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Sterling investors excluded as Depfa crowds Tube deal

Tube Lines, the consortium that operates three London Underground networks, disappointed sterling investors this week when it announced details of its £2bn plus refinancing of its £1.935bn senior and mezzanine debt.

Contrary to expectations, bookrunner Goldman Sachs and joint lead manager SG will only sell £250m to the public market, offloading the balance of around £1.675bn to Depfa.

The £250m portion represents  the £135m mezzanine and £80m of senior debt from the existing Tube Lines financing that closed in December 2002  and will be sold to investors through three tranches of bonds rated from BBB+ to BBB- by Fitch.

The leads are preparing a roadshow and declined to comment at this stage.

The rating of the debt that Depfa will take is linked to London Underground parent Transport for London (AA/F1+ from Fitch) and has a 20% risk weighting.

The Tube Lines consortium, comprising Amey, Bechtel and Jarvis, owns a 30 year public private partnership (PPP) concession to upgrade and maintain part of the London Underground.

The deal, which follows Metronet's blowout £1.03bn offering last year, has been long awaited.

In a market starved of corporate supply, particularly at the long end of the curve, the news comes as a disappointment for sterling investors.

"Given the supply/demand dynamic everyone was pinning their hopes on Tube Lines," said one UK investor. "The lack of liquidity makes it very difficult for us."

The problem is exacerbated by the deal's complexity, requiring a large amount of credit work for what will inevitably be a relatively small allocation. Like the £1.03bn bond financing for fellow PPP consortium Metronet, launched in March 2003 by Deutsche Bank, RBS Financial Markets and UBS, the bonds are secured on an enormously complex group of contracts and support arrangements.

But while most long dated sterling investors will be familiar with at least some details of how the concession operates from Metronet's deal, the credit story is very different. Metronet's bonds were supported by wraps from Ambac and FSA, whereas the notes being offered to investors by Tube Lines (Finance) plc are directly exposed to the operating performance of the consortium.

The structure, arranged by Goldman Sachs, provides considerable efficiency savings to Tube Lines. Under the mandatory sale process written into the contracts, Transport for London effectively guarantees 95% of the debt. Goldman took advantage of this underpinning to achieve a double-A underlying rating for the senior debt. Ambac is providing a capped guarantee for the scheduled interest on the £1.146bn ?A1' notes to be bought by Depfa, but those notes are only rated double-A and will be drawn down gradually by Tube Lines over time as required, saving on swap and other costs.

A further £300m of debt in the form of loans from the European Investment Bank (EIB) is wrapped by Ambac to achieve a triple-A rating. The approximately £112m ?A2C' notes, which represent Tube Lines' savings on interest costs through the refinancing, are unrated as they are subject to interest rate risk if redemption is accelerated.

The remaining debt consists of a £200m standby facility to cover unexpected cost overruns, a £55m safety change facility covering costs incurred because of changes in safety law, and an £18.5m letter of credit facility, all rated double-A.

All facilities and notes have legal maturity in September 2031, except the EIB loans which mature in 2027. Expected maturity is in 2027 for the ?A' and ?B' notes, while the ?C' and ?D' notes are scheduled to mature in 2029. The concession expires in 2032.

Under the contract Tube Lines takes over the maintenance of the tracks, signalling, trains and stations of the Jubilee, Northern and Piccadilly lines.

The consortium must undertake upgrades including replacing 42 miles of track, installing new train control systems and replacing escalators.

A new fleet of 93 trains will be procured for the Piccadilly line, although these will be financed through leases and are not included in the securitisation.

In return for performing its responsibilities under the contract, Tube Lines will receive a monthly payment from London Underground. The bulk of this payment, especially in the first 7.5 years of the concession, will pay for the specified upgrades. The remainder is performance related. 

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