Background to Network Rail's reclassification
In December 2013, the Office for National Statistics announced its intention to reclassify Network Rail as a Central Government Body in the UK National Accounts and Public Sector Finances with effect from 1 September 2014. This was a statistical change driven by new guidance in the European System of National Accounts 2010 (ESA10).
It was also announced in December 2013 that the UK Government, the Office of the Rail and Road and Network Rail would explore whether alternative approaches or refinements to Network Rail’s current borrowing model could deliver a more efficient approach, and if so from what point in time these might be introduced.
New funding arrangements
The UK Government has determined that, in future, value for money for the taxpayer will best be secured by Network Rail borrowing directly from the UK Government, rather than by Network Rail issuing debt in its own name.
On 4 July 2014 the Department for Transport and Network Rail signed a £30.3bn loan facility to cover Network Rail’s financing requirements for the current control period running from 1 April 2014 to 31 March 2019.
Consequently Network Rail no longer issues bonds under the Multicurrency Note Programme covered by the Financial Indemnity Mechanism (FIM). All outstanding debt will continue to be covered by the explicit, unconditional and irrevocable guarantee from the UK Government. Network Rail will continue to pay coupons and principal on the notes as usual, including pre-funding payments into the Security Trustee account six and 21 business days in advance respectively.
Investors' frequently asked questions
Network Rail is now directly funded by the UK Government for all of its financing requirements via a loan facility provided by the Department for Transport.
On 17 December 2013 the Office for National Statistics announced its intention to reclassify Network Rail as a Central Government Body in the National Accounts. This was a statistical change resulting from the implementation of the updated European System of National Accounts 2010 (ESA10). The change does however mean that Network Rail’s debt is included in UK public sector debt and the company is directly accountable to Parliament for its finances.
At the time of the announcement by the Office for National Statistics, a Memorandum of Understanding was published by Network Rail and the Department for Transport. The Memorandum of Understanding stated that Network Rail would work with the Deportment for Transport and the Office of Rail and Road to explore whether there were any refinements or alternative approaches to the current financing model that could deliver further efficiency. As a result of this work, it was decided that funding Network Rail direct from central government sources offers better value for money for the UK taxpayer.
Network Rail expects to meet its short- and long-term financing requirements through drawing down on the UK Government loan facility and therefore does not expect to issue new bonds or commercial paper in the markets. However, should the UK Government breach its obligation to lend under the loan agreement, Network Rail could issue commercial paper under the USCP/ECP programmes to meet its short term funding requirements.
The new financing arrangements have been put in place with a view to replace Network Rail’s planned borrowing from the commercial debt markets with direct funding from the UK Government for the 2014–2019 regulatory control period (CP5). Within and beyond this time horizon, Network Rail and the UK Government may review the new arrangements or make alternative arrangements, which may include either renewed issuance under the Debt Issuance Programmes covered by the FIM, issuance of unguaranteed corporate debt, or any other arrangements that deliver value for money and sustainable financing for the railways.
All the outstanding bonds, including nominal and index-linked benchmarks and private placements in all currencies will continue to benefit from a direct and explicit guarantee from the UK Government under the FIM. Network Rail will continue to pay coupons and principal on the notes as usual, including pre-funding payments into the Security Trustee account six and 21 business days in advance respectively. When existing debt matures, it will be refinanced by money borrowed directly from the UK Government under the DfT loan facility.
Yes, Network Rail will continue to maintain public credit ratings on the outstanding bonds, which will continue to be covered by the Financial Indemnity Mechanism.
All Network Rail’s outstanding bonds have been accepted as repo-eligible collateral (Class B) with the Bank of England. However, the Bank of England reserves the right to at any time deem securities previously accepted as ineligible.