Momentum to adopt and implement the 2007 Luxembourg Protocol to the Cape Town Convention on International Interests in Mobile Equipment on matters relating to railway rolling stock (the Convention), which aims to make it more attractive for private financiers to finance railway equipment worldwide, has finally started to take hold.
Railways have traditionally been heavily state-controlled, meaning sector projects have tended to be highly dependent on government priorities and budgets. Consequently, they have not always benefited from investment as and when required.
While there has been a clear move towards liberalisation of the market worldwide in the past few years which has certainly attracted private financiers, issues remain which will need to be resolved if greater investor interest in rolling stock is to be generated.
Private financiers typically require security to be taken over rolling stock assets they are financing, so they can repossess them in case of default and/or insolvency by debtors. A special statutory mortgage regime common in ship and aircraft financing, is not generally available in respect of rolling stock however, meaning sector investors must rely on other less secure security, such as a chattel mortgage or a pledge over the rolling stock, assignments of earnings, account pledges, shares pledges and/or parent guarantees.
As these types of security are predominantly unregistered, there’s usually no common database to turn to in order to view creditors’ rights over a rolling stock asset and therefore the ranking of priority of such creditors in respect of said asset.
Further complicating matters, for cross-border operating rolling stock assets, security created under one set of local laws may not be recognised in the jurisdiction where the asset is located at the time of enforcement of the security. Financiers should, prior to completing any financing, effect due diligence in any jurisdiction where the rolling stock is likely to be operated during the term of the financing to ensure that the security which is being granted is, to the greatest extent possible, enforceable wherever relevant. This can be extremely costly however and can rarely encompass all jurisdictions where rolling stock might potentially be located during the financing term.
There is also no uniform way of describing rolling stock. Each asset will have:
- A manufacturer’s serial number which will not normally change throughout the life of the asset but will be structured differently in different parts of the world; and
- A running number providing a description of the asset type and other relevant information which can change throughout the life of the asset.
The Protocol creates a framework for the registration and recognition of security interests of financiers, lessors and certain types of vendors in transactions involving rolling stock. It also aims to create a common system for repossessing rolling stock assets on default and/or insolvency by debtors, thereby achieving a similar position to the Aircraft Protocol.
The central registration database created by the Protocol will be an international registry accessible online at all times, allowing financiers, lessors and relevant vendors to register their interests in rolling stock, and third-party prospective creditors (among others) to view registered interests.
It is important to note that the Protocol applies to all rolling stock, the definition of which is set out in Article I (e) of the Protocol and includes "all vehicles moveable on a fixed railway track or directly on, above or below a guideway, together with traction systems, engines, brakes, axles, bogies, pantographs, accessories and other components, equipment and parts, in each case installed on or incorporated in the vehicles, and together with all data, manuals and records relating thereto".
Although there is no particular guidance in the Protocol as to the meaning of the term "vehicle" and doubts remain as to the eligibility of certain types of assets, the intention is clearly to encompass all vehicles used as a means of physical transportation:
(i) running on a fixed railway track and
(ii) running directly on, above or below a guideway.
Creditors will need to be aware that the Protocol also provides for different "alternatives" in case of debtor insolvency, from which each member state can choose its preferred procedure (likely dependent on belief in rail as a "public service").
Debtors will need to be located in a state which has ratified the Protocol in order for their creditors to be able to register their interests in the central registration database and therefore benefit from the rules set up by the Protocol. Of course, the more states to ratify the Protocol, the more effective the system will be.
The Protocol has been signed and ratified by both the EU (a prerequisite for ratification by member states) and Luxembourg. It has also been signed (though not yet ratified) by Italy, Switzerland, Germany and Gabon.
At a recent briefing organised by the Rail Working Group in the House of Lords, the Protocol was introduced to the UK rail and finance communities. With attendees including key rail companies, banks, MPs and Transport Select Committee chair Louise Ellman MP, ratification and signature should progress rapidly.
In other countries (EU or otherwise), discussions are currently ongoing regarding signing the Protocol. As it needs to be ratified by four states before entering into force, work remains to be done.
Nevertheless, clear progress has and is being made and ratification of the Protocol is surely imminent, heralding an exciting new era for private investment in the railway rolling stock sector.