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

Memorandum by Standard & Poor's (PRF 57)


  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. [26]

  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.

Ian Bell

Senior Legal Counsel

19 November 2001

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