pounds 400m issue derails Railtrack share price

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The Independent Online
SHARES IN Railtrack went into reverse yesterday after the privatised rail infrastructure monopoly launched a pounds 400m bond to raise money to fund its investment plans.

The 10-year bond issue will allow holders to convert their bonds into Railtrack shares. This is the first time the company has issued an exchangeable bond.

The issue was oversubscribed to such an extent that the underwriters, led by Warburg Dillon Read, exercised an option to extend the initial pounds 350m offer by pounds 50m. The book was closed after just over three hours.

The bond issue prompted a fall in Railtrack shares, which closed down 77p at 1459p. "The bond issue has led to the skid. People are selling the equity to buy the bond," said Richard Hannah, an analyst at BT Alex.Brown.

Investors have the option of exchanging for shares at 1,840p, a 25 per cent premium to yesterday's mid-market price of 1,472p, effectively gambling that the shares are set for a hefty rise.

The bond will pay interest at 3.5 per cent - at the lower end of the indicative range of 3.5 to 3.75 per cent - which represents a significant discount to what Railtrack would be required to pay with a straight bond issue.

Railtrack said the issue was designed to take advantage of the fact that debt was now cheaper than equity because of falling interest rates. "If we borrow now we get the lowest interest rates," said a spokeswoman.

Norman Broadhurst, the financial director, said: "This new issue represents an attractive financing opportunity which enables the company to diversify its funding base and maintain a strong balance sheet."

An official at Warburg Dillon Read said: "The sterling convertible bond market is an attractive place to raise money. We have been saying to our corporate clients for some time that this is a very attractive financing opportunity, given the mood of investors and given what interest rates are about."

The funds will contribute towards Railtrack's two most immediate infrastructure projects - the pounds 2.2bn upgrade of the West Coast main line to Glasgow and the pounds 600m Thameslink 2000 project to improve links between the north and south Home Counties through London. The company launched a 30-year pounds 250m bond issue in December.

One analyst said the bond was based on an implied share volatility of around 20 per cent, well below historic volatility for Railtrack shares last year.

The Railtrack treasury official said the scope for further exchangeable bond issues was limited because investor protection rules were in place limiting the number of shares a company could issue without shareholder approval.