Different Types of Financing – The European View

Martin J Fleetwood – Partner

Secretary, Rail Working Group

The European Market

European Union consists of 27 Member States

European Union opening up competition within its Member States

Most Member States share a common track gauge and loading gauge

Expansion of cross-border services has occurred

Majority of rail services still operate within a Member State

More operators entering the market and needing rolling stock assets

Large number of banks competing to provide asset finance

Main Operators in the European Rail Market

Old Order

– State Railways

Long term players

Access to Government backed funding

Ability to borrow on financial markets

New Operators

– Franchises/Concessions and Open Access

Medium to short term players – higher risk

Government support?

Look to financial markets for main funding

Financing European Railway Rolling Stock - I

Rail finance market maturing

– 15 years since UK rail privatisation

– Private operators in Germany for over 5 years

More value in the asset than the corporate

– Rolling stock has a residual value

– Railway company may be saddled with debt

Asset finance becoming more important

– Loan to asset value is very important

– Banks benefit from internal rating model under Basel II

Financing European Railway Rolling Stock - II

Expertise of lender is required

– Standard rather than specialist equipment

– Interoperability of equipment

Ability to recover rolling stock

– Different jurisdictions

English based Common Law e.g. England and Wales

Roman Germanic Civil Law e.g. Germany and Switzerland

Napoleon Civil Law e.g. France and Spain

– Physical Access to assets

Emergence of ROSCOs (Rolling Stock Leasing Companies)

Role of ROSCOs

Purchases rolling stock and leases to Operators

Obtains bank finance to enable purchases

– Often syndicated loan finance required

– Bank finance over longer term than operating lease

Ensures consistent cashflow available from Operator to support transaction

– Possible Government support for new trains

Has team of experts to assess leasing risks

– Residual risk in asset

– Ability to re-lease after existing lease expires

– Maintenance reserve required as part of lease rental

– Assets moving across borders / legal jurisdictions

Able to lease with or without maintenance package

Role of Banks

Finance to ROSCOs

– Consistent cashflow of ROSCO to support repayment profile

– Risk may be spread over a number of assets and a number of countries

– Amount of finance generally requires syndicated loans

Finance to Operators

– Not much appetite for lease finance or loans to support purchase of rolling stock

– Preference to set up own ROSCO

Finance for PFI/PPP schemes

PFI/PPP Schemes

Government procures new rolling stock fleet

– Specifies requirements of new trains

– Availability based payments

Consortium bids to provide new trains

– Manufacturer part of consortium

– Consortium required to obtain finance

Equity and shareholder loans

Syndicated loan finance

Government guaranty of minimum usage / level of availability payment if no default by Consortium

Consortium effectively becomes a ROSCO for that fleet of trains