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brakedwell 26th Jan 2008 08:05

FT - New Tankers on the never never
UK defence plan hits finance snag
By Sarah O’Connor and Sylvia Pfeifer
Published: January 25 2008 22:48 | Last updated: January 25 2008 22:48

The turmoil in credit markets has dealt a big blow to the UK government’s defence procurement programme, putting in jeopardy plans to help fund a new fleet of Airbus tankers for the Royal Air Force with a bond issue.

The £13bn project over 27 years, the largest private finance initiative, is now expected to be financed by bank debt.

The government and a consortium led by EADS, the aerospace and defence group, had been planning to raise £2.5bn in the City through a combination of bank debt and a bond issue. These bonds were expected to be supported by guarantees provided by troubled bond insurer Ambac.

However, Ambac and other bonds insurers have been hit hard by losses on bonds they have insured. The credit rating of Ambac was cut below AAA by Fitch Ratings and further downgrades are thought likely, sharply reducing the value of their guarantees.

For the past 10 years, PFI deals have been using bond insurers to support their bonds when raising initial capital for the projects. The insurers, or “monolines”, give their triple-A creditworthiness to the bond, making them cheaper to sell and so cheaper for the government to raise money.

But as the credit turmoil has spread, the price of all monoline-wrapped bonds has shot up as the market worries about the ability of the insurers to stand behind their commitments.

“The investment banks didn’t think they could place any Ambac paper in today’s markets efficiently,” said somebody close to the deal.

The other monolines the government was considering working with – including triple-A rated MBIA – were similarly struck by a collapse in market confidence.

“Although other monolines have not been as hard hit, there is scepticism generally around the monoline market,” said Anthony Forshaw, managing director at Deutsche Bank, the consortium’s financial adviser.

Instead, the government and the AirTanker consortium are likely to revert to their earlier plan to finance the deal solely through bank debt. They had sought to raise some money through bonds after the banks demanded a high rate of interest during the summer credit-crunch.

Last night, Phill Blundell, the chief executive of the AirTanker consortium, said: “It is fair to say a more bank-driven solution is now likely. We still expect to achieve the affordability targets we agreed with the government.”

HBOS will lead the group of banks lending the money. Lloyds TSB are also involved, and the consortium expects to get the deal away by the end of March.

The shift could be the death-knell for the monolines’ involvement with PFI, because unless the market’s confidence in them returns, their “wraps” will be virtually worthless. “Unless the cost of capital arbitrage returns . . . it’s going to be very difficult for the monolines to recover market share,” Mr Forshaw said.

BEagle 26th Jan 2008 09:06

"....and the consortium expects to get the deal away by the end of March."

Yes, but which 'end of March'? 2008...9...10...20??

D-IFF_ident 26th Jan 2008 10:25

So the finances of the PFI might be in disarray, the contract hasn't been signed, the actual in-service date is unknown, the capability of the aircraft as a tanker will not be optimised and the FSTA version will have no capability to receive.

What good news has come of the project in recent times?

Peter Hain is currently available for fund raising, perhaps he could step-in. And perhaps a revised financing consortium, involving Northern Rock and Société Générale, with a financial team led by Jerome Kerviel?


VinRouge 26th Jan 2008 10:32

Lets put this another way... I have been saying for a while now that UKPLC is bust. Noo Labs promise of no more boom and bust is going to bite them in the arse.
They have fought unemployment, not by generating a credible, well educated and respected workforce but by creating literally millions of non-job civil servants, allowing the unemployed to be passed off as unfit to work for reasons as rediculous as stress, whilst pouring billions into areas that needed more than funding to secure a healthy and equitable living environment. UKPLC now has the largest real public accounts deficit in its history, M4 money supply growth busting 15%, and falling tax revenues at a time we need to be spending more, in other words, we should have been saving for the past 10 years instead of spending it wantonly on millenium domes, the NHS and olympic stadia. :ugh: For me, its sad, because the last ten years were a wasted opportunity.

Back to the thread, it is really hard to see how they are going to resolve this one. Trouble is only starting for the international bond markets, with many of them expected to lose their AAA ratings. Banks will not lend to anyone, including the govt, without a significant punitative rate, and worse, they know they arent going to get in next time so they arent exactly going to go out on a limb to spend cash on something now that will only be in when the conseratives come to power.

Better get our tin hats on, as many many former bullish economists are predicting stagflation that could be worse than the 1970's. Once the public sector start to strike in force, just watch inflation go through the roof, along with pay deals! (and not neccesarily us either!)

Roland Pulfrew 26th Jan 2008 10:44

Just finished reading the Telegraph article over a coffee in London and having a chuckle to myself!! Only 6 months ago a member of the IPT was telling me we would "have a deal before Christmas"! How I laughed.

Just remind me, wasn't the Introduction To Service date supposed to be Apr 07? Which slipped to Apr 08? And we still haven't got funding for this programme!! It must be plain for all to see (except maybe the IPTL/DEC#/CM/DCDS(EC) and CAS) that PFI, to use the Aussie, is "a crock of sh*te". If 'Yes Darling' can stump up £24 - 55 BILLION for Northern Rock, he can find £2.5B to buy the RAF a desperately needed new tanker/transport fleet!!

# Perhaps I am being a bit harsh on the DEC as I understood that he had recommended canning the PFI a couple of years ago!

Wonders to oneself: Where does this leave the other great PFI White Elephant? MFTS anyone? :\

In Tor Wot 26th Jan 2008 11:08

Roland - agree wholeheartedly, but I'm afraid the seats of 38 labour MPs aren't resting on which tanker to buy. Therefore spending twice the annual defence budget to prop up a bunch of incompetent bankers will always win out over the crying need to assure a military capability. :ugh:

Squirrel 41 26th Jan 2008 11:15

Rant Mode: ON
Well, with all of these delays, we may (who knows) get a better deal by buying full-up KC-30Bs with RR Trent (:cool:!!) off the US production line (if the USAF can overcome Boeing's political arm-twisting...). :rolleyes:

Meanwhile, back in the real world; Yes, this PFI is a total - and totally predictable - shambles and it comes back to the fact that the Equipment Programme (or whatever it's called this week) is bust. And has been bust since the SDR in 1997, when it was clear that the "bow-wave" of projects would be in 2005-2012, and would require loads more cash, but it was in everyone's* interest, to worry about that later and claim credit for it now (1997). :hmm:

*Everyone = Ministers, Senior Military (now doubtless all enjoying their pensions) and Senior Civil Servants (ditto).

Unfortunately, later is now. And (as a non-Tory, it has to be said), what continues to grip my $hit is that Ministers keep spouting on that the forces wil get whatever they need, and then (spineless?) senior military and civil service types keep parroting that "front-line commanders have everything they need blah blah". Well, as far as I can see they certainly don't!! :*

What we really need is a recognition that we need to recapitalise the forces through investment in equipment and training, in the same way that we needed to do for the NHS and education.

IMHO, we also need a national debate on what we want the military to do, and once we know that, get cross-party consensus to fund it appropriately over a 10-15 year time horizon.

Rant Mode: OFF


PS, despite the fact that I think the Govt has been appalling over the Northern Rock fiasco - either nationalise it or let the damn thing go bust! - it's not correct to say we've given them £55bn. Depending on the security provided, we should get this money back with interest (eventually).

VinRouge 26th Jan 2008 17:26

On NR, we will only get the money back if individuals are stupid enough to hand over cash in return for NR bonds; IMO, not even worth the paper they are printed on and certainly not worth the risk with the returns they are talking about. Hence one of the reasons the radio 5 live money presenter calls them "Crock". Again, another issue Labour arent too bothered about as they know they wont be in next time and therefore not their long term problem. The fact is, NR are one of the biggest lenders to the UK Equivalent of US subprime going; massive loans to those that cant afford them, and worse, interest only morgages.

What scares me is this; Labour and the treasury wouldnt have dug this deep with NR UNLESS they werent expecting the credit crisis to unfold as deeply as it has, or didnt know how bad things are full stop. Which confirms one thing for me - they arent in the driving seat at the mo, which if you think about it, when they are supposed to be in control of the economy, is pretty scary. As for the military, public spending is going to have to get cut, lets face it, defence spending has never been one of Labours strong points, I dont think things are going to change overnight... :ugh:

Art Field 26th Jan 2008 20:13

So Air Tanker are finding it very difficult to raise the cash for FSTA, quelle surprise. The Consortium is a collection of manufacturing companies and is relying on the troubled and sceptical finance world to back them. A thought then, too late I know, but the other, rejected, Consortium, TTSC, included Spectrum Capitol, investment and merchant bankers.

The 767 might not be such an overall perfect aircraft for the RAF as the 330 but the requirement was for a Tanker that Trucked not the other way round. Perhaps there could have been a couple on the line at Brize already and others on the way because finance had been sorted long before the present problems arose. Did the thought of a shiny new big fat aircraft dazzle the decision makers? There still seems to be a danger of ending up with nothing at all.

BEagle 26th Jan 2008 21:16

Well, I'm afraid Boeing haven't done terribly well supplying the 767 tanker to the Italian Air Force - it's years late and not now due to be delivered until Q2 this year....:hmm:

And that's for modified 767-200ERs, not the full-up KC767.

What a pity the RAF didn't go for those A310MRTTs Filton were offering over a decade ago....:rolleyes:

Impiger 27th Jan 2008 10:24

And if only we had some old and obsolescent large bombers we could bolt a HDU on the back of and call it a Bowser! Might even persuade the Beagley One to return!

Back to the FSTA - I now understand that the project is to be treated 'on balance sheet' so there's another fine mess you've got me in to .....

BEagle 27th Jan 2008 11:28

Well, it's such a shame that your fast jet-centric air force scrapped all the real strategic bombers, my old mate, and as a result has something of a 'capability holiday' :yuk:.

"I now understand that the project is to be treated 'on balance sheet' "

No speako staff wankword-speak, chum. What does that mean in simple pilot-speak?

knowitall 27th Jan 2008 11:40

"I now understand that the project is to be treated 'on balance sheet' "

as i understand it

Gordon Brown has brought in rules to state how much the govt could borrow over an economic cycle

PFI schemes are effectivley an attempt to borrow money with actually having to borrow it, thus keeping it off that balance sheet and therefore making G Brown look prudent

I.E. we pay an hourly rate for the use of the "privately owned" tankers instead of just buying them and paying loan/bond repayments

the down side to this is that governments can borrow money VERY cheaply

the question is therefore if this PFI scheme is looking ever more expensive, and now has to be classed as Govt borrowing, why don't the govt just buy the things?

MrBernoulli 27th Jan 2008 14:17

Feckwits! And that includes the civil serpents AND senior arse-ifers who have overseen this horses-arse of a project. You clowns have cost the RAF a tanker force.

Game is up tanker drivers! There will be no more RAF tankers ...... ever! There is no more money, no more time. Enjoy what little AAR you do on the VC10 and Tri-shaw. It'll all be over soon.

VinRouge 27th Jan 2008 16:05

Isnt this the wonderment of "Resource Account Budgeting" also known as "Governmet Level cooking of the books"?

Squirrel 41 27th Jan 2008 16:59

Anorak Mode <<ON>>

I hate to be a finance anorak, but the on-balance sheet / off balance sheet hasn't got a great deal to with Resource Accounting (RAB) but quite a lot to do with the famed Golden Rule of then-Chancellor Gordon Brown.

As knowitall has (rightly!) said, the big presentational benefit of PFI for the government is that the contractor borrows the money and therefore it isn't public debt and therefore doesn't appear in the Public Sector Borrowing Requirement (PSBR).

Add in the "Golden Rule" (authors: G Brown and E Balls), which says that over the economic cycle UK will only borrow to invest (ie, no debt for provision of services in any one year), and that the level of debt will be "prudent" ie, c. 40% of GDP (vs 100%+ in Italy and 140%(?) in Japan), then the attraction for £3bn (0.2-0.3% of GDP) of debt on someone else's balance-sheet (AirTanker, in this case) is very attractive as it "isn't" public debt. (I would violently disagree, but who am I? Merely a taxpayer, of course).

The problem is that PFI = renting something, which is always going to be more expensive than buying it, as (i) companies borrowing money is more expensive than the government, because their credit rating is lower and (ii) they need to make a profit.

In short PFI only makes sense if the amount of cost over-run you expect from incompetence in the public sector is greater than the additional cost of borrowing and the profit you expect the private sector to make.

Note to 10 Downing Street,

Dear Prime Minister,

For F:mad:'s Sake, Gordon, borrow the bl**dy money and buy the damn things! And whilst you're at it, we'll have 20 x KC-30B with RR Trents, there's a good chap.....

Your sincerely,


Anorak Mode <<OFF>>

XV277 27th Jan 2008 17:19

Originally Posted by Squirrel 41 (Post 3867489)
As knowitall has (rightly!) said, the big presentational benefit of PFI for the government is that the contractor borrows the money and therefore it isn't public debt and therefore doesn't appear in the Public Sector Borrowing Requirement (PSBR).

Add in the "Golden Rule" (authors: G Brown and E Balls), which says that over the economic cycle UK will only borrow to invest (ie, no debt for provision of services in any one year), and that the level of debt will be "prudent" ie, c. 40% of GDP (vs 100%+ in Italy and 140%(?) in Japan), then the attraction for £3bn (0.2-0.3% of GDP) of debt on someone else's balance-sheet (AirTanker, in this case) is very attractive as it "isn't" public debt.

Which is also why they are so desparate to get the NR clusterf*ck sorted out through a bond/private sector deal.

FrogPrince 27th Jan 2008 18:00

Off Balance Sheet Financing
The accountancy profession attempted to eliminate these Spanish practices years ago by requiring the full substance of such transactions to be reported...

FRS 5 Reporting the Substance of Transactions

Issued: April 1994

FRS 5 addresses the problem of what is commonly referred to as 'off balance sheet financing'. One of the main aims of such arrangements is to finance a company's assets and operations in such a way that the finance is not shown as a liability in the company's balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated.

FRS 5 requires that the substance of an entity's transactions is reported in its financial statements. This requires that the commercial effect of a transaction and any resulting assets, liabilities, gains and losses are shown and that the accounts do not merely report the legal form of a transaction.

For example, a company may sell (ie transfer legal title to) an asset and enter into a concurrent agreement to repurchase the asset at the sales price plus interest. The asset may remain on the premises of the 'seller' and continue to be used in its business. In such a case, the company continues to enjoy the economic benefit of the asset and to be exposed to the principal risks inherent in those benefits.

FRS 5 requires that the asset continues to be reported as an asset of the seller, notwithstanding the transfer of legal title, and that a liability is recognised for the 'seller's' obligation to repay the sales price plus interest.

PPP/PFI has always been dodgy in my book.


Roland Pulfrew 27th Jan 2008 19:59

but the on-balance sheet / off balance sheet hasn't got a great deal to with Resource Accounting (RAB)
Squirrel, are you siure about that? IIRC the other gotcha under PFI & RAB is that if an asset is a PFI it is deemed to be off balance sheet then you the user (in this case it would be Air Cmd/2 Gp) would not pay the RAB "cost of capital" and "depreciation". If the asset is treated as on balance sheet then the user (Air Cmd) has to pay the RAB cost of capital and depreciation charges = UNAFFORDABLE in this case!!

Now of course these are only HMT accounting guidleines so the solution is simple - scrap the complete @rse that is RAB.

Grimweasel 27th Jan 2008 20:37

We are stuffed! The country is broke as are its soon to be heavily in-debted consumers who have been on a 10 year credit binge.

The trauma in the markets often takes 12-18 months to translate into the housing markets; prices will fall, MEW will stop and retailers will be up in arms as no one will have any money to spend. People will be laid off work; tax revenues will fall, just when we need the money the most. Inflation will increase (food/oil/etc are all getting more expensive as the cheap labour and imports from china revert to global averages) interest rates will go up to reduce the rate of inflation whilst the prices of goods also increase.

The only thing to do; hedge against the debts and inflation -


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