Why does UK government guaranteed Network Rail keep issuing debt in its own name – and at a higher cost?

Network Rail, the organisation that owns and manages the UK’s rail infrastructure, has just issued more of three tranches of its index-linked corporate bonds.  These bonds are, like all of Network Rail’s debt, rated AAA and fully guaranteed by the UK government (the business was effectively nationalised in 2002 having bought Railtrack out of administration) .  These bonds were issued with spreads around 30 bps over similar maturity UK index-linked gilts.  That level of spread is typical of where Network Rail’s corporate bonds trade at the moment – and there is over £28 billion of this public debt outstanding.  This means that if that corporate debt were issued today it would bear a total interest cost that is £84 million per year higher than the cost of issuing gilts (plus the costs of issuing debt as a corporate, e.g. separate listings, investment bank fees).  Present value a perpetual income stream of £84 million at, say, 3% (the yield of ultra long dated gilts) and that is an additional cost of £2.8 billion.

So why isn’t the government borrowing in its own name at rates 0.3% per year lower than Network Rail and then directly on-lending the money to it?  After all it has already assumed all of the credit risk through the guarantee.  I know that £2.8 billion is relatively small in the scale of the UK’s debt problems nowadays (it was roughly the overshoot in May’s government borrowing requirement), and that assuming Network Rail’s debt obligations directly would increase the total UK national debt, but we’re talking about a simple accounting change to save billions of pounds.

Just don’t let’s get started talking about PFI…

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