Metronet 'high default probability' puts skids under Gordon Brown's PPP of London Underground
AFX News Limited: 06.28.07
LONDON (Thomson Financial) - Moody's Investors Service said it downgraded senior secured unguaranteed debt ratings of Metronet Rail BCV Finance PLC and Metronet Rail SSL Finance PLC to 'Ba2' from 'Ba1'.
The downgrade reflects the materially higher default risk the debt of BCV Finco and SSL Finco, given that committed funding is not currently available, which is mitigated by the possibility of the banker of the two companies reinstating funding availability.
Moody's said it will continuing its review of the two entities' ratings for further possible downgrade.
The Ba2 rating symbolises high default probability, along with a low speculative-grade rating, negated by low loss severity in the event of a default by Metronet, the release said.
Operating costs soar as Metronet triggers £1bn review
Transport Briefing: 29/06/07
The future of the public private partnership of the London Underground, forced through by Prime Minister Gordon Brown during his time as Chancellor, looks increasingly uncertain this morning (29 June) after Metronet Rail BCV, the infraco responsible for maintaining and upgrading the Bakerloo, Central, Victoria, and Waterloo & City Tube lines, submitted an application to recover more than £1bn from London Underground.
The consortium has provided a Reference Application Notice to PPP arbiter Chris Bolt, together with its Statement of Case and Initial Submission, to enable Bolt to conduct an Extraordinary Review of its operations. By triggering the Extraordinary Review process, a mechanism provided for in PPP contracts, Metronet hopes to recover £992m from London Underground associated with its work to renew the Tube.
In addition, Metronet has also asked the arbiter to conduct an immediate Interim Determination, which could have the effect of directing London Underground to increase its four-weekly Infrastructure Service Charge payments to the company within the next six weeks by a sum equivalent to £400m over the next 12 months. The company says this is necessary to allow it to meet increased financial obligations during the Extraordinary Review period.
Having completed the first phase of the Extraordinary Review process in line with the directions of the PPP Service contract, today's announcement follows the notice given to London Underground on 21 June 2007. Metronet Rail BCV is seeking to recover a total sum amounting to £992m from London Underground. Of this, approximately £550m has been incurred, or is committed over the next 12 months, with future projections of obligations beyond June 2008, amounting to approximately £440m.
As recently as November 2006, Chris Bolt, arbiter of the £30bn, 30-year Underground public private partnership contract, said he expected Metronet to overspend by only £750m on its two contract areas in the first seven-and-a-half years of its contract, to October 2010.
Graham Pimlott, Metronet's chairman, said: "Metronet entered into the public private partnership in good faith. Where we have made mistakes our shareholders have borne the cost. However, the PPP terms are clear – where additional spending is required to meet London Underground's demands, then we are entitled to be paid. It's disappointing that we have been unable to reach a mutually acceptable solution with London Underground, therefore we are now left with no option other than to begin this process of Extraordinary Review.
"We have advised London Underground over the past 18 months that their insistence on the present high specification for the stations upgrade programme is rendering the programme unaffordable and will result in a great deal of further overspend. About half of the £992m we are seeking relates to additional economic and efficient projected costs beyond the beginning of July 2008. London Underground can still save money through such measures as de-scoping. Metronet's shareholders remain fully supportive – and we are confident of a large recovery from London Underground."
Legally, Metronet's five shareholding companies - Atkins, Balfour Beatty, Bombardier Transportation, EDF Energy and Thames Water - are understood to be able to walk away from the BCV PPP contract if Bolt decides not to force LU to pay a large proportion of the £992m requested. This would leave Transport for London and the government with responsibility for the cost overruns and servicing an estimated £2bn debt.
During the first four years of the PPP contract, the costs of Metronet Rail BCV have been considerably higher than was anticipated by the company at the time the contract was awarded. The issue of additional costs is provided for in the PPP contracts and given the scale and complexity of the Tube's renewal programme, the contracts provided a proper process to deal with this question.
To assert the responsibility for additional costs, the arbiter will consider what it would cost a 'notional infraco' in delivering the PPP contractual obligations. The amount of any award will be the difference between the amount that a notional infraco would spend, and the amount contained in the original contract. Extraordinary Review is the contractual mechanism to recover unforeseen increases in costs and reductions in revenues and this has been enshrined in the PPP contract from the outset.
Metronet says it has sought to make London Underground aware of the financial impact of meeting their changing requirements and a notional infraco would have done the same. However, London Underground has not re-defined scope to keep the overall cost to that set out in the PPP contract. It says LU has continued to act as if the PPP contract were a fixed price contract, while at the same time seeking to secure more scope and increased specification. Metronet says this has had the consequence of increasing costs significantly.
To date, Metronet Rail BCV has funded approximately £350m of additional costs, and its shareholders are prepared to absorb 50% of this sum - £175m - to compensate for inefficiencies, particularly in the early stages of the stations upgrade programme.
Metronet Rail BCV is seeking an Interim Determination award of up to £400m over the next 12 months, payable through the four-weekly Infrastructure Service Charge from London Underground, to ensure that it can continue to deliver its obligations efficiently. This is because the projected notional infraco cash flows required to carry out the contractual obligations during the period of Extraordinary Review substantially exceed available cash flows as originally envisaged by the PPP contract.
Metronet is therefore seeking an Interim Determination in accordance with the PPP contract to enable performance of a notional infraco's existing obligations until the Extraordinary Review determination comes into effect, expected in early 2008.
Tim O'Toole, managing director of London Underground, said: "We believe Metronet has not performed in an economic and efficient manner and that their financial position is a result of its and its shareholders failure to properly plan, manage and execute its maintenance and renewal activities." He added: "It therefore remains our belief, and is our submission to the PPP arbiter, that Metronet's cost overruns should be largely or entirely borne by the company and its shareholders."
Today's announcement refers only to the interests of Metronet Rail BCV. Separate proceedings are expected to commence later in the year in respect of Metronet Rail SSL.