of the group's unsecured financial obligations.

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