RISKS WITH NEW TRAINS
Yet there are risks with bringing new trains into service. There may be problems building them. They may not work properly. Recent deliveries from the likes of Siemens and Bombardier have been reliable (they worked ‘out of the box’), but older hands remember the problems Alstom had with its Classes 175 and 180 DMUs in the late 1990s and early 2000s.
New stock is now on order from CAF and Stadler, both of which have very little experience of the UK railway. That’s not to say their trains will have problems, but there’s no certainty. And that translates into risk.
There’s a risk of problems developing part way through a fleet’s life, as Heathrow Express found recently with cracking in its Class 332s. Andre uses this example to push the advantages of a ROSCO, with its engineers as well as its finance experts.
Then there’s the risk of a fleet not finding a new use when a franchise ends and the new operator has other ideas. Your fleet might not have a life of 30 years, it might just have a life of four sets of seven years. You cannot be sure, and so that’s a risk.
One of the new players in the rolling stock market is Rock Rail. It has netted deals for 150 vehicles to replace Moorgate Class 313s (worth £200m) and 378 inter-city EMU and regional bi-mode vehicles for Greater Anglia (£600m). Rock found funding from several sources, including SL Capital (a long-term infrastructure fund) and pension funds such as Greater Manchester and London.
RailReview approached Rock for an interview in April. When its reply came in mid-May, it was to say that it had no time until July, long after this issue of RailReview went to press.
Despite the concerns expressed by RailReview’s anonymous financial man about risks being ignored by new entrants, Rock’s team has plenty of experience. Founder Mark Swindell worked with Agility Trains on IEP financing, and advised Connex on its procurement and the introduction of Bombardier EMUs to replace slam-door stock. Rock’s team also includes Roger McDonald, whose career includes time as senior vice president of Alstom and managing director of Thames Trains. More recently he worked with DfT on the introduction of new trains to Thameslink.
With this experience, Rock should be very well aware of the risks involved with financing and leasing trains.
Rock’s appearance in the market place - together with Macquarie and its Class 379s, Beacon Rail financing TransPennine Express’ new stock, and Lombard with Caledonian Sleeper’s new coaches - might be a sign that the market is finally becoming a market (a decade ago a Competition Commission inquiry was looming, such was the Government’s dissatisfaction with train leasing).
Together they provide competition for the established ROSCOs. And everyone RailReview spoke to for this article agreed the market was a good idea. There was general agreement that with markets come winners and losers. No one wants to be the loser, but if there’s a true market then it’s inevitable that someone will.
RailReview’s financier comments on Rock founder Mark Swindell’s crowded diary: “He’s a very busy man because he’s done just under £2 billion in business without a cent of income, because he’s building a portfolio and he’s building in the long-term. And it’s backed with pension money, and so he’s really shaken it up. You’ll only find out over time whether that move has been a good move in terms of the pension fund or not. What are the assumptions? That you can increase rents? Because if you can, this market is showing you that you can’t.”
Greater Anglia’s complete fleet replacement and South Western’s substantial replacement may simply reflect a point in time where trains and money are cheap. The key questions surround whether either can become cheaper or more capable.
One customer doubts they will. RailReview spoke to a senior man within a TOC owning group. Speaking anonymously, he reckoned that trains available to order now were lighter, more energy-efficient and easier to maintain than they’d ever been. “The market opportunity for new builds is very attractive - trains are cheaper, cleaner, their doors are faster and they have more space.” He muses: “Will vehicles get another eight tonnes lighter?”
His point is that there has been a step-change in the quality and capability of trains over the past couple of years. “Will the next generation be that much cheaper?” he asks, before adding: “I can’t see finance getting that much cheaper.” In a telling aside, he adds that it was in the leasing companies’ interests to make people worry about rolling stock leasing.
Government sits behind many of the improvements the TOC owner mentioned. It placed large orders for inter-city and commuter trains that encouraged manufacturers such as Hitachi to develop its electro-diesel bi-mode IEP, which (as AT300) has won separate orders as well as the Government’s. Likewise, Bombardier and Siemens developed the next generation of suburban EMUs for Crossrail and Thameslink with their Aventra and Desiro City types respectively.
Government’s action has been expensive, not least with a 27½-year guarantee that Hitachi’s IEP fleets hold. But it has helped bring new money to the market and created stiff competition between manufacturers, the TOC owner says.
The next few franchises may also trigger substantial fleet replacements, but the real test of whether the market has dramatically cut the lifespan of trains will come when Greater Anglia next comes to renewal in 2024. If its new fleet were to be displaced, then there will be shocks all round. But if you take the view of RailReview’s man at the TOC owning group, there’s not likely to be another step-change in cost, quality or finance that will undercut them - unless GA’s new fleet owners, Rock and Angel, decide to push lease rents too high.
HIGHER CHARGES
Rents will rise if the market decides that the lives of trains are shorter. If a fleet were to be amortised over 20 years rather than 30 years, it will need to attract higher charges in order to pay its way and earn a return, unless ROSCOs decide to cut their margins in the face of competition. But pitch rents too high and you increase the chances that your fleet will have a short life.
RailReview’s finance man puts it simply: “Try to persuade a credit committee or a board of directors that you’ve got a 90% residual value that you have to amortise over its whole life, and you’ve come a cropper at the very first hurdle, meaning that it hasn’t even got on lease. People will sit there and go ‘bloody hell’. You’ve woken up a sleeping horde.”
One forthcoming franchise needs at least one new fleet. East Midlands Trains should change in summer 2018, with incumbent Stagecoach competing with First/Trenitalia and Arriva. The winner will need to decide what to do with the franchise’s HSTs - they have not been modified to comply with Persons of Reduced Mobility (PRM) regulations, and so must be withdrawn by 2020. But the 18 months between franchise award and PRM deadline is unlikely to be long enough to order and commission a new fleet, so the HSTs will need to be modified.
As Olivier Andre at Porterbrook explains: “If you want to make them PRM-compliant, you need to spend quite a lot of money per carriage to change the doors to have power-doors put on. You’re not going to spend that sort of money if the trains are only going to be used for one year after 2020.
“In the current market conditions, are we willing to take the risk and invest a lot of money, and take the position that the trains will still be in use in 2025 to reduce the leasing costs? Probably not, so all we do is price it over a much shorter period of time, so the costs will be quite high for the TOC. Or the alternative is that the Department gives us a guarantee that our trains will be used for longer.”
These guarantees are generally known as ‘section 54s’, after the part of the Railway Act 1993 that provides for the Secretary of State to direct train operators to use particular stock (see panel opposite). They reduce the re-leasing risk, and so can provide for lower lease prices at the risk of constraining the market.
If a complex fleet project (such as SWT’s Class 455, 456 and 458 one) comes round again, or compulsory modifications are mandated by Government, then it’s more likely that funders will ask the DfT for section 54 protection.
RailReview’s financing man comments: “Someone will now say ‘well, if you want me to do this, I want a section 54 because I’m just going to get burnt’. So the DfT, to me, are just brewing up a problem. Aggressive franchising bids and aggressive assumptions for funding for long-term assets equals you’re going to have a difficult time.”
Other ROSCOs implemented PRM modifications earlier. Eversholt Rail speculatively modified its Class 315s, even though it knew they would be displaced in London by new Crossrail Class 345s before the PRM deadline.
Eversholt’s Relationship Development Manager Tim Burleigh explains that it did this with an eye on the electrification of the Valley Lines in South Wales. Despite dating from the early 1980s, the ‘315s’ could have provided a cost-effective fleet, helping the overall business case even in the face of cheap trains straight from the factory.
Except that there are no wires being erected in the Valleys anytime soon. Furthermore, DfT’s plans to wire the Midland Main Line and trans-Pennine route have foundered in the mire of Network Rail’s struggling Great Western wiring project.
Will Britain see more electrification? “No,” according to Brown. “Not in my opinion, although no one’s broken cover to say so.”
