Double blow for Labour on Tube cash

THE Government faces a double hit over its funding plans for the London Tube as investors threaten to strike in the wake of the Railtrack fiasco. The double whammy is a result of the complex mechanism under discussion between ministers, advisers, credit rating agencies and institutions.

Talks are focusing on a £1.5bn bond issue required by Metronet, the preferred bidder for the Bakerloo, Central and Victoria lines.

The financing is complicated but debt repayment relies ultimately on the Government. Metronet, like the other infrastructure company Tubelines, will be funded by the Infrastructure Service Charge. The money will come from Transport for London, which is financed by the Government.

This backing should provide comfort for lenders, but credit agencies base their ratings on the likelihood of default, not repayment. The rating for Metronet's £1.5bn bond issue will depend on such things as whether the infrastructure companies perform well enough to receive the service charge they require and whether harmonious relations can be maintained with London Underground.

The rating is likely to be barely above what agencies call 'investment grade'. These sorts of credits typically have to pay about 3% more than gilts for long-term funding such as that required by the Tube.

Metronet hopes to pay less by enlisting specialist insurance companies who take on risk, for a fee, and in return enable bonds to be rated a top-notch AAA. The bonds are then described as 'wrapped' and the insurers are known as 'monoline wrappers'.

Typically, borrowers pay the wrappers about 0.5% and interest of about 1.5% more than gilts. In Metronet's case however, it is expected that, even if the Government satisfies investors' demands on Railtrack, both the wrap fee and the interest bill will be higher than they would have been before Railtrack was put into administration.