2.1 In October 2001, Railtrack plc, the operator of the domestic rail network entered railway administration. While Railtrack Group, which owned Railtrack plc, was not directly affected by the administration of its subsidiary, it decided to exit the railway business and so sought disposal of its interests in the Link.
2.2 LCR negotiated with Railtrack Group an agreement to purchase the latter's interest in the Link. LCR paid £375 million. The price comprised £295 million for Railtrack Group's expected return from its ownership of Section 1, and £80 million for the expected return from operating the entire length of the Link.12 The Department evaluated the deal and approved it.
2.3 Railtrack Group's withdrawal resulted in three notable changes to LCR's financing of the project. The company needed:
■ To replace the guarantee it had from Railtrack Group that covered bank debt facilities. The Department agreed that LCR could secure these debt facilities against the first four instalments of the Deferred Grant (Figure 3). To improve the value of the grant payments as security to the banks, the Department agreed to pay each instalment on its due date irrespective of whether or not the relevant construction milestone had been attained;
■ To find security for bank debt to bridge the period through to the receipt of the main funding for Section 2 which was to have been proceeds from the planned sale of Section 1 to Railtrack Group. The Department agreed that LCR could secure these debt facilities against three of the remaining four instalments of the Deferred Grant (Figure 3). To increase their value as security to the banks, the Department relaxed payment conditions by making payment no longer dependent on the attainment of construction milestones; and
■ To find funds to replace the proceeds that it was to have received from its sale of Section 1 to Railtrack Group. The sale proceeds were one of the sources of funds for the construction of Section 2. The Department agreed that LCR could use the same financing mechanism that Railtrack Group had been preparing with LCR to finance the purchase of the section. LCR would raise funds from bond issues and bank debt that were secured against the income stream that LCR would receive from Eurostar UK for access to Section 1 and the Section 1 Domestic Capacity Charge (Figure 3).
2.4 By the end of 2003, LCR had secured all the finance that it considered it would require to complete construction of the Link, operate and maintain Section 1 and fund Eurostar UK losses in the medium term. Since the 1998 restructuring, LCR has raised nearly £6,250 million of debt, comprising about £950 million of medium-term bank facilities and just under £5,300 million of longer dated debt maturing between 2010 and 2051 (Figure 4). LCR repaid £50 million of the debt raised in 1998 from Kreditanstalt für Wideraufbau. LCR rolled over the remainder into new bank debt facilities, together with debt it raised in 1998 from the European Investment Bank. As of 31 December 2004, LCR had £6,200 million of long and medium term debt (Figure 5) with all bank credit facilities fully drawn down.
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12 LCR sold on the rights to operate the Link to Network Rail for £80 million.