Why does UK government guaranteed Network Rail keep issuing debt in its own name – and at a higher cost?

Network Rail, the organisation that owns and manages the UK’s rail infrastructure, has just issued more of three tranches of its index-linked corporate bonds.  These bonds are, like all of Network Rail’s debt, rated AAA and fully guaranteed by the UK government (the business was effectively nationalised in 2002 having bought Railtrack out of administration) .  These bonds were issued with spreads around 30 bps over similar maturity UK index-linked gilts.  That level of spread is typical of where Network Rail’s corporate bonds trade at the moment – and there is over £28 billion of this public debt outstanding.  This means that if that corporate debt were issued today it would bear a total interest cost that is £84 million per year higher than the cost of issuing gilts (plus the costs of issuing debt as a corporate, e.g. separate listings, investment bank fees).  Present value a perpetual income stream of £84 million at, say, 3% (the yield of ultra long dated gilts) and that is an additional cost of £2.8 billion.

So why isn’t the government borrowing in its own name at rates 0.3% per year lower than Network Rail and then directly on-lending the money to it?  After all it has already assumed all of the credit risk through the guarantee.  I know that £2.8 billion is relatively small in the scale of the UK’s debt problems nowadays (it was roughly the overshoot in May’s government borrowing requirement), and that assuming Network Rail’s debt obligations directly would increase the total UK national debt, but we’re talking about a simple accounting change to save billions of pounds.

Just don’t let’s get started talking about PFI…

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. mark goldman says:

    oh but do get started on the PFI, if only to show what amatuers Network Rail are.  and yes, you are absolutely correct that the numbers involved in the Network Rail issuance are somewhat irrelevant-but it certainly doesn’t fall under the “value for money” mantra that oozes out of osbourne and co-including his predecessor-when it fit their purpose! 

    Posted on: 02/07/12 | 8:31 am
  2. ZLD says:

    Because the government is willing to keep the balance sheets separate?

    Posted on: 02/07/12 | 3:28 pm
  3. jonathan shapiro says:

    Hi guys, love the blog 
    I interviewed Network Rail treasury guys in October 2006 when I was a bonds reporter at Insto, a finance mag in Australia..
    I asked them this exact question, here is their answer, not sure its compelling enough though….
    Network Rail intends to execute sizeable issues in Australia, but will do so relatively infrequently and will avoid tapping smaller deals.

    “The bonds will perform better; we want to deliver liquid transactions that perform,” Maroudas said.

    Despite its explicit government guarantee, the entity is looking at raising incremental funding from its own balance sheet in the future.

    The cost of funding will be more expensive, but non-government funding has its benefits.

    “The reason we have been able to transform the company is because we have been distant from government,” said Maroudas.

    “We are not a nationalised industry and we have operational freedom. If you are going to be genuinely independent you are going to need to raise money independently and we believe it will help to reinforce the solid practises that we have introduced.”

    Posted on: 06/07/12 | 3:13 am
  4. Jim Leaviss, M&G says:

    Thanks Jonathan – that’s really interesting background, although as you say, not exactly “£80 million plus per year” compelling.  “The bonds will perform better” – ie the transfer of wealth from UK taxpayers to bond investors will be higher?!

    And thanks for the kind comments.


    Posted on: 09/07/12 | 11:35 am

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