Memorandum by Standard & Poor's (PRF
PASSENGER RAIL FRANCHISING AND THE FUTURE
OF RAILWAY INFRASTRUCTURE
In reply to your letter dated 30 October 2001
to Jonathan Manley, Standard & Poor's has the responses detailed
below. In addition, please also find enclosed various press releases
issued by Standard & Poor's which are relevant to some of
the issues that you raise. 
1. Prior to the administration, the senior,
unsecured and unguaranteed bonds of Railtrack plc ("Railtrack")
had a single-A rating with a stable outlook. Following the placing
of the company into railway administration, Standard & Poor's
downgraded the rating to single-C and placed the bonds on CreditWatch
with developing implications.
Railtrack's corporate credit rating prior to
administration was also single-A and this was downgraded to double-C
following the administration. Again the corporate credit rating
was placed on CreditWatch with developing implications.
(a) Standard & Poor's set out the reasons
for the change in a press release dated 9 October 2001 and this
is enclosed for your information. I also enclose, for your information,
a press release issued by Standard & Poor's on 8 October 2001
when Railtrack's ratings were placed on CreditWatch with Negative
implications immediately prior to the downgrade action.
2. At present, and in the absence of a fully
developed proposal, it is impossible to predict what rating would
be assigned to a successor entity to Railtrack. This also assumes
that a Standard & Poor's rating is sought for such successor,
since we would only assign a rating to the company limited by
guarantee on request and by the entering into a contractual relationship
between ourselves and the entity.
(a) It is very difficult to answer this question
in the abstract. Ultimately, when assigning any rating, Standard
& Poor's seeks to take into account all relevant factors (business
risk, financial risk, management etc) that may bear on the credit
quality of the issuer of debt.
In the case of a debt which relies on a more
legally structured approach, the legal due diligence would be
a key part of the ratings process. Therefore, it is perfectly
possible that an item that one would normally consider crucial
in determining the rating of a company (such as that which succeeds
Railtrack) may become irrelevant as the result of a particular,
and yet unanticipated, structural device which mitigates the identified
risk. Without additional information as to the intended structure
of Railtrack's successor we would be very wary of highlighting
any particular aspect at this time. However, in a press release
dated 2 November 2001 and which we enclose, we sought to identify
some of the key risk factors that are likely to be relevant.
3. As a rating agency, Standard & Poor's
role is to assess the transactions presented to us and, consequently,
assign credit ratings to them. In terms of the "steps to
be taken" it is, therefore, for the Secretary of State to
determine the approach to be taken to achieving the desired rating
level of triple-B.
(a) As a credit rating agency our role is
limited to that explained above. Consequently, we are unable to
comment on the market for triple-BBB securities and would respectfully
invite the Committee to address this question to those whose expertise
in the matter far outweighs our own.
(b) Please refer to the previous answers
to question 3.
4. Again, without additional information,
it is very difficult to assess whether any particular device,
in isolation, will be effective in achieving the target rating
for Railtrack's successor. However, the proposal for a reserve
fund and a subordinated loan facility are not unusual in the type
of structured financing under discussion for Railtrack's successor.
Standard & Poor's view is that, in these
types of financing structures, "the devil is in the details".
Clearly, our assessment as to the adequacy of the reserve fund
and/or subordinated loan would be, for example, dependent upon
both the terms of their use and the risks that they are in place
to mitigate. In terms of the reserve fund, for example, we would
need to understand its proposed funding (ie upfront or from on-going
surpluses), whether it was capable of being drawn by Railtrack's
successor in all circumstances or only for a limited range of
purposes etc. In respect of the subordinated loan we would need
to know how and in what circumstances it would be drawn down.
We would need to know how the cash drawn under could be used and
what would be the repayment terms for the loan etc.
(a) Without additional details as to the
proposed structure, it is difficult to determine the adequacy
of a £1 billion loan facility. For example, the current cost
estimation for the West Coast Mainline Upgrade now stands in excess
of £7 billion which is considerable greater than the original
budget of just over £2 billion. It is also not yet clear
what the ultimate final cost of the project will be. In that context,
whether the successor to Railtrack would take over the responsibility
for all or part of that project would be key in determining whether
a £1 billion loan facility was adequate.
(b) See earlier comments.
I hope that this clarifies some of the issues
that you raised. If you have any further questions, please do
not hesitate to contact myself or Jonathan Manley (Associate Director,
Infrastructure Finance) on 020 7826 3647.
Senior Legal Counsel
19 November 2001
26 Not printed. See http://www.ratingsdirect.com Back