Metronet falls on arbiter PPP cash-crisis7 August 2007
Metronet, the troubled concessionaire that has been maintaining and upgrading two-thirds of the London tube network, has gone into public-private partnership (PPP) administration after the official arbiter only awarded a fraction of its claims against London Underground (LU).
Ernst & Young (E&Y) has been appointed PPP administrator to find new infrastructure businesses to take over the work under the concession.
In the meantime, the legal protection of administration enables Metronet’s two infrastructure operating units Metronet Rail BCV Ltd (‘BCV’) and Metronet Rail SSL Ltd (‘SSL’) to keep working as going concerns, and without creditor pressure, on maintenance and upgrading activities – so long as client and government cash flow allow.
While both BCV and SSL went into administration, it was only the former company that had submitted a bid to the arbiter under the requested Extraordinary Review process; SSL was to make a later, separate, submission. In its application, BCV called for US$2bn of extra payment within 12 months – up from an initial figure put in for US$1.6bn. It claims LU wanted more than was priced for at the bid stage.
However, almost immediately after the arbiter’s draft interim verdict was known, awarding only US$242M that wouldn’t come for months, Metronet decided to put both BCV and SSL into administration. The Mayor of London requested the legal appointment of E&Y to run the infrastructure businesses under the Greater London Authority Act (1999), which ensures for continuity of essential services, in this case through continued payments except for Metronet suppliers’ claims, as supported by the government.
In explaining why it opted for administration, Metronet said BCV had ‘no access’ to more funds and would be unlikely to continue to be able to service debts in a timely way. Metronet’s shareholders had put extra funds already into the venture while writing down their investments due to accumulating difficulties of extra work and lack of efficient progress. Both BCV and SSL had regained some ground, the arbiter noted.
BCV and SSL had most of their funds loaned from special financial companies set up to raise debt for their works, one firm being dedicated to each – Metronet Rail Finance BCV and Metronet Rail Finance SSL, respectively. Ratings agency Moody’s has further downgraded the finance firms’ un-guaranteed debt, due to higher cash flow and default risk of BCV and SSL, but affirmed their guaranteed debt. Like its peer, Standard & Poor’s, the agency was steady on the ratings of LU’s owner, Transport for London (TfL).
During the PPP administration process TfL was keeping its payments to BCV and SSL, and Moody’s said there was government support. However it was noted by both agencies that there was a credit risk if support waned or TfL was bound to take onboard much of the finance companies’ debt due to mechanisms provided for in the concession agreement and financing terms.
The shareholders in Metronet are Balfour Beatty, Bombardier, EDF Energy, Thames Water and WS Atkins. BCV is responsible for work on the Bakerloo, Central, Victoria and Waterloo& City tube lines, while SSL handles improvements to the Circle, District, Metropolitan, Hammersmith & City, and East London lines.