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Might RBS and Santander offer a BOGOF?
At the end of September, Royal Bank of Scotland reveaked that appointed investment bankers Lazard to ‘review the strategic options' for its Angel Trains subsidiary. According to Informed Sources the bank really is looking at options: the business would be sold only if a worthwhile emerges.
It is worth noting that Rolling Stock Companies (ROSCO) have been put up for sale by their owning banks before and no-one has bought. Porterbrook was up for offers before it was acquired by current owner Banco Santander and could still be sold for the right price.
Of course, talk of ROSCO sales gets the sans culottes protesting. Press reports quoted a value of £4billion for Angel compared with the £395 million for which RBS acquired the company in December 1997.
Memories of the original buyers making individual fortunes when the sold on still rankle. And for £395 million to grow to £4 billion in 10 years sounds like easy money.
However the current estimate is based on what is known as ‘enterprise value'. And much has changed at Angel over the past decade.
For a start, in 1987, the only asset was the inherited ex-British Rail fleet covered by the Master Operating Lease Agreement (MOLA). In addition, the income from the existing leases, running up to 2004, had already been securitised.
Ten years later, while the rental from the shrinking MOLA fleet has fallen, the Angel fleet in the UK includes £2.4 billions worth of new traction and rolling stock. A further £1billion has been invested in new traction and rolling stock for the expanding European rail leasing market. Adding this lot up gives the enterprise value of around £4billion.
And while in the UK Angel faces the problem of ‘trying to get someone to buy something', the European leasing market is expanding fast. European assets are expected to double to £2bn in ‘the next few years.
Media reports on the potential sale highlighted the current Competition Commission inquiry into the Rolling Stock Companies as the major obstacle to a sale. In fact, with the Commission getting its teeth into DfT Rail's role in distorting the market, I don't see it as a potential show-stopper.
There are much greater threats to the ROSCOs, not least DfT Rail's traction and rolling stock procurement strategy. The approach to procuring the Intercity Express Programme (IEP), which by-passes the ROSCOs, is likely to be repeated with the New Generation electric and diesel multiple units intended to replace the MOLA fleets.
IEP procurement is currently based on a Train Service Provision contract, with a consortium responsible for manufacture, long term maintenance and funding (but see below). Applied to the replacement of the MOLA EMU and DMU fleets, the ROSCOs' role in the domestic market would dwindle away.
In this scenario, the only long term return from buying a ROSCO would be from overseas activities and maximising the revenue from the existing fleets. True, some of the ex-BR kit is expected to run on past the RVAR compliance deadline of 2020, but would a business with no future invest in what will be, at least nominally, written down assets?
Commenting on the MOLA fleets at a Conference on September 25, DfT Rail Technical Manager Peter Randall said that the Department will determine which are the ‘good vehicles' for investment and those which are ‘very inefficient' will be replaced. Not an encouraging prospectus for a potential buyer. Clarification is expected with DfT Rail's promised rolling stock strategy which has now slipped from November to January 2008.
IEP – 20 year assured useAccording to Informed Sources, DfT Rail has had to modify its original procurement model for the Intercity Express Programme (IEP) This was based on a 30-35 year total train service provision Private Finance Initiative deal However, such an arrangement, effectively removing any residual value risk, could result in the funding requirement being transferred to the government's books. Recently the Office of National Statistics reclassified the Underground PPP as public funding. Currently Rolling Stock Companies fund new trains on the basis of operating leases. An operating lease requires the owner of the asset to take the risk that a train fleet might come off lease with no future use. This is termed residual value risk. Lease rentals take this residual value risk into account. But a lease covering the book life of the asset is classified as a finance lease and loses various tax benefits. With IEP, DfT Rail is now suggesting that procurement will be backed by a 20 year utilisation guarantee. This will increase the overall cost.
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