Analysts in London are calling Railtrack's modest downgrade by Moody's Investors Service too relaxed, too cautious and naïve. "It's almost a laughable downgrade [Moody's] has given. It does not indicate a default or potential losses," said Jans Jantzen, analyst at Bear Stearns in London. "Railtrack is no longer investment grade," he emphasized.
Last week, the British government successfully petitioned the High Court to put Railtrack, Britain's rail infrastructure company, under administration, which precipitated an overnight downgrade by both Moody's and Standard & Poor's. Moody's dropped Railtrack from A2 to Baa1, while in contrast S&P slashed its rating 15 notches to CC from A.
"The government's saying it intends to create a triple-B structure, but all we've been handed is a blank piece of paper," said Jonathan Manley, associate director at S&P in London. Manley confirmed S&P has not been contacted by the government or its administrators Ernst & Young. "We haven't had any meaningful discussions about what this company is going to be about," he said.
Jeremy Hawes, the London-based Moody's analyst who made the ratings call, said, "Yes, there was a technical default when Railtrack was placed in Railway Administration, but no default has been declared by the creditors, and we believe that a default rating wouldn't add value. Instead, our approach has been to assess expected economic loss to bondholders. In our view bondholders have few options but to agree to the standstill. It is clear that they cannot enforce security over the assets of Railtrack. Their rights under Railway Administration have been limited from the beginning." Hawes underscored that it is not in the government's best interest to alienate bondholders, because Railtrack will have to return to the debt markets at some point to raise capital.
"I asked [Moody's] to outline a scenario that would prop Railtrack up to the triple-B level and they were unable to do so," said Vincent Dolan, analyst at Commerzbank Securities in London. Without government support, Dolan believes Railtrack deserves a single-C rating. "The government walking away makes the rating go to a default status. [Moody's] is taking a lot on trust from the government," he said.
Hawes conceded that it remains to be seen how the government will achieve a triple-B rating and that the administration process has never before been tested. "There will be plenty of twists and turns," he said.
As of now, if bondholders sign a standstill agreement, they are guaranteed principal and interest payments for as long as the company remains under administration. "The standstill agreement will remain in effect until the ultimate transfer scheme is presented. Bondholders will be stripped of all rights when the government walks away. There are too many huge unknowns for bondholders [to merit an investment grade rating]," said Dolan.
Railtrack has about £3.3 billion (about $4.75 billion) in debt, half of which is bonds. Last week, the '28 bonds were trading at 87.5, down from 92.5 prior to the announcement Railtrack was going under administration.