Utilities asked to buy back debt of pounds 1bn-plus: Salomon approaches BT, National Power and others

THE Government wants to sell pounds 1bn- pounds 1.5bn of privatised utilities debt back to the companies themselves in an auction to ease pressure on government borrowing and reduce the utilities' interest burden.

Salomon Brothers is acting as agent for the Treasury and has written to the companies, which include BT and National Power, to gauge whether they would be willing to buy and at what price. The Treasury currently holds pounds 2.75bn of privatised utilities debt, bearing interest rates of between 11.5 per cent and nearly 13 per cent.

Market sources say the utilities are keen to buy back their debt and that long-term bond investors could profit from the high-paying bonds.

Although the utilities would have to buy back the debt at 10- 20 per cent more than face value, because interest rates have fallen since the rates were set, there are advantages. First, the companies could replace high-interest debt with lower-coupon bonds reflecting current rates. Second, they could exchange short-term debt for longer-term, strengthening their balance sheets.

In April Eastern Electricty bought back pounds 118m of its debt from the Treasury for pounds 144m.

Salomon is asking each issuer at what price it would consider buying back debt or exchanging it for new bonds. The investment bank reckons interest rates would be between 8 and 9.5 per cent.

Salomon will sell to the highest bidder, either in one sale next month or in two tranches, depending on market conditions.

The auction list is dominated by pounds 1.2bn of BT debt. A spokesman said yesterday: 'We have received the letter and are considering our position.'

National Grid has three issues totalling pounds 450m. The others are National Power, Scottish Hydro-Electric, Scottish Power and five regional electricity companies: London Electricity, Northern, Norweb, Seeboard and South Western.

In the first auction of privatised debt two years ago, which raised pounds 1.38bn, BT bought back pounds 320m of debt for pounds 376m, while the investment house Goldman Sachs picked up pounds 180m of BT debt and UBS pounds 229m.

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