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