BusinessCorporate FinanceOn the money

On the money

Several billion pounds of debt of London & Continental Railways – the company which is building the fast rail link from London to the Channel Tunnel – was re-classified as government borrowing a few days ago.

The reason given for the change by the Central Statistical Office was that it
had only just discovered the various powers the government had over the company.

These included the right to force the flotation of sale of LCR and keep 90%
of the proceeds; the right to veto the sale or purchase of any shares on LCR
before 2011; rights to 35% of LCR’s cash flow from 2021; and the right to
approve the company’s budget. All pretty far-reaching stuff.

What is interesting is that the boffins have only just discovered that the
controls exist. Such matters potentially affect the value of the bonds and have
to be disclosed in the documentation, which accompanies a debt issue.

In this case, the relevant sale was in 2003 so the facts have been in the
public domain for some time. It suggests that the CSO has only just got round to
reading the prospectus.

Perhaps we should not be too hard on the department, because it is not alone.
At the International Securities Dealers Association conference in Budapest last
summer, an investment banker on one of the panels said the greatest risk he saw
in the debt markets was that fund managers who buy the bonds had got so
complacent they had stopped reading the small print.

A company would issue a bond, and either issue an amendment to the terms, or
issue a new bond which affected the security of the earlier issues and no one
would notice. Only when something went wrong would they realise they had no
protection.

It’s good to know our savings are in safe hands.

Anthony Hilton is the financial editor of the Evening Standard

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