CTRL Section 1 Finance is simple, transparent and indirectly government-backed - in fact probably one of the easiest sells to hit the bond markets in recent years. But it is also the way rail infrastructure (at least in the UK) is likely to gain long-term financing in the future given the restructuring of Railtrack into Network Rail.

The deal is a £1.25 billion ($2.08 billion) future flow securitisation of track access charges payable by the UK government to Channel Tunnel Rail Link (CTRL) project sponsor London & Continental Railways (LCR) for use of Section 1 of the CTRL: in a parallel but independent transaction, LCR is also rolling over a £200 million EIB loan and a £100 million loan from KfW into long-term loans similarly secured on Section 1 access charges. Proceeds will be used to refinance a small part of Section 1 debt and finish Section 2 - currently 57% complete.

Lead managed by bookrunners Barclays Capital and UBS and non-book joint lead Citigroup, the bond is not directly guaranteed by the UK government - unlike LCR's previous bond issues. However, the revenues that underpin the bonds are fully guaranteed, resulting in a triple-A rating from all the agencies and cheap money for the issuer.

The cashflows comprise two different streams from Section 1 (the completed southern half or the line, near the Channel tunnel). These are track access charges for Eurostar (UK) Ltd and domestic capacity charges which the government will pay to reserve capacity on the line for both domestic and Eurostar trains.

The deal was split into two sequentially amortising tranches. The £747.989 million of fixed rate 'A1' bonds have a 20.7 year average life and maturity on 2 June 2035. They were priced at 100.002 with a coupon of 5.234% to give a spread of 24bp over the 8% 2021 Gilt.

The £500 million index-linked tranche has a 39.5 year average life and matures on 2 November 2051. It was priced at 99.988 with a 2.334% coupon to yield 21bp over the 2% 2035 index-linked Gilt.

The transaction could have been complicated by other financing mechanisms - notably maximising returns on existing assets through leasing structures (as were incorporated into the Dwr Cymru water bond financing). But according to Mark Bayley, finance director at LCR, "track leasing was prohibitively complex given the ownership issues involved."

The deal is good news for LCR, which has had a troubled existence since being granted a 90-year PFI concession to build and operate the CTRL in 1996. Initially the company was unable to raise the necessary £5.2 billion of finance without government support and in 1998 the government agreed to guarantee £3.75 billion of bonds and to restructure the concession.

During this first restructuring it was agreed that Railtrack UK Ltd (RTUK), a subsidiary of the now-defunct railway infrastructure operator, would acquire the assets of section 1, assume the construction risk and operate the link when operational. RTUK was to receive the track access charges and domestic capacity charges, and also had the option to acquire the assets of Section 2. LCR was still responsible for construction, but delegated those responsibilities to two subsidiaries, Union Railways (South) and Union Railways (North).

A second restructuring followed in 2001 after Railtrack ran into financial difficulties and decided not to exercise its option to purchase Section 2, throwing the project's viability into doubt. The 2001 restructuring resulted in LCR being responsible overall for construction, but the ownership and operation of the assets being split, with RTUK in charge of Section 1 and LCR in charge of Section 2. With the demise of Railtrack in 2003 LCR acquired RTUK, thus reuniting the line under one management.

Around £1.2 billion from the securitisation will go towards Section 2, which will cost £3.3 billion in total. A further £1.036 billion will be paid for in a deferred grant from the government, while £1.1 billion was raised in government-backed Eurobonds in LCR's last issue in June 2002.

Despite having an unwrapped triple-A rating, the deal still sold stronger than expected given the problems some recent wrapped index-linked PFI issues have faced. The conventional bonds pulled in £1.3 billion of interest while the index-linked had £900 million of interest, and from a diverse range of UK institutional investors.

The only discernible risk in the transaction is a potential time lapse between non-receipt of a Eurostar access payment and the government stepping in. This risk is mitigated by a strictly timed mechanism that ensures there is time to call on the guarantee. There will always be at least 25 days between a scheduled cashflow payment and the subsequent bond payment.

Although simple in structure, and on the face of it anti-PFI, given it comes with guarantees, the CTRL deal achieves two key PFI aims in terms of getting the project finished. First, it provides the project with realistic low-cost funding and a debt repayment profile ideally suited to the project's long-term cashflows. Second, it is off the government balance sheet: both direct and cashflow guarantees are considered contingent liabilities and not counted as UK national debt.

Once complete the line will knock 40 minutes of the current travel time with the consequent knock-on effect of more journeys per day. National Rail's securitisation, recently put back until next year, may achieve the same for the UK's depressed commuters.

CTRL Section 1 Finance

Status: Closed 2 November 2003

Description: Future flow securitisation of government-backed track access charges of Section 1 of CTRL to fund completion of Section 2.

Issuer: London & Continental Railways

Indirect Guarantor: UK government

Joint lead managers and bookrunners: Barclays Capital; UBS

Joint lead manager: Citigroup

Security Trustee: Deutsche Trustee

Transaction administrator: Deutsche Bank

Legal counsel to lead managers: Freshfields

Legal counsel to issuer: Herbert Smith

Legal counsel to Dept of Transport: CMS Cameron McKenna