 |
Euromoney’s borrower awards 2007 |
| Overall awards | |
| Best sovereign/supranational/agency borrower | Best bank borrower |
| Best insurance borrower | Best ABS |
| Best CDO borrower | Best covered bond issuer |
| Best corporate borrower | Best high-yield/leveraged finance borrower |
| Latin America regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Central & Eastern Europe regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Asia regional awards | |
| Best sovereign borrower | Best corporate borrower |
| Best financial borrower | |
| Middle East and northern Africa regional awards | |
| Best borrower | |
 |
“We have an index-linked asset base and an index-linked revenue stream. It makes sense to have index-linked debt” |
In April 2007, Network Rail launched the largest non-government index-linked bond in any market. This first foray into the sector, which was a 30-year, £1 billion ($1.98 billion) linker, garnered subscriptions of just under £2 billion. The issue is the next step in the UK rail infrastructure company’s continuing maturity as a borrower, a process that began more than three years ago with its first MTN issue, in March 2004. That programme was the biggest non-government bond in sterling at that time. “Having made a real entrance into various markets in 2004 and 2005, much of our focus is on consolidating our investor base – which means we spend a lot of time with investors explaining who we are and what we plan to do,” says Fred Maroudas, director of funding at Network Rail. “As a result, we have seen our bonds performing strongly so that in sterling, for instance, we are now generally recognized as a gilt surrogate”
Future instalments of the index-linked bond (the next is due in August) will also feature issues in Canadian and Australian dollars, which are new currencies for the company. Network Rail has put a lot of work into broadening its investor base, especially in these new markets. “We went on a very extensive roadshow with Canadian investors,” says Maroudas. “We do not treat Canadian dollars as an arbitrage currency but as a strategic one.”
Establishing itself in these new markets has been just one of Network Rail’s priorities over the past 12 months. Maroudas points to three clear themes. First, while the company has been breaking into new markets, it has also been consolidating its position in its major ones. Beyond its highly favoured sterling issues, the borrower regards the US dollar as a strategic currency.
The company’s spreads are beginning to tighten. The 47/8% 2009 MTN that printed in March 2004 priced at the equivalent of 39 basis points over gilts, whereas the recent linker issue priced at 26bp over. Network Rail is slowly getting performance on its bonds, and is delivering on promises made over the past three years.
The second theme is that Network Rail is no longer an agency in transition. The long-standing difficulties that followed rail privatization are the common parlance of any British commuter but, according to Network Rail, things have been getting better. “Over the last three years, there has been a dramatic turnaround in the performance of the company,” says Maroudas. “Whereas before a customer had around a 70% chance of their train arriving on time, that figure is now 91%.”
Network Rail points to other statistics that illustrate this improvement. What’s impressive is that the company has made these advances at the same time as cutting 30% from its cost base. This transition has allowed Network Rail much more freedom in its borrowing strategy, the result of which is the new inflation-linked bond.
“We have an index-linked asset base and an index-linked revenue stream,” says Maroudas. “It makes sense to have index-linked debt.”
The company took the product on a roadshow to about 20 investors. Unsurprisingly, the market took a great deal of interest in what is essentially a gilt with extra spread. “We were delighted with the way the deal went,” says Maroudas. “We made it clear that we would issue regularly over time, ensuring future liquidity.”
Maroudas goes on to explain how the company deliberately limited the issue to £1 billion, and will continue to do so, to provide transparency and ensure regular flow. Although Network Rail will avoid tapping, to aid the secondary market, it is likely that most investors will view this product as a buy-and-hold asset.
The third and final theme of Network Rail’s strategy over the past year is preparation of the market for the company’s next development. “We are very gently beginning to prepare the market for the future, when we are likely to supplement our present issuance programme with a corporate issuance strategy,” says Maroudas. “This will be in place by March 2009.”
From that date, every new pound put into the railway will be financed by corporate issuance without a government guarantee, although the company will continue to refinance its present issuance programme. “We will try to be as open as possible with the markets, telling them how and when this transition is going to occur,” says Maroudas. “Investors are already expressing interest, but they understand it’s still early days.”
Network Rail will focus on four key currencies – Canadian and Australian dollars as well as sterling and US dollars. The index-linked bond will go a long way to achieving this, once it becomes a multi-currency issue.
Network Rail’s financing requirement over the next two years amounts to some £10 billion, of which 50% to 60% will be in linkers. The company will aim to establish three liquid benchmarks, with maturities of between 15 and 45 years.
