Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by Moody's Investors Service Ltd (PRF 55)


  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 change?


  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 releases attached[25].

  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 achieved?


  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 this matter.


  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.

Andrew Blease

Vice President—Senior Analyst

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