Utility debt sales to top up privatisation proceeds

THE Government is planning to auction part of its pounds 5.6bn debt holdings in BT and the privatised electricity companies, to raise pounds 1bn in order to meet its pounds 8bn target for privatisation proceeds in the current financial year.

All the companies will be invited to make bids at an auction to redeem enough of their own debt to provide the Government with pounds 1bn in cash. In the case of BT, third party investors will be able to bid for debt.

The companies involved are BT, National Grid, National Power, PowerGen, Scottish Power, Scottish Hydro, Eastern Electricity, London Electricity, Manweb, Northern Electric, Norweb, Seeboard and South Western Electricity.

At privatisation the Government sold a proportion of its shares in these companies but also retained substantial amounts of medium- to long-term debt bearing a fixed rate of interest. The Government holds pounds 1.9bn of debt in these companies that is due to be repaid before 1997. It holds a further pounds 3.7bn of debt that matures in 1997 or later, and it is from this batch that the initial pounds 1bn sum will be raised.

Further amounts could be raised from the pounds 3.7bn debt holdings in the future to bolster government revenues. In its Autumn Statement last year the Government indicated a target for privatisation proceeds of pounds 8bn, and since only pounds 7bn of asset sales could be readily identified, analysts concluded that pounds 1bn would be raised from sales of debt holdings.

The Government recently appointed Baring Brothers, the merchant bankers, to advise on the sales. Yesterday the Treasury wrote to the companies affected by the proposals with a view to setting up an auction towards the end of next month.

The debt sales are to be carried out in the form of a competitive auction in order to maximise value for money for taxpayers, according to Baring, since that avoids restructuring and marketing costs.

Since the electricity companies have pre-emptive rights over the pounds 2.1bn of their government-held debt until the end of this year, they will be the only ones allowed to bid for their own debt in the September auction. Bidding will be in relation to a benchmark price established by Baring. Success will go to the electricity companies that bid the most for their respective debts.

Tax complications have been a big obstacle to companies wishing to redeem their debt, even though BT and the electricity companies could reborrow money at cheaper interest rates of around 10 per cent, compared with about 12.5 per cent on the pounds 3.74bn of government-held debt. This is because the premium that borrowers must pay to redeem their debt is not allowable for tax relief.

Baring will make allowance for this in the benchmark prices confronting BT and the electricity companies. Third-party buyers will face an unadjusted minimum benchmark price.

Commentary, page 21