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Transport for London and GLA set for big bond sales

Transport for London, the double-A rated local government body charged with managing London?s transport system, is likely to issue up to £3bn of debt over the next five years.

And the Greater London Authority, London?s city government, is almost certain to approach the capital markets to help finance its £10bn Crossrail project to build a new railway across London from east to west.

The issuers will join a growing huddle of rail-related agencies and other issuers entering the capital markets on the coat-tails of the UK government.

London & Continental Railways, Network Rail and the two public-private partnership consortia upgrading the London underground, Metronet and Tube Lines, have between them issued £17bn of bonds and about £6bn of CP and loans over the last three years.

The funding is needed to satisfy the UK rail network?s seemingly limitless demand for capital investment.

The government cannot increase the national debt too steeply, but equally the markets will not finance railway infrastructure investment unless the government shoulders most of the risk.

Transport for London (TfL) and the Greater London Authority (GLA)?s emergence on the scene will be significant in another way, however ? UK local government bodies are notable by their absence from the capital markets, unlike many of their counterparts elsewhere in Europe.

Yet such issuance became almost inevitable when Alistair Darling, the secretary of state for transport, gave the government?s backing last week to London mayor Ken Livingstone?s Crossrail scheme, which will require special legislation comprising a public and a private bill.

At the same time TfL, which manages London?s public transport systems under the mayor?s direction, agreed a new funding package with Darling?s Department for Transport that permits it to borrow in the debt capital markets.

TfL has been given government sanction to invest up to £3bn in transport infrastructure improvements over the next five years ? a target that is likely to be funded by issuing bonds.

?Real progress has been made in putting London?s transport funding on a stable footing,? said Jay Walder, managing director of finance and planning at TfL in London. ?We have consistently argued that London needs the sort of longer-term funding certainty enjoyed by other world cities and the agreement with the government provides this for the first time.

?It will give us the flexibility that other cities already have in financing their transport investment including, for the first time, the ability to raise bonds to finance that investment through prudential borrowing,? Walder said.

TfL?s board will deliberate the size and structure of the programme over the next few months and will reach a decision on October 27, when it meets to finalise the options available for financing capital investments such as extending and maintaining London?s rail, road, tram and bus networks.

?Crucially, the five year funding agreement enables TfL to take forward those projects which support London?s bid to host the Olympics in 2012,? Walder said. ?The Olympic projects we will now take forward include extending the East London Line to Dalston Junction, West Croydon and Crystal Palace, expanding the Docklands Light Railway and new transit projects in East London and Greenwich.?

Risk status close to sovereign

TfL is almost certain to issue in the capital markets, as a report from its finance committee on July 22 makes clear.

?The most likely sources are a bond issue or loans from the Public Works Loans Board,? it declares. ?A bond issue, although it is slightly more expensive, is currently favoured, principally as it will establish a track record in the market and will expose TfL to the rigours of market scrutiny.?

Bankers in London say the size of any issuance would be capped by the £3bn ceiling of TfL?s five year capital investment plan.

TfL, according to bankers in London, would enjoy a similar quasi-sovereign risk status to Network Rail, the Aaa/AAA/AAA rated private, not-for-profit company that owns the UK?s national railway infrastructure.

This view is supported in part by Standard & Poor?s (S&P), which affirmed its double-A rating on TfL with a stable outlook yesterday (Thursday).

?The funding agreement is not legally binding but does confirm the strong relationship between the UK government and TfL,? S&P said. ?By agreeing to the five year deal, the government has entered into an unprecedented arrangement with TfL, both in terms of access to new borrowing from the wider debt markets and the length of the underlying five year financial arrangements.?

In February, S&P reported that TfL?s AA rating reflected its strong links with the UK government ?through the provision of funding via transport grants and central oversight by the UK local authority framework, and a strong fare generating capacity as a result of its monopoly status.?

S&P said these strengths were offset by the challenges of managing cost pressures, since TfL has taken over London Underground Ltd and its hugely complex public-private partnership (PPP) contracts for upgrading the Tube system.

TfL is liable for 95% of the £5bn debt of the underground PPPs if a put option is exercised in the event of a project default.

The organisation raises funding from bus and tube fares and grants from central UK government and the GLA.

Its budgeted expenditure for this year was £4.35bn, of which revenue will cover 51%, government grants 48% and the GLA grant 1%.

TfL?s agreement with the government sets out increases in grant income from the government of about £200m-£300m a year for the next five years. That means the annual grant will have risen to about £2.5bn a year in the financial year ending March 2010. The government is to review the funding arrangement in 2006.

UK local authorities keen to explore the capital markets could hardly have more influential role models than the GLA and TfL.

After years of shunning the financial markets, since the Hammersmith & Fulham council derivatives scandal in the 1980s, the government introduced a new ?prudential borrowing? framework in April that allows local authorities to borrow in the capital markets without central government approval ? although they will have to work within a code of conduct that limits their powers.  

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