Infrastructure: End of the line for Metronet?


Louise Bowman
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Just months after the conclusion of Eurotunnel’s latest restructuring, London Underground rail operator Metronet is shaping up to take the Channel Tunnel operator’s place as the market’s favourite infrastructure saga.

Doors closing on Metronet

Metronet, which entered PPP administration on July 18 last year, now faces a put option on its debt becoming exercisable this month.

Metronet issued two fixed-rate and two index-linked bonds in 2003, both of which were wrapped – by FSA and Ambac. The total £1.2 billion ($2.45 billion) debt was issued through two finance companies, BCV Finance and SSL Finance.

On January 18, the creditors of these two companies have the right to require London Underground to take on the loans they have outstanding – ie to "put" the loans. If this happens, the outstanding bonds could be accelerated and investors face the prospect of being redeemed at par. This has an unfortunate precedent in Eurotunnel (see Investors rap MBIA over Eurotunnel payout, Euromoney, March 2007) and both investors and monoline guarantors will be anxious to avoid a repeat performance.

How likely is it that the put option will be exercised? Key to that decision will be the establishment of a settlement price acceptable to both sides. "The formula for valuation is unclear," explains Kale Brown, corporate securitization analyst at Barclays Capital. "It depends on forecasts, which are at best contentious for a company in administration. The alternative is to receive the underpinned amount [by exercising the put option] which will potentially result in a capital loss for the bank lenders and the monolines."

What value?

The valuation calculation is based on a discounted cashflow formula analysis based on revenue and cost assumptions that have not yet been agreed. This raises the prospect of Metronet and London Underground Ltd (LUL) being unable to agree on a settlement price by the January 18 deadline. The PPP administrator (Ernst & Young) has yet to determine whether there is any value whatsoever in the Metronet business. If the contract has no value then LUL could just take it on; certainly the prospect of Transport for London raising any debt in this market to acquire the stricken firm’s service contract is very remote.

Opinion is divided as to what might now happen. Some feel that time is running out for a restructuring of Metronet’s debt. "As time marches on the chances of a restructuring are falling," one rating agency analyst tells Euromoney. "Debt restructuring is no longer a base case assumption for us – it is too late. In order to minimize their loss the most likely scenario is that the monolines will redeem their bonds at par." He explains that while in the case of Eurotunnel it was quite clear that there was a payment default, in Metronet’s case the appointment of Ernst & Young as administrator is an event of default in itself.

Not everyone agrees, however. "If I was everyone involved I would do all I could to get these bonds rolled over," says one banker. Brown at Barcap agrees. "The option won’t be exercised immediately without a negotiation," he predicts. "No one at the table wants to take an immediate capital loss." The monoline guarantees provided by Ambac and FSA do not cover any Spens payments to noteholders or any default interest due.

The monolines themselves have two options depending on any settlement price: either take the proceeds and hold them on account, paying the liabilities on the bonds as they fall due (that is, do not accelerate); or accelerate the bonds. But given that the chances of any agreed settlement price in the near term look pretty remote, a more attractive course of action might be to try to negotiate with the monolines to revise the covenant structure of the existing debt and essentially buy some more time.

This has a precedent in the £235 million Craegmoor whole-business securitization of a group of UK nursing homes – a deal that has now paid down. When the deal ran into difficulties in early 2006 the company negotiated with senior bond insurer MBIA to temporarily reduce its original covenants (which it had been in breach of for six months) and waive events that would cause any breach. This might be an attractive option for the monolines in the Metronet case. "If I were them I would say ‘pay us a fee and we will restructure’," says one observer. He adds: "The monolines are not in a position to let TfL get away with anything. Eurotunnel hosed over its investors and Ambac and FSA are well aware of the reputational hit that MBIA took over it."


According to Tim Barker, head of credit research at Morley Fund Management, a meeting of investors under the auspices of the Association of British Insurers had yet to be called in early December. "I expect that we will be approached by Metronet and asked to consider amending the bonds," he says. "But the documentation that binds this deal together is very supportive of bondholders. When you buy bonds such as these you are well aware that you could be accelerated out, but we do not believe that the Metronet documentation would permit a similar situation to that which took place with Eurotunnel."

Moody’s downgraded the unguaranteed debt ratings of the Metronet finance companies to B2 on November 29. At the time Andrew Blease, senior vice president at Moody’s stated that there was a "lack of evidence that a refinancing or restructuring without impairment will be implemented and that the most likely alternative is the exercise of the put options on LUL". When the deal was launched the underlying rating was Baa3/triple-B plus.