Investors back Network Rail bonds

Network Rail, the engineering firm that owns and maintains the UK’s rail infrastructure, has issued almost €10 billion equivalent of fixed- and floating-rate bonds in euros, dollars and sterling. The deal came as a relief to supply-starved investors.

The attractive pricing impressed buyers: demand was strong enough for three of the bonds to be upsized. The bonds priced at around 20bp over comparable supranationals such as the European Investment Bank.

Investors were also reassured by the deal’s structure. The bonds were issued through a special-purpose vehicle called Network Rail MTN Finance, which is supported by a standby loan facility from the Strategic Rail Authority (SRA), the UK’s rail regulator.

The SRA is not a government department; however the UK government expressed its support of the credit through a ‘letter of comfort’ signed by secretary of state for transport Alastair Darling.

One bondholder felt the credit was especially cheap given the potential for positive event risk. “If the government’s upcoming strategic review on transport leads to the SRA being reabsorbed back into the Department of Transport, the Network Rail bond effectively becomes a gilt,” he says.

Network Rail, the not-for-profit firm that replaced the defunct private company Railtrack, brought five bonds to the Euro MTN market within the space of a week. The first, on Tuesday March 16, was a £2.25 billion five-year bond priced at 4.875%. The second, a $1.25 billion four-year bond priced at 2.625%, came the next day. Thursday saw a £1 billion two-year floating-rate note come to market, followed on Friday by two euro-denominated issues: a €1.25 billion three-year floating note and a €2.5 billion five-year bond priced at 3.125%.

Both Fitch Ratings and Standard & Poor’s rate the bonds AAA, while Moody’s rates the paper one notch lower at Aa1. The deals were underwritten by Merrill Lynch, HSBC, RBS and RBC.

Network Rail will use the proceeds to begin repayments on a £9 billion (€13.5 billion) bridge loan. Nine banks lent Network Rail the cash prior to its takeover of Railtrack. Leftover cash will be used for general corporate purposes.