Railtrack, the privatised operator and owner of the infrastructure supporting Britain's railway network, has made an impressive start to its life as a private sector borrower and a new kid on the capital market's block.
Voted in Euroweek's 1997 Review of the Year as the most impressive new borrower in the UK (and the fifth most impressive worldwide), Railtrack tapped a range of investors and maturities over the last quarter of 1997 -- the most difficult for the global capital market -- without erring on the side of greed in terms of amounts or pricing.
Given that Railtrack has an investment programme of some £16bn over the coming 10 years, the timing and reception of its issues in the domestic and international capital markets will be an important consideration.
This, presumably, is one reason why the company will not be drawn on precisely how much of its investment expenditure will be generated from internal sources and how much will need to come from the capital market.
But Railtrack's treasurer, Martin Wood, says that the borrowing requirement will be "significant" -- significant enough, he adds, to make Railtrack "one of the UK's largest corporate borrowers over the next five to six years".
"Consequently," he explains, "Railtrack is accessing its funding opportunities in a whole spectrum of markets."
Technically speaking, the £300m 25 year bond which Railtrack launched into the domestic market in October via Barclays Capital and HSBC -- notable for being the largest long dated sterling corporate bond of the year -- was not its first.
The company had launched two bonds with maturities of 10 and 20 years raising £235.7m via SBC Warburg as part of its privatisation in May 1996, but, as Wood says, these issues were "effectively sponsored by the government."
Although this meant that Railtrack had already conducted extensive roadshows in the UK and Europe, which it did not feel compelled to repeat last year, it also meant that as far as the issuer was concerned its 1997 bond was its debut transaction in its home market.
"It was important for us to set a benchmark and to get our name established in the market," explains Wood. "We also achieved an all-in cost of about 7.5% on an annual basis, which we were very pleased with."
Railtrack's debut sterling bond was priced at 78bp over the Gilt, and was launched into a confused market environment which at the time was sending out conflicting signals about the UK's future plans on Emu membership.
As Wood concedes, this inevitably gave Railtrack's treasury team a nervous pre-launch weekend, as a raft of stories in the national press about Emu sparked volatility in the Gilts market.
Nonetheless, the issue met with an enthusiastic response that led to a spread narrowing on the first day of trading of 2bp.
The pricing of the Railtrack bond excited some negative comment -- with the suggestion made in some quarters that the pricing was simply too generous for a company which had just enjoyed an upgrading of its ratings from A+ to AA- by S&P, and from A2 negative to A2 stable by Moody's.
Wood dismisses this suggestion as being "a little unfair," however.
He says: "I don't think we left much on the table. It settled down within a week to trade at 76bp over the Gilt, and the important point from our perspective was to make sure it was not priced so tightly that it would fail, but I don't think we gave it away."
Observers suggesting that the pricing of the Railtrack bond may have erred on the generous side also need to recognise that the sterling issue was only one in a series of fund raising exercises launched by the company in the last quarter of 1997, as well as being a probable prelude to several others in 1998.
"It was a busy quarter for us, because we also established a £600m project finance facility with the EIB which is to date the single corporate facility that the EIB has provided for a UK company," says Wood.
This agreement was signed in December 1997 and by early February £200m of the debt had been drawn, both in tranches of £100m and with maturities of 11 and 13 years respectively. "In both cases we secured a fixed rate of 6.42%," says Wood.
Completing the mosaic of facilities in the latter weeks of last year was a $750m Euro-CP programme, which was also signed in December and which meant that in the short course of a few months Railtrack had spread itself across a healthy mix of maturities.
"We will be able to create our own yield curve," Wood explains, "because with the exception of the two bonds launched at privatisation we more or less started with a blank sheet of paper. But in general the nature of the assets which we are funding are very long term, which will naturally push us towards the longer end of the curve in our capacity as a borrower."
Not surprisingly for a long term sterling issue, the overwhelming majority of the £300m issue was placed with traditional long term domestic investors, although the deal also attracted some attention from Europe.
But looking to the future Wood does not see Railtrack's borrowings as being anchored purely in the sterling market. "Our intention is to set benchmarks in different currencies and not just in sterling," he explains. "We are considering the establishment of an MTN programme, on the back of which we can go into Europe and set up benchmark issues there as well."
More progress has been made on Railtrack's strategic plans to access US investors, which it has already successfully done through the privatisation equity offering and which has led to over 10% of its shares now being in the hands of investors across the Atlantic -- an encouraging indication that US equity investors are comfortable with the Railtrack credit.
A possible funding source for Railtrack will be a Yankee issue, which Wood accepts will involve considerably more investor marketing than the sterling bond, although quite how much will depend on which precise route to the Yankee market Railtrack decides to take.
"Broadly a plain vanilla private placement would be fairly straightforward," says Wood. "But the downside is that we would probably lose between 10bp and 25bp in terms of pricing, in addition to not getting much publicity in the US or tapping the widest possible investor base."
Other alternatives would include a 144A issue, giving Railtrack access to US qualified institutional buyers, or, at the top of the spectrum, a fully registered transaction offering access to retail investors.
"Critically, there's less management time involved in a 144A offering," says Wood, "and there is also only a small price differential between a 144A placement and a fully registered deal for a company with Railtrack's credit standing.
"On a good day that would be 1bp to 2bp; on a bad day it might be 5bp. Broadly, we would expect to command similar terms in the Yankee market to what we have achieved in sterling, although of course you have no way of knowing where swap or corporate spreads will be on any given day."
He adds: "The key driver in the Yankee market is access to capital, which is why we are keeping our options open with regard to choosing which road we go down in the US."
On balance, Wood -- who joined Railtrack from Severn Trent last May -- is satisfied with the way in which the credit has been received by investors.
"From a banking perspective, I certainly have the impression that the financial community is now a lot more comfortable with Railtrack," he says.
"For example, at the time of privatisation, we put together a large £2.35bn syndicated loan facility which, because of political uncertainty, had a bit of a bumpy ride through the syndication process. We've now cancelled half of that facility and have demonstrated to our banks that we are prepared to look at diversifying into different markets and different maturities. They have taken a lot of comfort from what we have already achieved."
Wood concludes: "From a treasury perspective, Railtrack in 1997 realised its ambition of being master of its own destiny. The establishment of a major sterling benchmark issue, EIB and commercial paper facilities are part of the company's strategic funding plans to develop a diversified investor base across a range of different maturities -- and this process is sure to continue in 1998." EW