Warning for debt-laden firms

THE resignation on Tuesday of Stanislas Yassukovich from the board of Telewest should send a shiver down the spines of any director of a company that has a mountain of debt and no chance of getting a rights issue away to ease the burden.

It underlines the emergence and growing influence of a new kind of financial player - the American vulture funds that buy distressed debt and then go for the corporate jugular. Yassukovich quit because he did not like the way the bond holding funds renegotiated the Telewest rescue deal and halved what shareholders were left with.

These funds do not play by London rules - the code devised by Sir David Walker when he was at the Bank of England in the 1980s. It took as its premise that struggling companies should be helped to survive if something was worth saving and that all those with money at risk should share the pain to get them sorted out. The philosophy of a vulture fund is different. It buys debt at distressed prices and then goes for the jugular if that is seen as a way to increase the value of its holding. The interests of shareholders or other bond holders do not come into it.

It is a much rougher world. In one company, the first the chairman knew that a vulture fund had built up a position in his debt was when he took a phone call and was told he was fired. Using a clause in the bondholders' agreement, the caller was going to replace the entire board with a team that would liquidate the business rather than struggle to save it.

Though less aggressive towards the board, the recent high-profile battle for advertising giant Cordiant had similar features. It was the holders of the debt who controlled the company's destiny, not the shareholders, and the people who bought the debt cheaply made fat profits. So heavily indebted companies need to be aware that the rules of the game have changed - and there are new players in town who know them better than British boards do.

The right track

ACCORDING to a BBC news report, Japan's new Maglev train recorded a speed of 350 miles an hour in tests this week. Maglev stands for magnetic levitation - the train wheels retract once it gets above 80mph and thereafter it floats on a magnetic field 10 centimetres above a concrete track and is powered forward by a linear induction motor. This eliminates the wheel friction that slows down conventional trains and opens up a whole new dimension of speed.

The Japanese have been running trials for three years but it is no longer wholly experimental. The 19-mile Maglev link from Shanghai in China to its new Pudong airport has been open for a year and draws heavily on German technology.

Magnetic levitation is in fact the first wholly new idea in railways since Stephenson's Rocket and is more akin to flying at extremely low altitude. But the reason it is not sweeping the world is that the track is very expensive to build. The Chinese link track cost about $1.2bn (£736m).

But there again Britain's West Coast mainline upgrade is going to cost £10bn or more, and using the Chinese costing that would buy 135 miles of track, which is easily enough to get to Birmingham and indeed two-thirds of the way to Manchester.

It may be considered a frivolous suggestion, but would it not make sense to scrap the West Coast upgrade, which even when completed will only bring trains up to speeds that are already considered old hat in most developed countries and instead use a bit of boldness and imagination and put the money towards a proper state-of-the-art system worthy of the 21st century?

It could be built from London to Glasgow for the money the Chancellor got from the telecom licences auction three years ago.

Browned off

CHANCELLOR Gordon Brown held out an olive branch to business leaders at the CBI conference on Tuesday, saying he would 'welcome more representations' on his controversial proposal to cap individual pension pots at £1.4m - which threatens a lot of medium-to-high earners.

One should not pre-judge the issue, but consultations with Brown have almost legendary status. Those who go in determined to put a counter argument to a proposal rarely get anywhere. Instead, Brown's opening gambit is along the lines of: 'I hear you do not like my idea. Let me explain it to you again so you understand it fully.' The possibility that someone might both understand and disagree is simply not considered.