TfL’s Simon Kilonback on bond issuance

Simon Kilonback is group treasurer at Transport for London. He has been with the organisation for three years and before that worked in financial markets and in corporate treasury with Sony and WH Smith. He began his career in banking.

Room 151: You’re an old hand at bond issuance – how have you got to where you are now?

SK: In 2005/2006 TfL issued some smaller, £200m bonds. There were two reasons for doing it and one was that in order to get the bonds you have to get credit ratings. That instills a greater amount of financial rigour and transparency and one of the main reasons why HM Treasury and Department for Transport agreed to TfL starting its bond programme was that this external oversight was very important to them.

Getting a rating and maintaining it is a fairly arduous process. I have a team here where two or three people work quite a lot of the time every week in terms of modeling our business plans and changes to things that may happen, preparing for discussions with the ratings agencies and actively managing our relationship with those agencies. It is a huge time commitment and you need to know that you have sufficient capital expenditure and borrowing to justify having people work almost full time on the ratings agency side of things as well as on the bond investor and bank side.

I know from talking to some of the treasurers at some of the larger local authorities that lots of them would like to issue bonds and clearly, we have been issuing them over the last 12-18 months at a rate that looks very attractive compared to the changing PWLB rate and even the current certainty rate. You do have to weigh up the cost of running a bond programme though, against the ease of just picking up the phone to the PWLB.

For us one of the things is that it is also important to have diverse sources of funding. We have nearly £8bn of debt outstanding now and our business is very cap-ex heavy. Running a railway is like that and so we know that we are going to have a continued need to borrow every year. So having that ability to have the choice of how and where we fund ourselves is important to us. It’s part of our corporate risk management to have those diverse sources of funding.

Over the last two or three years we have bought back or unwound a lot of our PFI transactions and we have started going out again and raising debt on the bond markets and through our commercial paper programme. The test we set ourselves is to ensure we can make savings compared to borrowing from the PWLB when we use either commercial paper or a bond.

We have invested a lot of time with investors in getting them to understand our statutory framework and our corporate framework and our business plans over the next few years. That has allowed us to get from issuing the 30-year bond at gilts +98 last July to issuing a 33-year bond two weeks ago at gilts +60. Last year we very deliberately did a 30-year, 10-year and a five-year to set out a proper benchmark curve and also to give ourselves that ability to borrow in different tenors.

While most of the assets we are financing are long term assets that get depreciated over anything from 50-120 years, the cost of borrowing within a balanced budget environment – as any S151 officer has to contend with – means that because we have the PWLB there as our liquidity backstop we are comfortable with the idea of refinancing more often than every 30 years.

At these rates – and on balance – you still want to do a large proportion of your funding in the long term. However to the extent that you can reduce your cost of funding for the next 5-10 years by balancing some shorter term borrowings in there, we have been able to make some savings that we can reinvest in delivering transport rather than paying banks and investors debt service.

Room 151: So how long is the recently issued bond?

SK: It is May 2045 so 32 years.

Room 151: Do you think that local authorities are capable of issuing bonds?

SK: Certainly some of the treasurers I have talked to from the larger authorities are more than capable of issuing bonds. You have seen Cambridge University and other universities issuing but what I would say is that you can’t underestimate the time and headcount commitment that you need to sustain more than a one-off bond transaction.

One of the things we have done here is invest in people that have experience of financing in various environments. If you want to use market-based borrowing, whether it is bank borrowing, bond or other forms of transactions you need to invest in people that have that expertise.

Room 151: Moving on to having a credit rating, you have highlighted in the past that a rating is not just for Christmas. How does having a credit rating interact with borrowing from the PWLB?

SK: The thing with a credit rating – and I have got experience of this in major PLCs that went out in order to do a bond issue and then never wanted to do another – is that even if you terminate your relationship with the rating agency, they reserve the right to continue to rate you without the access to management and without the two-way discourse that takes place in order to keep your rating up to date.

So you can have very unhelpful (or helpful, depending on which way it goes) ratings published even if you no longer wish to have a rating and have no intention of ever issuing a bond again.

So my point is that you need to think about it as a long term commitment, not a one-off transaction. Because we are able to do things like use the commercial paper borrowing programme to save tens of millions of pounds a year, it is very important to us to be able to maintain our rating.

Now under the prudential borrowing regime S151 officers are able to determine for themselves how much it is prudent to borrow. That allows them to borrow amounts from the PWLB against revenue streams which would be questioned in an investment grade market environment. They have a tax stream and as long as you can cover your debt service and allow for any fluctuations in that tax stream you can go out and borrow a large amount of money and service it over 30 years with the PWLB: you don’t need to really do any in-depth sensitivity analysis or modeling in order to be able to do that.

You can’t do that if you are going to go and arrange a loan with the EIB, with banks or with the bond market. You need to be able to demonstrate to them that your degree of leverage is suitable for the credit rating you have, although obviously in the local authority sector we all benefit from government-related issuer status and the strength of the UK government, which tends to allow you to borrow a higher amount than a corporate with an equivalent rating.

Just to be really clear I think there are plenty of capable people in local authorities but I also know that you need to think very carefully about time and resource when you take on either a bond programme or a rating. You can’t ditch it once you’ve done one transaction; you can’t walk away from the rating very easily.

Room 151: Do you think we will see a council in the bond space again any time soon?

SK: I think there are councils that have a need to issue and I think that provided they are comfortable that it makes sense for them to incur the time and cost expense necessary then I think they should consider doing it.

Room 151: It seems that there are a number of councils looking at issuance but it is taking a while.

SK: We spent two weeks talking to investors and three months preparing for it before we did our issue. It’s also down to the banks that you chose to work with, the degree of support you get through the process. It appears to happen quickly when the bond is announced but there are months of work behind the scenes to get to that part, including all of the necessary documentation.