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

Freight lessors resilient

Like the UK, and indeed the rest of the world, rail finance in continental Europe has suffered as a result of the economic downturn, but this is most visible in the financing of freight stock, rather than the curtailment of major passenger transport projects.

By Claire Hack

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Like the UK, and indeed the rest of the world, rail finance in continental Europe has suffered as a result of the economic downturn, but this is most visible in the financing of freight stock, rather than the curtailment of major passenger transport projects.

According to Martin Metz, head of land transport finance at DVB Bank, activity – or inactivity – in rail freight traffic provides a number of key early indicators for general economic development.

“This includes, for example, wagon load figures in the US, as much as when freight cars, having been parked during economic turmoil, are returned to revenue-earning service,” Metz said.

“We are noticing, more and more, that freight stock is being pulled out of the sidings and back into service.

“A decent number of cars are still not employed, but the situation is turning more positive. In other words, the economy is kicking in again, slowly but consistently.”

In terms of locomotives, Metz said, the situation has not yet “relaxed” and a number of lessors are continuing to focus on keeping their fleets employed, including offering them on a “pay per-day” basis.

“This is good, as running a locomotive is always better than parking it, and it also serves operators who want it for a limited job – say seven days, and then they would simply give it back,” Metz said.

Quote from Martin Metz“Returns on a per-day basis are higher than those on long-term leases, as the risk of locos being returned quickly and standing around idle for another 20 or 30 days is substantial.

“Rental rates would therefore naturally need to cover this risk with a mark-up.”

New investment in freight vehicles remains low in Europe, Metz said, with “not much new to finance” – a trend which has meant his team is currently focused on “secondary transactions”.

This includes refinancing used rolling stock fleets, sold, for example, by companies pulling out of the market, or perhaps purchasing existing transactions from banks clearing their books, Metz said.

Freight, furthermore, has suffered more than passenger transport as commuter trains continue to support the market, according to Frank Hermandung, senior vice-president of rail finance at HSH Nordbank.

Indeed, according to DVB Bank’s 2009 annual report, freight rolling stock lease rates dropped by as much as 50% year-on-year, although purchase prices “did not go down significantly as manufacturers are generally unwilling to lose money on production”.

Hermandung said: “The passenger market specifically is made up of relatively long-term contracts with terms usually between 7 and 12 years.

“It is not very vulnerable to economic change and it is not very volatile – commuters still use the train to get to work even in an economic downturn.”

The question, Hermandung added, is whether there will be enough competition from private operators to provide for competitive pricing and successful tendering.

“This depends on the quality of tendering documents and structures that will be invited by the tendering agencies,” he said.

However, while freight may be more susceptible to economic volatility, it has benefited from increased road congestion, meaning companies more frequently turn to rail networks to transport goods, according to Dieter Fennema, also an SVP at HSH Nordbank.

Fennema added: “The problem is that the rail freight market is not using its inherent strengths, rather it is often benefiting from the weakness of road transport.

“Volumes are on the up again since January 2010 and utilisation of fleet is on the up again – it looks promising.”

And unlike the UK, which is subject to value-for-money reviews by its government, investment on the passenger side remains high  in Germany, which is the biggest market in Europe and elsewhere on the continent.

“There has been a liberalisation in the rail market for more than 15 years now, with private operators being allowed to tender for regional passenger franchises along with incumbent operators,” Metz said.

“There are requirements to tender out almost all regional franchises until 2018 and this is the biggest market in Europe.

“There is definitely volume coming out of those tenders and that is also the case for the Netherlands, Sweden, Denmark and Poland. The big question is how to finance it.”

 

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