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

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

“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

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

“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

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

“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.”