View from City Road: Debt wrinkles are ironed out

RECENT rumours in the bond market of the demise of the Government's plan to sell pounds 3.74bn worth of debt in privatised companies now appear unfounded. Though there was little enthusiasm for the initial plans put forward by Barings, the securities house given the task of selling the debt, a little tweaking of the model seems to have eased some of the more troublesome concerns.

Barings initially thought that it could sell the debt to the privatised companies, which would then refinance it at market rates. Though the idea seemed sensible, there was a large stumbling block.

BT, which was being asked to buy back pounds 1.69bn of its own debt, has a pounds 500m Eurosterling bond issue maturing next year, which it will have to refinance. It was concerned that the market might find it a little difficult to swallow more than pounds 2bn of new BT bonds all at once. The new proposals change the terms of the BT debt so that investors can bid directly for it. This means that a large amount of this pounds 1.69bn will be bought up on the secondary market, cutting down BT's bond-issuing burden.

Once the bids start coming in next month, Barings and BT will be able to see if the bids for the BT bonds show whether BT's position in the debt markets has been impaired by having these extra bonds in issue. The best guess is that there will be a slight deterioration, but as BT is a popular issuer, it will lose little ground.

Conspiracy theorists will note that when the Government first announced it was selling this fixed-coupon debt, base rates were 10 per cent. Now they are 8 per cent and by the time the debt is sold they could be 6 per cent. This pushes up the price of the debt. And every penny counts for Mr Lamont.