21. It appears from the early papers that the original funding structure proposed for LCR involved a combination of debt issues: credit enhanced bonds which would carry the government guarantee, drawings from the European Investment Bank (EIB) and access charge bonds which would benefit from government support but not a guarantee. It seems, therefore, that there was some consideration as to whether the project could issue debt without, or with a limited, explicit guarantee.
22. In June 1998, the Government agreed to provide a series of guarantees to back bonds to be placed into the sterling bond market. Schroders, the Department's financial advisers for the Link, advised that to minimise the cost of these bonds, they needed to be as "Gilt-like" as possible. After consultation with the UK Debt Management Office (DMO) and the market in September and early October, it was agreed that the best way to launch the bonds would be through a book building process. The bonds themselves would be Eurobonds, more like issues by the EIB and Kredietanstalt für Wiederaufbau (KfW) than Gilts.
23. The disruption in the Gilt market in Q4 1998 and the rise in the indicative spread for the GGBs, provoked a review of this decision and in October 1998, the Treasury recommended LCR be funded via an issue of Gilts. This recommendation was rejected, and lead managers experienced in the placing of Eurosterling Bonds were interviewed in November and appointed.
24. It was always accepted that issuing GGBs was likely to create an additional public sector cost, but from the outset it was argued that this could be justified on the following grounds:
a) the Government guarantee was only a contingent liability and therefore did not form part of the Public Sector funding requirement unlike an issue of Gilts;
b) the fact that LCR was being funded by the private sector would bring private sector disciplines to the company, protecting the taxpayers' investment;
c) the project would be seen as a Public Private Partnership.
25. By November 1998, an additional argument was added, that is, that there was insufficient time to restructure the project and obtain EU clearances for direct funding. A complete restructuring would probably have led to the project having to be retendered. The time constraint appears to have been serious as construction had started and LCR was running out of funds. This meant a funding package had to be concluded, despite market conditions.