Signals go to green for Tube cash

THE Government's capitulation to the City over Railtrack has prompted a dramatic change of heart among investors over funding for the London Underground. The first £1.5bn tranche of City finance for the Tube is now expected to be successfully launched in less than three months' time.

Prior to the Network Rail rescue package, announced on Monday, investors were threatening to boycott Tube financing. But sentiment has swiftly shifted and the Government could save millions of pounds as a result. 'The Railtrack deal has given people a lot more confidence,' said one institution.

The rescue package for Railtrack involves full repayment to bondholders of the £1.6bn they lent the company before it went into administration. These investors have been arguing for months that they needed to be treated fairly if the Government wanted to use them for future large infrastructure projects. The Tube was a particular bone of contention because it will require around £14bn of private sector money over the next several years to help renovate and upgrade stations, track and signalling.

'It is abundantly clear that part of the reason the Government stepped up to the plate on Railtrack was because of fears about Tube funding. The City was not playing ball and the Government was concerned,' said a senior infrastructure expert.

Late last month, bondholders sent a letter to ministers effectively threatening to withhold capital until and unless Railtrack was sorted out to their satisfaction. The threat came as first soundings were being made about a £1.5bn bond issue for Metronet, the preferred bidder for the Bakerloo, Central and Victoria lines.

Any problems with this deal could have set an unwelcome precedent for the Tube's future financing needs. Now roadshows for the issue are expected to take place in the coming weeks and a successful outcome is anticipated. Metronet, led by chief executive Rod Hoare, is likely to have to pay a lower interest rate on the bonds, and other complex financing costs may also be lower.

Funding for the Tube is complex but ultimately relies on heavy Government backing. Institutions will be looking for clear explanations in the bond documentation of what support the Government will provide and where the buck stops in the event of any distressed situation. The issue is being arranged by Deutsche Bank.