Can Tube Lines and Metronet refinance?
In theory, both Tube Lines and Metronet could refinance their debt, as there are no limitations on their ability to refinance in the PPP Service Contract.
In practice, in the case of Tube Lines, it is unlikely that they will refinance most, if not all, of their debt. Metronet, however, has greater potential for refinancing. The potential for refinancing by both companies is described below.
Tube Lines: Tube Lines original financing was floating rate bank debt with an interest rate swap, as described above. When Tube Lines refinanced their debt in May 2004, they actually borrowed at a higher underlying interest rate than the original financing, but received payment from the interest rate swap providers for cancelling the swap, thereby achieving the net effect of borrowing at the same interest rate as the original financing.
Tube Lines achieved the refinancing benefit by being able to reduce the weighted average credit spread on the refinancing from approximately 1.60% in the original financing to 0.686% on the refinancing.
Because of the significant reduction in the credit spread achieved by Tube Lines in the refinancing, for the majority of the debt, it will be unlikely that Tube Lines will be able to achieve any material benefit-net of fees and expenses-from a further refinancing. However, the credit spread on £172 million of debt will increase significantly starting in 2010. Therefore, Tube Lines may be able to gain some benefit by refinancing this debt before the interest rate margins increase in 2010.
Metronet: There is a possibility that Metronet could achieve significant refinancing benefit if they are able to further reduce the credit spread paid on their debt. A significant portion ofMetronet's current debt are in bonds. Therefore, if Metronet chooses to refinance 100% of the debt, they may need to pay substantial pre-payment penalties to the bondholders. For the floating rate bank debt, we expect that for the majority of this debt, Metronet will enter into interest rate swaps. Metronet may still need to pay a pre-payment penalty to unwind the swaps, but this payment should be less than to the bondholders. The amount of refinancing benefit for both Metronet and Tube Lines will only be determinable at the time of refinancing as it is impossible to predict what structure would be available at that time, or the underlying interest rates or credit spread.