City threatens rail funds boycott

RAILTRACK bondholders have threatened to boycott all future funding of the Tube and the railways unless investors are fairly treated over Railtrack.

The Government is looking for about £50bn from the private sector to help finance Britain's struggling rail system and the London Underground. But City institutions including Barclays Global Investors, Legal & General, Scottish Widows and M&G today refused to play ball unless their demands over Railtrack are met.

In a private letter to the Government, a committee representing bondholders said: 'It is not realistic to expect the capital markets - foreign or domestic - to provide future funding for the UK rail infrastructure, on reasonable terms, unless confidence is restored.'

A committee made up of seven institutions met the Government today to discuss the problem. Byers' preferred successor to Railtrack, the Company Limited by Guarantee, was also attending.

One institution said: 'The people suffering from what the Government did to Railtrack are not wealthy capitalists. They are UK pensioners. They are our clients and we have to safeguard their interests.'

Railtrack was put into administration last October in a move that shocked the City and other stakeholders. Bondholders, including those who compiled today's message to Byers, lent Railtrack £1.5bn. They have effectively been forced to sign a special agreement with the Government, waiving their rights in exchange for continuing to be paid interest on their bonds. Now they are fighting back and demanding that whoever takes over Railtrack should offer bondholders the option of redeeming their bonds at par or at the appropriate gilt plus the appropriate spread, whichever is higher.

'Instead of being forced into the new structure, bondholders need to be incentivised to reinvest as well as to provide new capital,' said the letter.

The message will prove particularly difficult for the Government to ignore as it faces continued criticism over the running of the railways and the Tube. 'We need certainty for our clients. We need to know we will be fairly treated,'said one institution.

The seven firms representing bond investors are Aegon, BGI, L&G, M&G, Merrill Lynch, Morley and Scottish Widows.