94. Under the terms of the Development Agreement, LCR must fund the construction of Section 2 of the Link. In order to ensure LCR can meet this commitment, a number of arrangements have been put in place, including the facility for LCR to issue a further £1,100 million of GGBs. These will have a final maturity of no later than 31 December 2010 (which is the last date for Railtrack to purchase the completed Section 2).
95. It is common practice in the Sterling Bond Market to issue further tranches of bonds. A new bond issue can have the same legal status as an existing issue in all respects but form a separate series or it can be part of the same series. A series of bonds is a class of securities where all the terms are identical including the coupon, payment dates and maturity. It is, therefore, impossible after issue to distinguish a new bond from an existing bond of the same series.
96. The main advantage of issuing a new tranche of bonds to be consolidated with an existing issue is that the total issue size is increased and this may, therefore, add to the bonds' liquidity. In theory, a more liquid bond should trade at an improved price. However, the price of this existing bond will act as a guide for pricing the new issue. If further GGBs are issued it would seem logical to create them in the same series as the existing 2010 bonds so they can be consolidated with them. It is, therefore, important that the existing bond is seen to be successful in order to ensure the best price for the new stock.
97 We cannot predict the appetite for a future issue of LCR bonds. However, we can perhaps say that it is unlikely that there would be as much demand for a 2010 issue as for a longer bond. This is in part due to the continuing shortage of Gilts which is exaggerated at the long end of the market. However, this is evaluating the bonds in isolation from the project. Additional 2010 bonds should be repayable from the proceeds of Railtrack's expected purchase of Section 2, reducing the debt in LCR and the overall risk profile of the borrower.
98. We do not wish to labour the relative unattractiveness of the existing 2010 issue. It is highlighted only because of the exceptionally aggressive pricing achieved for the longer dated GGBs. In terms of a comparison with bank debt, even in then current market conditions, a further issue of 2010 bonds would be priced substantially below LIBOR, achieving similar cashflow management benefits to LCR as the existing issue (although a new 2010 issue would, by definition, be less than 10 years and not therefore as attractive as a straight 10 year issue).