View from City Road: Auction that offers something for all

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The Independent Online
The Treasury's pounds 1.5bn auction of privatised company debt looks like one of those rare deals that offers something for everyone.

The Government can say its privatisation programme is on course, by passing privatised debt to the private sector. The Treasury gets up to pounds 1.5bn in 'negative expenditure', a neat substitute for issuing gilts. And the likes of BT and the power generators get the opportunity to replace high interest, short-term debt with lower interest, longer-term debt.

If the companies do not fancy the price being asked for the bonds, the sterling bond market will probably hoover up the remainder. True the market for new bond issues is getting tough, but this is a very different animal. These are existing bonds in well established utilities, and likely to be seen as offering good value for longer term investors.

They may not get the chance, however. There are good reasons why the companies involved will want to snap up their debt. Admittedly, when BT bought back pounds 320m of its own bonds in the first auction two years ago it had to pay pounds 376m and write off the pounds 56m difference. But it was able to buy back 121 4 per cent bonds with cash, then yielding 6-7 per cent.

This time the companies have an even bigger incentive to buy, or to swap their bonds for new ones since rates have fallen so much lower than the coupon on the existing bonds, which vary from 11.5 to 12.5 per cent. Tax problems when buying back debt at a premium may be outweighed by refinancing their balance sheet at a lower rate.

The only party for whom the benefits of the exercise are less obvious, is the Treasury's agent for the auction, Salomon Brothers. The first auction of privatised company debt two years ago saw Barings collect a measly pounds 451,000 fee. Salomon is unlikely to do much better. Few tears will be shed. It will get its pay-off in terms of prestige, influence and publicity.

The sad thing for the Government is that the pounds 1bn- pounds 1.5bn to be raised is small compared with the pounds 3bn of net new gilt issues each month. Still, every little bit to ease pressure on the gilt auctions must be a help. Most of the best family silver has already been privatised, and this debt auction, while an interesting wheeze, is not going to make a sizeable dent in this year's pounds 37bn PSBR.

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