Memorandum by Moody's Investors Service
Ltd (PRF 55)
PASSENGER RAIL FRANCHISING AND THE FUTURE
OF RAILWAY INFRASTRUCTURE
Thank you very much for your letter dated 30
October asking as a number of questions.
By way of background, we would like to point
out that Moody's is a credit rating agency. We assign credit ratings
to bonds and other debt obligations of companies, sovereigns,
sub-sovereign entities and other types of debt issuing vehicles.
Credit ratings are, and must be construed solely as, opinions
and statements of opinion, and not statements of fact or recommendations
to purchase, sell or hold any securities. We do not, and cannot,
conduct Investment Business within the meaning of The Financial
Services Act 1986. The nature of our business naturally constrains
our ability to answer all of the questions in the level of detail
that you might like.
However our answers are outlined below. We have
also set out your original questions for ease of reference.
1. What credit rating did Moody's give to
the company's existing bonds before and after Railtrack PLC was
placed in administration?
(a) What were the specific reasons for any
Moody's long term/short term ratings of Railtrack
PLC where A2/P1 just prior to Railtrack PLC being placed into
Railway Administration. The long term rating is now Baa1 (on review
for downgrade) and has been since 9 October 2001. The short term
rating was changed to P2 (on review for downgrade) on 9 October
2001, and was confirmed on 11 October 2001.
The rationale for the Moody's rating changes
outlined above was communicated to the markets through the press
2. What credit rating do you currently expect
to give to Railtrack's successor if it is a company limited by
guarantee as proposed by the Government?
(a) What factors will you take into account
when deciding the new credit rating?
Based on our current information base it is
not possible to determine with any degree of accuracy the ratings
that Moody's may assign to any company limited by guarantee that
may be a successor company of Railtrack. However the fact that
it may be a company limited by guarantee rather than a company
owned and/or governed in some other way is likely to be less significant
that other factors in any Moody's rating assessment. The more
significant factors that are likely to drive our rating decision
are set out in our response to question 2a.
The key aspects that Moody's will consider when
assigning a rating to any successor company to Railtrack is outlined
in the appendix.
3. The Secretary of State for Transport,
Local Government and the Regions expects the new company to have
at least a triple-B credit rating. What steps will have to be
taken to ensure that this is achieved?
(a) Is the market for "BBB" grade
investments large enough to enable the new company to raise sufficient
funds for its needs?
(b) Might Railtrack's successor not require
a higher credit rating than "BBB"? How would this be
Moody's regards bonds that are rated in the
Baa category (the Moody's equivalent of the BBB referred to in
the question) as exhibiting the following characteristics: Bonds
which are rated Baa are considered as medium-grade obligations
ie, they are neither highly protected not poorly secured. Interest
payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact may have speculative characteristics
as well. Clearly the debt raised or acquired by the successor
entity to Railtrack will, in the opinion of Moody's Rating Committee,
need to be exposed to business risks and have a financial structure
that would be consistent with such a definition.
In the light of the comments set out in the
second paragraph above we are unable to provide any guidance on
In the light of our inability to give an answer
to question 3a, we are unable to give an opinion as to whether
Railtrack's successor may require a higher credit rating than
Baa/BBB. However in order to achieve a debt rating in the "A"
category (the next highest rating category), the Bonds would need
to exhibit the following characteristics: Bonds which are rated
A possess many favourable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some
time in the future.
4. Under his plans for a company limited
by guarantee, the Secretary of State has proposed that surpluses
should be used to form a reserve fund and that a subordinated
loan facility should be made available to act as a cushion between
the risk of poor financial performance and debt providers. Do
the proposals for a reserve fund and a subordinated loan facility
offer sufficient comfort to potential investors?
(a) It has been suggested that £1 billion
may be available under the loan facility. Is this sum adequate?
(b) Under what terms and conditions should
the loan be made available?
Both the use of reserve funds and subordinated
loan facilities could act as substantial mitigants of credit exposure
for providers of debt to the successor company of Railtrack. Whether
they offer sufficient protection to enable Moody's to assign ratings
to such debt at particular rating categories very much depends
on the aggregate business and financial risked perceived by Moody's
as applying to the successor company to Railtrack (see our answer
to question 2 above) and the quantum of such amounts.
It is not possible to determine whether £1
billion made available under the loan facility referred to in
the question is sufficient to achieve the desired rating category
at this time. Such a judgment will need to be made in the light
of a developed financial structure and business model for the
successor company of Railtrack.
It is not possible to determine the appropriate
terms and conditions that should apply to the loan facility referred
to in the question at this time. Such a judgment will need to
be made in the light of a developed financial structure and business
model for the successor company of Railtrack.
We trust that the answers to the questions you
raised are sufficient for your purposes.
Vice PresidentSenior Analyst
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