What reclassification means for investors

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.

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