City firms cash in on £3.75 bn issue

A landmark bond issue could set important precedents, say City lawyers.

London & Continental Railways (LCR) is issuing the bond this month to finance the Folkestone to Fawkham section of the Channel Tunnel rail link.

In an unprecedented move, the Government has guaranteed the issue for up to £3.75bn. The first tranche will be for £1bn-plus, making it the largest ever sterling Eurobond issue, the biggest UK rail development this century and the biggest private finance initiative (PFI) transaction.

Herbert Smith acted for LCR, and Cameron McKenna acted for the Government.

Andrew Preece, head of Herbert Smith's international projects group, says the issue may have implications for the future of such deals.

In order to avoid delay to the building of the link, changes were made to LCR's contract after it told the Government in January 1998 that it would not be able to fund the project fully. Preece says: “This will be an important precedent for the extent to which a procurement contract can be altered.”

The Government's guarantee is an unprecedented step in a PFI transaction because the Treasury is guaranteeing the funds needed by a private company to build the asset. Preece says: “By accident, we have set a rather good precedent for public-private partnership projects.”