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July 1, 2010updated 12 Apr 2017 4:22pm

Impact of public pool leasing played down

In the past in Europe, it would have been a simple matter of the larger lessors offering operating leases, but many have either pulled back from the market or pulled out altogether, leaving it open for other funders, or indeed, for local authorities to purchase rolling stock themselves in order to lease it to operators known as public pool leasing. However, Martin Metz, head of land transport finance at DVB Bank, said: There is a risk that if the market is taken up with public authorities, most or all of the private initiatives like private lessors and banks will simply pull out.

By Claire Hack

Toy train

 

Redeployment guarantees offer security to lessors.

 

In the past in Europe, it would have been a simple matter of the larger lessors offering operating leases, but many have either pulled back from the market or pulled out altogether, leaving it open for other funders, or indeed, for local authorities to purchase rolling stock themselves in order to lease it to operators – known as ‘public pool’ leasing.

However, Martin Metz, head of land transport finance at DVB Bank, said: “There is a risk that if the market is taken up with public authorities, most or all of the private initiatives like private lessors and banks will simply pull out.”

Similarly, redeployment guarantees, which allow a lessor to hold on to a rail franchise even if the operator changes, could see numerous companies edged out of the market, he added.

“Why should companies whose role is to understand equipment values, secondary markets, re-leasing and making returns on the cash-flow generating capacity of trains, work in a market if parts of it were covered by redeployment guarantees or public pools?” Metz said.

These are the major issues dominating the European landscape, according to Metz, both of which, he said, could have a negative impact on competition.

Yet there is disagreement over the significance of public pools, as some, like Metz, see it as being dangerous to the market, while others see it as a means of preserving competition in a fragile arena, and still others do not believe it will ever really take off.

Metz said: “The problem is the market needs billions and billions of euros’ worth of new investment in the next couple of years to replace older equipment.

“At the same time, banks are becoming more cautious in terms of how much they want to invest in this market.”

He continued: “Financing has become much more expensive and margins have approximately doubled for private operators.

“This is currently offset by low interest rates but they will go up again and margins will not go back to the levels seen before the recent downturn – so where will the money for new investments come from?

“There are good arguments against state involvement but so far there are no convincing counter proposals to solve the imminent challenges.

“The alternative might simply be to fall back on the state railroads like Deutsche Bahn with the consequence of losing the competitive success of the last decade.”

And Frank Hermandung, senior vice-president in Rail Finance at HSH Nordbank, added that there are also valid arguments for the value of redeployment guarantees.

He said: “It is similar to a financial guarantee. It takes away the residual value risk for the lessor, which makes it much more inexpensive to invest, so margins come down.

“It is also flexible if structured in the right way and can be used for a temporary bridge in case of momentary problems.

“You then increase the number of banks that are interested in financing – most of the banks are not willing or able to take on residual value risk.

“By taking that away and promising equipment will stay on a franchise, you increase the number of banks that are able to do the deal, which then creates competition and that will bring down prices significantly.

“At the same time you uphold, if not increase, competition between the operators on that line.”

The phenomenon of public pool leasing is still relatively nascent, however, and Bertrand Bocris, asset finance manager at Dexia Credit, believes it will not amount to much.

He said: “I don’t think it really exists yet and I don’t know if it has much of a chance.

“It could be a good idea, but I don’t know it’s more than wishful thinking – it’s going to be very, very difficult to set up.

“For instance, in Germany, operators want to be free to choose their rolling stock in every region – they really want to stay independent [of the state]. I am not sure they are ready to work together.”

 

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