Investors cool on £14bn Tube funding

BANKS and City institutions expect to be asked to provide more than £14bn to upgrade and renovate London Underground's stations, signals, tracks and trains.

Initially, Tubelines - which is the preferred bidder for the Jubilee, Northern and Piccadilly lines - is raising £2bn in bank loans. Metronet - preferred bidder for the Bakerloo, Central and Victoria lines - is looking for £1.5bn from banks and the same from the bond market.

The financing mechanisms are complicated but debt repayment relies ultimately on the Government. As details begin to emerge, the consequences of Transport Secretary Stephen Byers's decision to put Railtrack into administration look increasingly painful.

Bond investors are fighting shy of any involvement in the Tube unless they are 'fairly treated' over Railtrack. Even if the Government caves in to their financial demands over the collapsed rail firm, financing for the Tube is almost certain to be more expensive than it would otherwise have been.

Metronet and Tubelines will be funded by the so-called Infrastructure Service Charge. This will come from Transport for London and will depend on the companies achieving certain performance targets. TfL is funded by the Government, which has also agreed to repay 95% of all senior bank and bond debt if the contract between London Underground and the infrastructure companies is terminated.

The Government backing should provide a fair degree of comfort for lenders but credit agencies, on whom many institutions rely for guidance, 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 sufficiently well to receive the service charge they require and whether harmonious relations can be maintained with London Underground. The latter is quite a challenge and 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. Typically, borrowers pay these insurers about 0.5% and interest of about 1.5% more than gilts, instead of 3%.

It is widely expected that, even if the Government satisfies investors' demands on Railtrack, Metronet will have to pay a higher fee to its insurers and higher interest rates. 'Whatever happens, there will be a long-term impact on rail and tube projects,' said one institutional investor.