Cracks emerge in Byers' plan to put railways back on track

The creators of Glas Cymru, the model for Stephen Byers' scheme for the new Railtrack, have torpedoed the railway rescue scheme by pointing out fatal flaws in its ability to raise cash.

The Transport Secretary cited Glas Cymru, a company limited by guarantee which bought Welsh Water last year, as the template for the so-called Newtrack which is to take over the old Railtrack.

His comments came after he forced Railtrack plc into administration three weeks ago, prompting losses for thousands of shareholders.

The new rail business will need to raise at least £3.5bn in debt from the City and Mr Byers' advisers, Schroder Salomon Smith Barney, have said the company will have a BBB debt rating.

However, both Clifford Chance, the lawyers, and Royal Bank of Scotland, the bank, behind Glas Cymru told The Independent on Sunday that they saw problems with the Newtack plans.

Steve Curtis, a partner at Clifford Chance, said that there was a "different credit story" and Newtrack would not be able to raise the money with a mere BBB rating.

He pointed out that Glas Cymru, which is headed by the former Treasury man-darin Lord Burns, obtained an A-rating for the majority of the £2bn of bond finance it raised. Just £350m was issued with the less attractive BBB rating.

RBoS agreed. A senior banker said: "In the market place there clearly isn't the appetite for BBB that there is at the A-level. You are not going to get huge amounts away at the BBB level."

Research by Dresdner Kleinwort Wasserstein indicates that the market for BBB debt is simply not large enough for Newtrack to raise £3.5bn. This year just £4.76bn of debt has been raised in the UK with this rating this year and only £1.2bn last year.

"To do more than £1bn for a single issuer would require a change in the fundamentals of the UK market," said Roy Fraser of DKW.

He argued that many fund managers are not allowed to buy BBB debt under the terms of their agreement with their funds' trustees.

The criticisms of Newtrack back up the attack on the plans made by Steve Marshall, chief executive of Railtrack Group, who refused to take any part in Mr Byers' plans for a new rail infrastructure company.