Angel Trains' owners may pay price for costly leases

Tag : parts per billion

Royal Bank of Scotland (RBS) completed the first piece of itscash-raising programme yesterday by selling Angel Trains, the trainleasing business, to Babcock & Brown European InfrastructureFund for £3.6 billion.

The deal is a key component of RBS’s dash to raise furthercapital after completing its £12 billion rights issue thisweek. However the new owners could be forced to sell parts of theAngel business within months if the Competition Commission decidesthat prices for leasing trains are too high.

The Commission ruled last December that there was evidence thatprices in the rolling stock leasing market were too high andsingled out Angel Trains, the biggest operator, which has about 40per cent of the market.

Speaking on behalf of a consortium of investors, Simon Gray, headof European Infrastructure M&A at Babcock & Brown, said:“We have made very conservative assumptions for this businessand planned for all the outcomes. We don’t think that Angelhas been making excessive profits and it may well be shown thatthey have provided good value for money.”

Babcock & Brown had to enlist 17 banks to raise the £2.8billion debt it needed to buy Angel. RBS, which is exiting theindustry after 11 years, is one of the banks providing long-termdebt. Mr Gray said: “We are seeing a reluctance by banks toput up their balance sheet to underwrite deals. Instead of going toone or two banks, who would syndicate the debt to others, we had togo to a much larger group.”

He added that it was not surprising to see RBS continuing as alender to the new owners: “There would have been concern ifthey hadn’t been.”

The sale of Angel Trains has been a critical part of RBS’splan to shore up its finances and focus on its main bankingbusiness. It is also understood to be selling its insurancebusinesses – Direct Line and Churchill – for about£7 billion.

Analysts believe the bank will make a profit of £250 millionto £300 million on the sale of Angel Trains after theconsortium, which includes Deutsche Bank, Access Capital Advisers,and AMP, the Australian specialist investor, secured the deal forless than the expected £4 billion. RBS bought Angel Trains in1997 for £408 million.

One of three national “roscos” [rolling stock leasingcompanies], it provides 4,100 passenger train vehicles and 280freight locomotives to passenger and freight operators in the UKand Europe. Its customers include 18 of the UK’s 20 trainoperating companies and it has fleets with South West Trains andVirgin West Coast. It also has a significant order book to buildpassenger trains, locomotives and wagons, including new Pendolinocarriages for routes from London to Glasgow through Manchester.

Angel was created in 1994 in advance of the privatisation of theUK’s rail network and is the biggest of the UK’s threetrain leasing companies. Its rivals are HSBC Trains and Porterbrookwhich are owned by high street banks HSBC and Abbey respectively.

Angel’s buyers hope to capitalise on a growing rail marketthat has seen passenger numbers rise by 50 per cent and freighttraffic up 60 per cent in the past decade, as well as benefit fromnew European rules on open access.

Rob Gregor, the head of European infrastructure at AMP Capital,said: “We believe that the liberalisation of the Europeanmarket and government investment in the UK mean that this is anexciting time to be investing in the UK and European railsectors.” Despite the impact of the credit crunch, aspokesman for Babcock & Brown said that it secured debt for thedeal on “competitive” terms. Infrastructure assets areseen as a safer bet by investors in the current turmoil.

The Babcock & Brown European Infrastructure Fund owns 22.2 percent of Forth Ports and a stake in Brisa, a Portuguese toll roadcompany. The fund, which closed in November last year, raised€2.2 billion (£1.7 billion), which it will gear up totake long-term stakes in European infrastructure assets.

The fund is ring-fenced from its parent company, which is listed inAustralia. The parent company saw its shares fall again yesterday,compounding heavy losses earlier in the week.

The decline in Babcock’s share price has taken its marketvalue below a level set by its lenders that would trigger a reviewof its debt agreements. Babcock has said that reaching the reviewlimit does not mean it would have to repay or speed up repayment ofits A$2.8 billion (£1.35 billion) in debt, due by 2011.

The sale of Angel completes a busy week for RBS, whose £12billion rights issue was backed by more than 95 per cent of itsshareholders on Monday.