Network Rail turns to bonds to raise emergency funds

Contained in a letter to the Office of the Rail Regulator and backed by Network Rail, the proposal could free up £4bn for the Strategic Rail Authority. It is likely to go down well with the Government; last week the SRA was forced to scale back a number of rail projects due to spiralling costs.

Written by UBS's global head of transport, Robert Jennings, the letter argues that Network Rail should be allowed to raise more money through securitised bonds.

A spokesman for Network Rail said: "This is an interesting idea which deserves to be carefully considered. This does not form part of Network Rail's current financial plans, but it could provide the basis for the long-term evolution."

The facility would be used only in emergencies. Mr Jennings says that, if used, it would probably lead to the resignation of Network Rail's senior management.

The bonds would be secured against Network Rail's so-called regulatory asset base, which is a notional value given to the business. The funding would replace a £4bn equity facility that the SRA has earmarked should Network Rail get into severe difficulties.

Network Rail is also preparing to turn to the bond market to pay off its overdraft and provide working capital. Details are still confidential, but it is understood that Network will issue two bonds in late summer or early autumn, with a value of £5bn and £4bn. Controversially, the bands will be guaranteed by the SRA, but won't appear on the Government's balance sheet.