The bid was selected ahead of rival offers from Eurotunnel, Goldman Sachs Infrastructure Partners and Infracapital; Morgan Stanley, 3i Infrastructure, Abu Dhabi Investment Authority; and Allianz/BT Pension/PSP Investments. Citi acted as financial adviser to the UK Department for Transport, UBS advised the seller, London and Continental R ailways (LCR), and the winning bidder was represented by Royal Bank of Canada and Lexicon Partners, with Linklaters as legal counsel.

The winners do not appear perturbed by the price. Stephen Dowd, senior vice-president from Ontafrio Teachers’ Infrastructure Group, says that HS1 “will provide stable inflation-protected returns from proven and long-standing patronage levels”.

The protected returns are contained in the HS1 revenue model. The track generates most of its revenues from track access charges (see table) paid by the train operating companies (TOCs) using the line. Roughly £250 million of the yearly HS1 income of £265 million is from these charges. The principal customers are Eurostar and Southeastern Trains, which contribute 40% and 60% respectively. While the UK government holds the infrastructure and the freehold to the land, HS1 has the right to sell access to track and stations on a commercial basis.

HS1 currently has a capacity of 20-services-per-hour, with 50% of that being used by Southeastern Trains and 25% by Eurostar. This aspect of the asset proved an important part in the sale as the government has pledged to underpin the domestic service until 2040 – when the concession expires – from 2014. This will provide a steady income to the concession company at least half of the project forecast.

According to published figures, HS1 was due to generate £135 million in the last financial year as earnings before interest, tax, depreciation and amortisation (EBITDA). If that figure remained static for the next 30 years, total income for the concession would be just over £4 billion.

Under the HS1 structure, however, the asset is linked to the Retail Percentage Index (RPI) inflation, meaning the revenue is modified annually to represent the changes in overall spending. The most recent financial year, for example, RPI stood at 4.6%, meaning the projected EBITDA would rise to £141.2 million. The bidders predicted that EBITDA would be around £200 million by 2020, representing a 67.5% increase on the 2010 levels.

Another important consideration for the asset is the current and future capacity. Dowd highlighted the “upside potential as the European Union moves to liberalise international rail travel”, which refers to the plan by German train operator Deutsche Bahn to use HS1 and the Channel Tunnel for services from London to Frankfurt, via Cologne, Brussels and Lille as well as connections from Amsterdam via Rotterdam to London by 2013. As such, HS1 has the potential to increase income further with another potential stream coming from Deutsche Bahn. This could bolster HS1 forecasts by up to a quarter.

The financing of the sale has been a sensitive issue. LCR sent out an expression of interest request in March for financial institutions to structure the deal. The initial suggestion was for two options. The first was a stapled bridge-to-bond package, and the second a straightforward bond issue, to be executed before conclusion of the sale. Both options were to be available to potential purchasers.

UBS was appointed as financial adviser to LCR and developed the stapled loan and bond package alongside Barclays Capital, BNP Paribas and HSBC to lead the financing. The deal comprised a staple loan of around £1.5 billion with a three-year tenor, before refinancing as a bond. It is thought that the loan would have had a sub-200bp margin, helped by the UK government underpinnings, and carried a debt-service coverage ratio around of 1.3x.

The consortium rejected this proposal and has come up with its own solution. The exact nature of the structure is unconfirmed but the group is reported to have agreed a loan package worth around £1.38 billion, substantially less than the £1.5 billion staple loan proposal. The arranging banks are said to be led by financial adviser RBC and include: BNP Paribas; Lloyds; Export Development Canada; JP Morgan Chase & Co; Santander; National Australia Bank; RBS and Bank of Nova Scotia.

The centrepiece is a £860 million term loan, which has a tenor of five years and pricing is claimed to be substantially lower than the staple option, starting at around 125bp over Libor. The second tranche is a £450 million facility with a seven-year term, priced at 175bp. There is also a five-year £65 million revolving credit facility.

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The UK Government brought in the charging framework for HS1 under the Rail Regulations 2005. In 2009, the most recent track access charges were made up of the following:

Investment Recovery Charge (IRC). This fee was defined by the assumed time spent by a company’s rolling stock on HS1 (excluding the time stopping at stations). The IRC per train per minute was £69.57 (as of February 2009) subject to indexation.

Operations, Maintenance and Renewal Charge (OMRC). This relates to the costs directly incurred through the running of the train services and the common costs, based on the expected train minutes on HS1. The OMRC charges are set at the outset of each price control period and last year were set at £48.14 per train minute for the international route and £37.21 for domestic services. This OMRC per train per minute is multiplied by the agreed chargeable journey time of a train and indexation is applied each year, based on the RPI.

Traction Electricity Charge. If traction electricity – the power used to run some trains – is procured on behalf of the train companies, all are passed on.

Capacity Reservation Charge. A charge can be made to train operating companies of 25% of the full IRC per train path and the company may surrender some or all of the reserved capacity rights.

Congestion Tariff. If capacity is reduced because of congestion, the train companies may have to pay a fee.

Other Services Charge. These are costs related to bespoke ancillary services provided to a particular train company

The Freight Supplement. Franchised train operating companies may be charged as a result of costs from freight charging arrangements.

Carbon Costs. A charge linked to the liabilities from any carbon reduction commitments.