GLOBAL INFRASTRUCTURE DIESELNETZ

GERMAN RAIL ATTRACTS INSTITUTIONS THE DIESELNETZ ULM TRANSACTION PAVED THE WAY FOR INSTITUTIONAL INVESTORS IN THE GERMAN REGIONAL PASSENGER SECTOR. IN APRIL 2019 INSTITUTIONAL INVESTORS CLOSED WITH DIESELNETZ SACHSEN-ANHALT THE SECOND TRANSACTION IN THE SECTOR. BY DERK OPITZ, PARTNER AT ASHURST.

The German regional passenger rail transport As there is no fully functioning secondary sector, or Schienenpersonennahverkehr SPNV, market for used passenger rolling stock in is a fully liberalised sector and has been opened Germany, a bidder for a concession faces the so for privately owned operating companies called residual value risk, ie, if the bidder does (TOCs) competing with the incumbent state- not win the following concession period, it is owned operators. left with a fleet of rail vehicles it cannot use Given that regional public passenger any more, even though the rolling stock can transport in general is not organised as a self- technically still be used for another 10 to 20 sustaining transport sector in the sense of full years. funding through fare box revenues, the federal Against this background most of the 26 government through the local public transport German PTAs support the financing of new authorities (PTAs) of the federal states financially rolling stock in a way that deals with the residual supports regional public passenger transport, value risk and provides comfort for the financiers. regionalisation funding. There is no uniform approach in Germany In order to create a level playing field for the as regards the support of the financing of new competing TOCs the PTAs in particular support rolling stock for the regional public transport. the financing of the acquisition of the rolling In fact, each of the 26 PTAs has its own stock needed for the respective operation, in approach. particular when the PTA requires the TOCs to use new rolling stock. Before Dieselnetz Ulm The reason for that support is that the PTAs European and German policy has been trying for aim to promote competition and want the TOCs years to support the financing of infrastructure to compete with better services for passengers by institutional investors. For example, Solvency and not with better financing conditions. II, the regulatory regime applying to insurance Therefore, the financing is supported in companies in Europe since 2016, introduced the one way or the other to take the financing concept of “qualified infrastructure”, privileging conditions out of the equation in a tender the investments of insurance companies in public process. infrastructure. If that was not the case, the state-owned At first glance financing of German regional TOCs would have a considerable competitive passenger rail transport looks like the perfect edge over the privately owned companies. investment for long-term and risk-averse For example, AG, Germany’s investors such as life or health insurers given its leading , is 100% long term and low risk profile. Notwithstanding owned by the German federal government and that fact, until Dieselnetz Ulm, as further therefore benefits from the AAA rating of the described below, there was no financing by federal government. Deutsche Bahn AG could institutional investors in this area. This had theoretically finance its operations on the capital mainly three reasons: market at German public bond conditions, ie, at a l First, the financing of German regional coupon close to zero. passenger rail transport was a domain of A peculiarity of the German SPNV is driven by the German semi state-owned banks, or European regulation and specifics of the German Landesbanken. They purchased the remuneration market for rolling stock. claim against the PTA under a receivable Pursuant to European procurement laws a purchase agreement to issue covered bonds concession period for regional passenger rail backed by the claim against a public body. Even transport services in Germany is in principle though there are no public bonds covering the limited to a maximum period of 15 years. full length of rolling stock financings, the banks The average life time of rolling stock used for offered to the TOCs public bond conditions for public transport is 25 to 35 years depending, in the entire term and thereby outpriced other particular, on the type of traction. financing sources.

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l Second, the Solvency II definition of qualified to assign the portion of the fixed remuneration infrastructure does not explicitly include claim against the PTA relating to the costs of rolling stock. Hence, at least as per today, the rolling stock financing to the financiers and it is the prevailing view among insurance (ii) the PTA waives any counter-claims it would companies that rolling stock does not qualify as have against the TOC vis-à-vis the financiers in infrastructure within the meaning of Solvency relation to such portion being assigned. II. The waiver of counter-claims has the effect l Third and most important, until Dieselnetz that even in case of a default of the TOC Ulm there was no market precedent for a with its obligations towards the PTA under financing with insurance companies. Usually the concession, the financiers would still be the bid is awarded two to three years before the remunerated. If the performance of the TOC commencement of operations. The supply of a deteriorates so much that the PTA is required mid-sized fleet of vehicles can take two years. to terminate the concession, the PTA would On average, the TOC has a maximum of six replace the TOC and oblige a new operator to months to have its financing in place in order to assume the financing. Thus the project risk be able to start the construction process in time. is taken away from the financiers and the Against this background, in particular the financiers can rely on the solvency of the PTA smaller, privately owned TOCs were hesitating instead of the TOC when assessing the likeliness to take the transactional risk and rely as of defaulting payments. counterparties on insurance companies, which The BEG, however, is organised as a private have, at least in Germany, limited experience at limited company owned by the Free State of the most with rolling stock financings. Bavaria. The remuneration claim is therefore not a direct claim against a public body. The second institutional deal For Diesel Network Ulm the time had come Bayerische Eisenbahngesellschaft mbH (BEG), for a new financing structure. Given that BEG the PTA of the Free State of Bavaria, in 2018 is a private company the remuneration claim selected DB Regio AG in a competitive bidding against the PTA is not a direct claim against a process to operate regional passenger transport public body and thus not eligible for a public services on the diesel rail network around the bond issue. Hence, the semi state-owned banks Bavarian city of Ulm (DNU) for a concession were not able to offer covered bond financing period from December 2020 until December for DNU. 2032 with approximately 1.5m train kilometres As stated, the regional passenger rail per year. transport in Germany is typically financed with The tender documents required from the a purchase of the remuneration claim against TOC to operate the passenger services with the PTA by the financiers under a receivable newly purchased diesel multiple-units (DMUs). purchase agreement (RPA). One of the reasons DB Regio AG will be operating the DNU with for choosing an RPA, in particular over a loan, Coradia LINT diesel railcars with a purchase is that a loan governed by German law can be price of more than €90m. repaid without premium or penalty after 10 BEG decided to support the financing of the years no matter if the contractual term is longer acquisition of the new DMUs in Ulm with a than 10 years. redeployment guarantee in combination with a Under Solvency II, however, insurance waiver of counter-claims. companies are limited in their type of l Redeployment guarantee – Under a redeployment investments. As a direct investment insurance guarantee the PTA guarantees the financiers companies can only invest in loans, bonds or that it will oblige the TOC being awarded the equity stakes. A financing by way of an RPA is subsequent concession period to use the DMUs not possible with insurance companies. under the same terms as for the first concession Therefore, DB Regio had to implement a period. In other words, the PTA guarantees the structure that has never been used before use of the DMUs for approximately 25 years. for SPNV transactions. The investor category This allows financiers to put in place a financing of institutional investors offered new with a term matching the lifetime of the rolling opportunities but on the other side, the stock. transaction had to meet further investment l Waiver of counter-claims – A waiver of counter- criteria such as in particular, the security claims means that (i) the PTA allows the TOC principle laid down in § 124 (1) No. 2 of the German Act on the Supervision of Insurance Undertakings, Versicherungsaufsichtsgesetz – Until Dieselnetz Ulm there was no VAG. DB Regio instructed Joh Berenberg, Gossler & market precedent for a financing with Co KG to arrange a financing by way of a project bond with insurance companies. Berenberg insurance companies. The smaller TOCs selected Ashurst LLP as legal adviser to the investors. The group of investors arranged were hesitating to take transactional risk by Berenberg was made up of the German pensions funds, life and health insurers

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represented by their asset managers MEAG, with its obligations towards the PTA, can acting for DKV Deutsche Krankenversicherung theoretically prejudice the TOCs ability to pay AG and ERGO Lebensversicherung AG, and the finance costs. Talanx, acting for HDI Pensionskasse AG and After the concession was awarded to Abellio neue leben Pensionskasse AG. in 2015, Abellio’s parent company NS financed Ashurst chose registered notes, the acquisition of the vehicles with a leasing Namensschuldverschreibungen, to finance DNU structure. DISA Asset Ltd, a subsidiary of NS, because registered notes (i) meet the criteria of served as leasing company. DISA Asset was § 124 (1) No 2 VAG and (ii) can have a term of financed in a rather traditional way by way more than 10 years. of shareholder loans and a term loan from In spite of the fact that for both sides (the Sumitomo Mitsui Banking Corporation and KfW TOC and the insurance companies) the project IPEX-Bank GmbH. marked new grounds away from well-known In April 2019, NS sold the shares in DISA paths financial close was reached in less than Asset to 3i’s European Operational Projects three months. Fund. 3i decided to replace the existing traditional financing also with an institutional The first institutional deal solution by replacing the existing debt In 2015, there years before DNU, the state simultaneously with the acquisition of the of Saxony-Anhalt, the regional association shares, making use of the experience from for the metropolitan area of Braunschweig, DNU. Regionalverband Großraum Braunschweig, and 3i instructed Ashurst with the the free state of Thuringia, together the DISA implementation of the financing structure. PTAs, awarded Abellio Rail Mitteldeutschland As for DNU, the long-term financing GmbH, a subsidiary of Dutch was provided by registered notes, Nederlandse Spoorwegen NV (NS), the contract Namensschuldverschreibungen, subscribed for the provision of local rail transport services by institutional investor MEAG. In addition, on the so-called diesel network Saxony-Anhalt, 3i included short-term loans in the financing Dieselnetz Sachsen-Anhalt or DISA, with a structure provided by SMBC. concession term of 14 years. Last but not least, the financing structure The DISA concession, with approximately 9m had to allocate the project risk between the train kilometres per year, is one of the largest financing parties, the leasing company and concessions in the German local passenger the TOC. Hence, in the DISA transaction two transport market. Abellio will be operating DISA more layers of complexity were added to the with 52 Coradia Lint 41 diesel railcars with a transaction. purchase price of more than €170m. Similar to DNU, the DISA PTAs required Going forward the use of new rolling stock. The DISA PTA DNU opened a new financing source for TOCs supported the financing by way of a residual active in the German regional passenger rail value guarantee, Restwertgarantie. transport market and a new market segment l Restwertgarantie – Under a residual value for insurance companies. The long-term, stable guarantee the DISA PTAs assumed the cashflow and low risk investment can indeed obligation to purchase the vehicles at the become a perfect match for the insurance end of the concession term for a guaranteed companies. DISA proved that institutional minimum price; in other words the DISA PTAs investors can be imbedded in complex financing did provide a solution for the residual value structures. risk, albeit in a different manner than for For the suburban railway network of DNU. Hanover, the regional train network around The DISA PTAs did not, however, agree to a (network Elbe Spree) and the Augsburg waiver of counter-claims. This means unlike networks currently being financed institutional for DNU, the DISA concession does contain a investors are more than a theoretical limited project risk, ie a default of the TOC alternative. n

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