Railtrack to raise £10bn in radical deal

Overhaul to be funded by borrowing against income
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The Independent Online

Railtrack is working on a radical financing plan to raise up to £10bn to invest in Britain's creaking rail network.

Railtrack is working on a radical financing plan to raise up to £10bn to invest in Britain's creaking rail network.

It is understood that chief executive Gerald Corbett has asked Railtrack's advisers to fine-tune the idea, which could be launched by the end of the year.

Under the plan, Railtrack will securitise the income it receives from the train-operating companies to gain access to its rail network. This will involve borrowing money against the income from the charges - similar to mortgages - which is then converted into a tradable security.

News of the idea will be greeted with interest by the City, which has been speculating for months on how Railtrack will raise the cash. The company estimates that over 12 years, the improvements and upgrades will cost £52bn, with £8bn in the next five years.

However, analysts were concerned that if Railtrack went to the bond market to raise the cash, it could damage its credit rating. Another theory was that Railtrack might use the equity market to finance the improvements. But since March 1999 Railtrack's shares have fallen 37 per cent - essentially scuppering a rights issue.

An internal Railtrack report says: "We have the balance sheet to enable us to borrow the money to finance large projects. The key to being able to borrow this money is the ability to pay it back, and that is why profits are so important.

"We are already one of the biggest non-institutional borrowers in the country, and our forecasts show that in the next five years we will become one of the largest."

Railtrack will delay its securitisation plan until two critical government-backed reports are published.

The first is from rail regulator Tom Winsor, which will set a series of financial constraints on Railtrack. In July Mr Winsor published the draft report, which was enthusiastically greeted by the City, which had feared a tougher regime.

But Railtrack has since expressed serious concerns over Mr Winsor's call that it should cut costs by an average of 4.2 per cent a year. Railtrack said the figure was "too demanding", and warned it would eat away at its cost base. Railtrack is currently negotiating with Mr Winsor over the figures, and a final review will be published by 27 October.

The second crucial report will be from Sir Alastair Morton's shadow Strategic Rail Authority. This will flesh out the Government's 10-year rail plan and finalise new fiscal incentives.

If Railtrack goes ahead with the securitisation, it is expected to create a specially formed vehicle to raise the debt. Securitisation experts predict the vehicle could receive a top-flight AAA credit rating. The rating takes into account the risk of the cash flow drying up. However, experts say that this is extremely unlikely as Railtrack receives some of the cash from the Government.

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