Rock and rail
The year 2000 was a busy 12 months for financiers involved in
funding Australian public transport assets. Last year saw several
landmark financings which are likely to provide templates for the
large number of rail project finance transactions expected between
now and 2003. In 2001 alone, project finance transactions are
likely to be closed or at least launched for rail sector
privatizations, rail network extensions and the construction of a
completely new rail system.
In the market as Project Finance goes to press is the A$585 million ($325 million) financing for Australian Railroad Group (ARG)'s new Westrail franchise. The previously state-owned Westrail freight business was sold by the Western Australian state government to the two partners in the ARG consortium, Westfarmers and US rail operator, Genesee and Wyoming (G&W). G&W already owns the Australia Southern Railroad which will be merged together with the new Westrail franchise. ARG did not have to take on Westrail Freight borrowings or debt with the sale of the physical assets.
As part of the overall funding arrangement, Westfarmers is understood to be taking a A$120 million, 50% stake in the new, merged business, paid in equity. G&W is using a combination of cash and equity for the remaining 50%. Also, according to sources close to the deal, the total A$585 million debt financing includes a A$100 million capex facility, with the remaining A$485 million being acquisition finance. The A$485 million loan is structured in separate, three and five year tranches and the margin is said to close to 150bp over Australian bank bills.
Pricing the transaction was a challenge, say bankers, given that this was the first deal for an Australasian freight rail operation in recent years. ?You have to go back as far as the 1993 financing for New Zealand rail assets to find a similar deal in the region,? says one of the banks involved in the deal. An early bird stage is included in the syndication of the financing whereby banks who were supporting the three losing bids for the Westrail franchise will be invited to participate in the deal before the general syndication is launched.
Early indications are that appetite in the banking market for the transaction is strong. Nick Hann, at Macquarie Bank, which is involved in an advisory role for a number of rail projects soon to need financing, says that banking appetite for rail deals in general has improved dramatically over the last few years. ?The rail sector was treated with a fair degree of skepticism by the financial markets until the privatization process kicked off in earnest. Financiers were suspicious of the ownership and institutional structure and the overall government controlled environment,? a second, Sydney-based banker adds. At the same time, says Chris Tomkin at ANZ in Melbourne, rail industry project financings are giving banks the opportunity to diversify project finance portfolios that are still heavily weighted towards power and gas.
This is undoubtedly good news for the A$1.2 billion Darwin to Alice Springs rail project which is also currently in the financing market. Although A$450 million of the total financing cost will come from the government, the transaction is arguably the most important in the Australian rail market in the last 100 years. ?It is certainly the most significant piece of new rail infrastructure in Australia over the last century,? says Hann.
Three of the four lead arrangers for the deal are known to be ANZ, ABN Amro and Royal Bank of Scotland. The fourth bank leading the deal is believed to BNP Paribas and Macquarie is financial adviser. Few details about the financing are currently available although it is believed that the transaction is being structured with the standard project finance debt to equity ratio of 70% debt and 30% equity. The financing is expected to close early in 2001.
The most innovative deal for a public transport project last year was the securitization financing of rolling stock for National Express's newly acquired Bayside Trains and Swanston Trams franchises in Melbourne. The A$679 million transaction, arranged by Macquarie Bank, Deutsche Bank and WestPac was a landmark deal, being the first securitization of a government subsidy profile through an operating lease.
The AAA rated deal was collateralized on rolling stock leases (GATX Rail is the lessor) supported by Victorian government guaranteed investment contracts (GICs). The securitization is also noteworthy for its 20-year term, making it the longest dated private corporate bond issue in the market. By comparison, typical Australian corporate bond terms are between five and 10 years.
The securitization package is not disimilar from rolling stock lease securitizations done in the UK. One noteworthy difference, however, is the level of government support in the deal. In addition to the GICs, the support package includes a direct rolling stock agreement signed by the Victorian government to support National Express's lease obligations. Any default by the lessee must be remedied by the Director of Public Transport on behalf of the Victorian government, says a source involved in the deal.
National Express opted for a securitization because the banking community was reluctant to absorb the company's hefty A$900 million financing requirement over the desired 20 year period. A$900 million represents all of National Express's funding needs relating to its new Melbourne public transport franchises. The remaining A$220 million, to finance new rolling stock for the V-Line Passenger franchise which National Express also won, is likely to be funded by another bond issue, says Andrew Hunter, a director in Macquarie's Asset Finance and Infrastructure team.
The current securitization is structured in three tranches, a class A-1, fixed rate, A$192 million tranche, a class A-2, A$234 million, fixed rate and bullet repayment tranche with a 15 year maturity and a class A-3, A$253 million tranche with a 20 year maturity. It is anticipated that the V-Line Passenger bond will be structured as a 20 year amortizing bond.
Similar project securitizations are a distinct possibility in the next few years. The Western Australian government is known, for instance, to want substantial private sector involvement in the procurement of new rolling stock for the Perth to Mandurah rail development, which is an extension of the existing Perth rail network. Like the Melbourne trams securitization, the state government is said to want an operating lease arrangement for the rolling stock. Financiers say the total cost of the rolling stock supply tender is likely to be about A$400 million.
If a securitization is chosen to fund the assets, there will however be a number of important structural differences to the Melbourne transaction. The Western Australian government favours private sector participation in financing the actual infrastructure but has not committed itself to having private companies own or control the infrastructure. Nick Hann says that a private sector operating franchise for both the infrastructure and rolling stock assets, similar to the National Express franchise in Melbourne may not therefore exist in the Perth to Mandurah development.
Also, the National Express securitization includes a direct rolling stock agreement signed by the Victorian government to support National Expresses' lease obligations. Financiers don't yet know whether the government in Western Australia will be willing to support a securitization financing for the new Perth rolling stock assets using GIC instruments or any other means of financial support.
A securitization deal for rolling stock assets in the freight sector is also feasible, thinks Andrew Hunter. But he says, ?what makes a freight securitization more challenging is that, in contrast to the National Express deal, the state government won't necessarily be there to step in and take over the leases if a private sector lessee runs into serious financial difficulties.? Passenger rail services, like the metropolitan services that National Express now runs in Victoria, are so-called ?essential? services which the state government is obliged to maintain, for political reasons if nothing else. It is highly likely, therefore, that all passenger rolling stock operating lease contracts will include government support. The same assumptions cannot be made in the freight business.
The Westrail Freight privatization process and financing will also provide guidance for the financial institutions and sponsors who participate in two more upcoming rail freight privatizations: the sell-off of National Rail Corp and Freight Corp. National Rail which has an extensive network of freight business in five states is jointly owned by the Australian Federal government and the New South Wales and Victorian state governments.
While the sale of National Rail has been on the cards for several years, New South Wales's incumbent Labour adminstration only recently agreed to the privatization of Freight Corp, which is mainly involved in coal transportation in the Hunter Valley. Early in the year it was reported that Australia's Federal government was considering raising more funding for transport infrastructure through the debt markets where previously the government had stated that any additional funding would have to come from privatization. At the time, that government announcement seemed to suggest that the sale of Freight Corp was unlikely.
The two freight businesses combined are said by government sources to be worth approximately A$1 billion. Bidding consortia are expected to be led by the usual Australian and US suspects like Genesee & Wyoming, Wisconsin Central, Tranz Rail and Rail America, as well as construction firms and rolling stock manufacturers. The National Rail privatization, which is being managed by the Office of Asset Sales and IT Outsourcing (OASITO), is due to be completed by the middle of 2001.
Despite the similarities to Westrail there are also some important operational and financial differences which will again help to determine the shape of the eventual project financings. Westrail was sold as a vertically integrated operation centered around a special purpose company, existing business including current customer contracts, and a long term lease (of 49 years) over the land corridor and the railway infrastructure ? including the track. In contrast, National Rail and Freight Corp will both be sold as above rail operations and will not include track and other key fixtures.
One of the advisers to the government in the Westrail privatization describes Westrail Freight as ?probably the only profitable railway in Australia at the moment.? A statement that is generally accepted by other bankers. Freight Corp did make an A$40 million profit last year, but only after a A$90 million subsidy from government. On an operating basis National Rail is described as ?marginally profitable?. However, on a net basis National Rail has posted losses since it was set up in 1993. On the plus side, National Rail has managed to post strong revenue growth. In the first half of 1999 its revenues totalled $A226 million, compared with a total of $A417m for the full year in 1998 to 1999.
One of the most important questions for banks examining the Freight Corp and National Rail businesses will be to determine how the substantial rolling stock cross-border leases, entered into by both entities, will impact on the project financing options. These leases will be difficult to unwind. Indicating the size of the penalties that could be incurred, Jim Rowe senior manager, global structured finance at ANZ, says the state of South Australia would have had to have paid about $200 million to terminate a lease transaction on power transmission assets during the privatization of the South Australian energy businesses.
Providing an encouraging precedent, the cross-border leases on Westrail rolling stock appears to have been dealt with successfully. Two-and-a-half years ago Westrail entered into a $200 million cross-border leasehold deal arranged by Allco Finance Group. The lease is understood to have been reassigned from the government to AGR.
More to come
The year 2000 did see the death of one rail project that has been under discussion for several years, the very fast train (VFT) Sydney to Canberra link. The sponsoring consortium, Speed Rail, consisting of GEC Alsthom, Leighton Contractors and Qantas, wanted the government to subsidize a substantial portion of the A$4.8 billion project. The government balked at the proposed subsidy amount and effectively withdrew their support. One banker previously close to the deal calls it, ?dead and buried.?
Another substantial rail project, the Southern Inland Expressway from Melbourne to Brisbane which will open up access to and from the Port of Brisbane for regional and interstate areas by offering an alternative to a route travelled by 2,500 trucks a day, looks set to roll forward in 2001. The proposed development is sponsored by the Australian Transport & Energy Corridor (ATEC) partnership consisting of the Federal government, Queensland Rail, New South Rails Access Corporation and Australian Rail Track Corporation.
In the market as Project Finance goes to press is the A$585 million ($325 million) financing for Australian Railroad Group (ARG)'s new Westrail franchise. The previously state-owned Westrail freight business was sold by the Western Australian state government to the two partners in the ARG consortium, Westfarmers and US rail operator, Genesee and Wyoming (G&W). G&W already owns the Australia Southern Railroad which will be merged together with the new Westrail franchise. ARG did not have to take on Westrail Freight borrowings or debt with the sale of the physical assets.
As part of the overall funding arrangement, Westfarmers is understood to be taking a A$120 million, 50% stake in the new, merged business, paid in equity. G&W is using a combination of cash and equity for the remaining 50%. Also, according to sources close to the deal, the total A$585 million debt financing includes a A$100 million capex facility, with the remaining A$485 million being acquisition finance. The A$485 million loan is structured in separate, three and five year tranches and the margin is said to close to 150bp over Australian bank bills.
Pricing the transaction was a challenge, say bankers, given that this was the first deal for an Australasian freight rail operation in recent years. ?You have to go back as far as the 1993 financing for New Zealand rail assets to find a similar deal in the region,? says one of the banks involved in the deal. An early bird stage is included in the syndication of the financing whereby banks who were supporting the three losing bids for the Westrail franchise will be invited to participate in the deal before the general syndication is launched.
Early indications are that appetite in the banking market for the transaction is strong. Nick Hann, at Macquarie Bank, which is involved in an advisory role for a number of rail projects soon to need financing, says that banking appetite for rail deals in general has improved dramatically over the last few years. ?The rail sector was treated with a fair degree of skepticism by the financial markets until the privatization process kicked off in earnest. Financiers were suspicious of the ownership and institutional structure and the overall government controlled environment,? a second, Sydney-based banker adds. At the same time, says Chris Tomkin at ANZ in Melbourne, rail industry project financings are giving banks the opportunity to diversify project finance portfolios that are still heavily weighted towards power and gas.
This is undoubtedly good news for the A$1.2 billion Darwin to Alice Springs rail project which is also currently in the financing market. Although A$450 million of the total financing cost will come from the government, the transaction is arguably the most important in the Australian rail market in the last 100 years. ?It is certainly the most significant piece of new rail infrastructure in Australia over the last century,? says Hann.
Three of the four lead arrangers for the deal are known to be ANZ, ABN Amro and Royal Bank of Scotland. The fourth bank leading the deal is believed to BNP Paribas and Macquarie is financial adviser. Few details about the financing are currently available although it is believed that the transaction is being structured with the standard project finance debt to equity ratio of 70% debt and 30% equity. The financing is expected to close early in 2001.
The most innovative deal for a public transport project last year was the securitization financing of rolling stock for National Express's newly acquired Bayside Trains and Swanston Trams franchises in Melbourne. The A$679 million transaction, arranged by Macquarie Bank, Deutsche Bank and WestPac was a landmark deal, being the first securitization of a government subsidy profile through an operating lease.
The AAA rated deal was collateralized on rolling stock leases (GATX Rail is the lessor) supported by Victorian government guaranteed investment contracts (GICs). The securitization is also noteworthy for its 20-year term, making it the longest dated private corporate bond issue in the market. By comparison, typical Australian corporate bond terms are between five and 10 years.
The securitization package is not disimilar from rolling stock lease securitizations done in the UK. One noteworthy difference, however, is the level of government support in the deal. In addition to the GICs, the support package includes a direct rolling stock agreement signed by the Victorian government to support National Express's lease obligations. Any default by the lessee must be remedied by the Director of Public Transport on behalf of the Victorian government, says a source involved in the deal.
National Express opted for a securitization because the banking community was reluctant to absorb the company's hefty A$900 million financing requirement over the desired 20 year period. A$900 million represents all of National Express's funding needs relating to its new Melbourne public transport franchises. The remaining A$220 million, to finance new rolling stock for the V-Line Passenger franchise which National Express also won, is likely to be funded by another bond issue, says Andrew Hunter, a director in Macquarie's Asset Finance and Infrastructure team.
The current securitization is structured in three tranches, a class A-1, fixed rate, A$192 million tranche, a class A-2, A$234 million, fixed rate and bullet repayment tranche with a 15 year maturity and a class A-3, A$253 million tranche with a 20 year maturity. It is anticipated that the V-Line Passenger bond will be structured as a 20 year amortizing bond.
Similar project securitizations are a distinct possibility in the next few years. The Western Australian government is known, for instance, to want substantial private sector involvement in the procurement of new rolling stock for the Perth to Mandurah rail development, which is an extension of the existing Perth rail network. Like the Melbourne trams securitization, the state government is said to want an operating lease arrangement for the rolling stock. Financiers say the total cost of the rolling stock supply tender is likely to be about A$400 million.
If a securitization is chosen to fund the assets, there will however be a number of important structural differences to the Melbourne transaction. The Western Australian government favours private sector participation in financing the actual infrastructure but has not committed itself to having private companies own or control the infrastructure. Nick Hann says that a private sector operating franchise for both the infrastructure and rolling stock assets, similar to the National Express franchise in Melbourne may not therefore exist in the Perth to Mandurah development.
Also, the National Express securitization includes a direct rolling stock agreement signed by the Victorian government to support National Expresses' lease obligations. Financiers don't yet know whether the government in Western Australia will be willing to support a securitization financing for the new Perth rolling stock assets using GIC instruments or any other means of financial support.
A securitization deal for rolling stock assets in the freight sector is also feasible, thinks Andrew Hunter. But he says, ?what makes a freight securitization more challenging is that, in contrast to the National Express deal, the state government won't necessarily be there to step in and take over the leases if a private sector lessee runs into serious financial difficulties.? Passenger rail services, like the metropolitan services that National Express now runs in Victoria, are so-called ?essential? services which the state government is obliged to maintain, for political reasons if nothing else. It is highly likely, therefore, that all passenger rolling stock operating lease contracts will include government support. The same assumptions cannot be made in the freight business.
The Westrail Freight privatization process and financing will also provide guidance for the financial institutions and sponsors who participate in two more upcoming rail freight privatizations: the sell-off of National Rail Corp and Freight Corp. National Rail which has an extensive network of freight business in five states is jointly owned by the Australian Federal government and the New South Wales and Victorian state governments.
While the sale of National Rail has been on the cards for several years, New South Wales's incumbent Labour adminstration only recently agreed to the privatization of Freight Corp, which is mainly involved in coal transportation in the Hunter Valley. Early in the year it was reported that Australia's Federal government was considering raising more funding for transport infrastructure through the debt markets where previously the government had stated that any additional funding would have to come from privatization. At the time, that government announcement seemed to suggest that the sale of Freight Corp was unlikely.
The two freight businesses combined are said by government sources to be worth approximately A$1 billion. Bidding consortia are expected to be led by the usual Australian and US suspects like Genesee & Wyoming, Wisconsin Central, Tranz Rail and Rail America, as well as construction firms and rolling stock manufacturers. The National Rail privatization, which is being managed by the Office of Asset Sales and IT Outsourcing (OASITO), is due to be completed by the middle of 2001.
Despite the similarities to Westrail there are also some important operational and financial differences which will again help to determine the shape of the eventual project financings. Westrail was sold as a vertically integrated operation centered around a special purpose company, existing business including current customer contracts, and a long term lease (of 49 years) over the land corridor and the railway infrastructure ? including the track. In contrast, National Rail and Freight Corp will both be sold as above rail operations and will not include track and other key fixtures.
One of the advisers to the government in the Westrail privatization describes Westrail Freight as ?probably the only profitable railway in Australia at the moment.? A statement that is generally accepted by other bankers. Freight Corp did make an A$40 million profit last year, but only after a A$90 million subsidy from government. On an operating basis National Rail is described as ?marginally profitable?. However, on a net basis National Rail has posted losses since it was set up in 1993. On the plus side, National Rail has managed to post strong revenue growth. In the first half of 1999 its revenues totalled $A226 million, compared with a total of $A417m for the full year in 1998 to 1999.
One of the most important questions for banks examining the Freight Corp and National Rail businesses will be to determine how the substantial rolling stock cross-border leases, entered into by both entities, will impact on the project financing options. These leases will be difficult to unwind. Indicating the size of the penalties that could be incurred, Jim Rowe senior manager, global structured finance at ANZ, says the state of South Australia would have had to have paid about $200 million to terminate a lease transaction on power transmission assets during the privatization of the South Australian energy businesses.
Providing an encouraging precedent, the cross-border leases on Westrail rolling stock appears to have been dealt with successfully. Two-and-a-half years ago Westrail entered into a $200 million cross-border leasehold deal arranged by Allco Finance Group. The lease is understood to have been reassigned from the government to AGR.
More to come
The year 2000 did see the death of one rail project that has been under discussion for several years, the very fast train (VFT) Sydney to Canberra link. The sponsoring consortium, Speed Rail, consisting of GEC Alsthom, Leighton Contractors and Qantas, wanted the government to subsidize a substantial portion of the A$4.8 billion project. The government balked at the proposed subsidy amount and effectively withdrew their support. One banker previously close to the deal calls it, ?dead and buried.?
Another substantial rail project, the Southern Inland Expressway from Melbourne to Brisbane which will open up access to and from the Port of Brisbane for regional and interstate areas by offering an alternative to a route travelled by 2,500 trucks a day, looks set to roll forward in 2001. The proposed development is sponsored by the Australian Transport & Energy Corridor (ATEC) partnership consisting of the Federal government, Queensland Rail, New South Rails Access Corporation and Australian Rail Track Corporation.
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