Train leasing – exporting a good idea

Timothy Jackson Warsaw, 31 March 2004

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Executive Summary

What is innovative about train leasing ?

o o Not just innovative financing….

Not just maximising commercial opportunities….

o Not just management of financial or operational risk  But a combination of all of these • Where did this potent cocktail originate ?

o Radical privatisation of British Rail…… o Experience, liquidity and innovation of City of London….

o Analogy with the aviation sector  “engineers of added value” • Train leasing can add value in a surprisingly wide variety of applications 31 March 2004 Train leasing – exporting a good idea -2-

The British experience – the facts

BR Business Unit

Heavy Maintenance depots Telecommunications Passenger rolling stock fleets Freight operations

Privatised Entity

British Rail Telecom 3 x Roscos Engineering companies Infrastructure BR Infrastructure Services Passenger operations 3 x trainload freight companies (  EWS) TesCos Railtrack 13 x companies 25 x TOCs

Means of disposal

Trade sales Trade sales New companies created Trade sale Trade sales + buy-outs Public flotation Trade sales Franchised

Timing of Disposal

June 95

Current Position

Mainly owned by key manufacturers December 95 January 96 February 96 Now all owned by major banks Consolidated into one company March-April 96 May 96 February – July 96 Dec 95 – March 97 Failure  Network Rail Regional consolidation 

The train operating lessors were the only new entities created in this process and represent an innovation and a success story

31 March 2004 Train leasing – exporting a good idea -3-

The British experience – the lessons learned

Fragmentation Contractual complexity Privatisation of infrastructure + + + + Massive and accelerated investment in rolling stock Efficient use of capital, disconnected from fleet size, franchise length or operator credit Preservation of scale economies and technical know-how to manage train fleets Balance between public service obligation and transfer of risk to private sector 

We don’t provide finance, we invest in trains

31 March 2004 Train leasing – exporting a good idea -4-

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The British experience – why were the train leasing companies created ?

Pressing need to raise capital out of sale of existing train fleet and to avoid the budget burden of investment in new rolling stock  A cash drain becomes a cash source Separate train ownership from train operations, to encourage and facilitate entry of new players onto the track  Disaggregation of railway into core skills • Allow shorter-term operational decisions in an industry used to planning with notoriously long-term capital assets  Mismatch train life and concession/operation term • Preservation of economies of scale for efficient procurement, maintenance and funding of rolling stock  Whole life investment optimisation, with private sector skills added • Preservation of critical safety and engineering skills and responsibility  Rolling stock engineering allied to financial engineering 31 March 2004 Train leasing – exporting a good idea -5-

Angel Trains – rapid transformation

1993 1994 1995 1997 1998 1999 2000 2001 2002 Railways Act launches rail privatisation in United Kingdom Angel Trains established inside the former British Rail Transferred from BR to the Department of Transport 100% taken over by The Royal Bank of Scotland Group plc UK’s largest ever order of freight rolling stock: 280 locomotives from GM-EMD for English Welsh & Scottish Railways UK’s largest ever order of passenger rolling stock: 53 high-speed tilting trains from Alstom / Fiat Ferroviaria for Virgin Rail Group Incorporation of Angel Trains International in London and Angel Trains Cargo in Antwerp Offices opened in Madrid and Stockholm Offices opened in Cologne and Rome 31 March 2004 Train leasing – exporting a good idea -6-

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Angel Trains – current situation

100% subsidiary of The Royal Bank of Scotland Group Europe’s largest train leasing company Total investments exceed € 4 billion, of which € 450m outside domestic British market Some major investments in UK: • • • • € 550m in 280x GM-EMD Class 66 freight locomotives for EWS € 1 billion in 53x Alstom Pendolino high speed tilting trainsets for Virgin Rail € 1 billion in 785x Siemens Desiro EMU cars for Stagecoach and First Group € 320 million in diesel and electric trains for First Group, Arriva, etc.

Trains leased out in Austria, Belgium, Denmark, France, Germany, Italy, Luxembourg, Netherlands and Spain Lessees outside UK comprise both national railways (DSB, SNCF) and private operators (Connex, Arriva, rail4chem, Graz Köflacher Eisenbahn, etc.) Total staff of approx. 200, located in London, Derby, Antwerp, Cologne, Madrid and Rome Credit rating of A+ from Standard & Poors Recognised across the rail industry - governments, operators, manufacturers and banks - as an informed and pro-active investor in trains Train leasing – exporting a good idea 31 March 2004 -7-

Technical capabilities

• Procurement • manufacturer neutrality • • Experienced and multilingual team, with technical and commercial skills purchasing power, due to scale of orders with all leading manufacturers • Asset management • • • expertise in the planning and monitoring of maintenance quality control audits mandatory modifications, technical upgrades and enhancements according to local regulation or operator requirements Train leasing – exporting a good idea 31 March 2004 -8-

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Financial capabilities

Financial optimisation • equity funds from RBS • capital markets: three long-term securitisations, short-term commercial paper programme • • • public sector long-term lending agencies: EIB, KfW, ICO, EDC private bank loans tax leverage • Residual value • • • core competence for Angel Trains no support from external appraisers or guarantors maturities ranging from short-term hiring (2-5 years) to long-term leasing (15-20 years) depending on the market and asset type Train leasing – exporting a good idea 31 March 2004 -9-

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Regionalisation in European Railways

Causes • EU directives: separation of rail infrastructure from operations • utilities directive requires competitive tendering for public sector procurement of services from private sector suppliers • • more local decision making preferred transfer from central to regional government of the financial burden for local passenger rail services • Consequences • devolution of responsibility for regional rail services has now become standard in Europe for the Länder, Régions, Provincie, etc. but at different paces and in different ways • entry into the market of new private or regional operators (Arriva, Connex, Transdev, Ferrovie Nord, FGC, Regentalbahn,...) alongside incumbent national railways • • typical concession length from 7 to 12 years perceptible improvement in quantity and quality of service offered Train leasing – exporting a good idea 31 March 2004 -10-

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Some references in Western Europe

DSB

• initial rental of three Siemens Desiro DMUs • replacement, less than two years later, by twelve new trains, with a technical specification adapted to the Danish market

Connex

• supply of three Siemens Desiro DMUs within six months, thanks to DSB exchange above • rental of a total of twenty-eight Siemens and Bombardier DMUs, spread across four different concessions

Arriva

• • lease of twenty-nine Alstom LINT41 DMUs first private operator in Denmark

SNCF

• • rental of a total of twenty-three diesel locomotives to SNCF Fret Franco-German certification for cross-border service Train leasing – exporting a good idea 31 March 2004 -11-

Prospects in Poland……

• • • • establishment of PKP Regional Service increased involvement of Voivods pilot privatisation of SKM and WKD large rolling stock renewal requirement  Angel Trains willing to work with operators and administrations on the basis of proven structures and proven assets Train leasing – exporting a good idea 31 March 2004 -12-