Rock Infrastructure has closed its first rail deal, unlocking a new source for financing UK rolling stock with institutional capital. Rock’s founder Mark Swindell tells IJGlobal the status quo for financing offshore transmission assets (OFTOs) in the UK is due for a shake-up too.

Rolling stock

The Moorgate rolling stock order, so called as the fleet will run along the Great Northern route to and from Moorgate in London, provided Rock’s subsidiary Rock Rail its first deal.

Franchise operator Govia Thameslink Railway (GTR) has the contract to operate the Great Northern route from September 2014 to September 2021. For the line between Moorgate London, Welwyn, Hertford, Stevenage and Letchworth, GTR ran a tender and in December 2014 made a £200 million ($278 million) order of 25 six-carriage trains of Siemens Class 700 trains. GTR also ran the funding competition.

The rolling stock finance market in the UK is dominated by three rolling stock operating companies (ROSCOs) which own and lease fleets out. The alternatives are a long-term project finance solution where there is a Section 54 long-term guaranteed lease, or asset finance solutions on a shorter-term basis linked to the lease.

The UK government is retiring the Section 54 lease guarantees by 2019, so as not to interfere with an open rolling stock funding market. This introduces a new element to the deals – refranchising risk.

Rock Rail

Rock Rail was bidding in the funding competition, as one of 12 including the three ROSCOs, and asset finance providers. Mark Swindell said: “We seek to identify ‘core fleets’. In this case we do not think the fleet will be jettisoned off from this track, but it is not guaranteed beyond 2021… We’ll need to lease the trains to whoever operates the route in future.”

Rock and its institutional financing partners were able to get comfortable with this risk, and they won GTR’s funding competition on 11 January 2016. This is the first non-ROSCO funder for new trains that do not benefit from a Section 54.

Rock's consortium swiftly brought the £200 million Great Northern deal to financial close in just over one month. Rock Infrastructure is putting in 6% equity, with S&L Capital providing the remaining 94%. Aviva Investors has provided all of the debt, which has a tenor in excess of 15 years.

Rock Rail, with skin in the game, structured the deal and manages the asset. It takes a success advisory fee reinvested in the project as its minority equity.

Swindell explained: “We have developed a long-term project finance solution to work with all the industry stakeholders to compete head-to-head with the asset finance businesses created by the privatisations in the mid-90s. We demonstrated in the most competitive rolling stock competition to date that Rock Rail can deliver the best short- and long-term debt and leasing terms, as well as the speed and certainty of completing the deal.”

He added: “We are leaving behind the clunky image of the overly complex and slow moving project finance vehicles created for the Department for Transport procured mega deals.” Thameslink and Intercity Express’s rolling stock orders were in excess of £1 billion each.

Rock is bidding other core fleet deals now, and Swindell says they see a “reasonable pipeline of new orders” in the UK. East Anglia and South Western are the next rail franchise awards coming, with seven lined up before 2020.  Swindell adds that for Rock Rail they are looking at the US and to a smaller degree continental Europe.

Having closed this first deal with two UK-based institutions, Swindell says there are other potential partners in the UK, Germany and Canada. 

Rock Transmission

Rock Infrastructure, seeks to find “first-mover” opportunities, to offer a “fit for purpose funding platform for pension and insurance companies who wish to invest direct in greenfield assets”, as Swindell puts it. In greenfield PPPs, Rock has worked on the Mersey Gateway Bridge and upcoming Silvertown Tunnel.

Rock’s next target is a younger sector, which only came to market in 2009 – offshore wind transmission assets.

Traditionally offshore wind farm developers have built the farm's associated transmission assets themselves. They have then sold on the assets under EU unbundling rules to new owners (OFTOs), which take on ready-built assets with long-term availability-based, RPI-linked 20-year revenues streams.

There have been a handful of bidders (mostly infrastructure funds and developers) dominating the OFTO tender rounds and the fourth tender round, to be launched next month by Ofgem and the Department of Energy and Climate Change, is due to follow the same generator-financing format.

But institutional investors are looking for exactly this kind of low-risk investment.

Rock hopes to come in once the generator has undertaken the preliminary works, high level design and consenting. Rock, with its minority equity stake and its institutional investor partners, would then participate in the financing, construction, operation, maintenance and decommissioning of the transmission assets and the costs associated.

Rock wants to come in and bid this model on the fifth tender round and beyond.

“Ofgem sees benefit in encouraging offshore wind developers to adopt a new model for financing offshore transmission systems. This model will introduce third party finance to fund offshore transmission assets before they are built which will assist developers in funding bigger wind farms,” Swindell said.

“The government is seeking a lower subsidy strike price per MWh for the next auction of offshore wind opportunities and Rock Transmission has developed an OFTO build model that can reduce the strike price by 20%."