Case Study – The Reliance Rail Rolling Stock Project, Australia
Reliance Rail was Australia’s largest PPP project when it was put to market in 2005-06 at Australian Dollar (AUD) 3.6 billion, with a capital requirement of AUD 2.35 billion. The contract required the design, construction, and maintenance of 78 urban train sets (626 carriages with 8 per train) for 30 years with options for further rolling stock purchases beyond that term. The contract was the first PPP for rail rolling stock procurement in Australia involving a long seven year manufacturing and construction period, complex risk allocation, and international procurement arrangements.
The new trains featured high levels of innovation and the contract extended to driver and crew training, and construction of a new maintenance facility to service rolling stock over the life of the contract. The trains were operated by the state-owned RailCorp organization as part of the NSW rail transport service, and the PPP paid by way of an availability payment involving availability, reliability, and disruption performance criteria.
The winning bidder for the project was a consortium of the engineering company Downer EDI (49 percent), ABN Amro and Babcock and Brown Public Partnerships (12.75 percent each), and AMP Capital Investors (25.5 percent). ABN Amro provided an underwriting of the AUD1.95 billion bond debt component and the bank debt was provided by Westpac, Mizuho, National Australia Bank, and Sumitomo Mitsui.
The Reliance Rail project was highly leveraged with equity accounting for around 6 percent of project capitalization. The debt finance and the interest rate swaps required for the fixed (pre-operational stage) and floating (operational stage) debt feature a monoline guarantee from FGIC and Syncora. The bonds were swapped into the Consumer Price Index (CPI) for inflation protection at a lower cost than otherwise available in the Australian market (Project Finance 2006-07).
A credit wrap was purchased in 2007 from two monoline insurers, Syncora Guarantee Inc. and FGIC UK Limited for the bond and bank finance to reduce the cost of capital to that available for AAA grade debt. Following the financial crises of 2007-08, both insurers incurred credit rating downgrades, and in 2010 Moody’s rated the guarantee of both companies at Ca (Standard and Poor’s CC) (Moody’s Investor Services 2010).
In 2012, Reliance Rail encountered credit reappraisal ahead of a drawing on its bank facility. The concern involved the consortium’s weak financial position, delivery delays, and an 18-month slippage in the delivery schedule. The project’s AUD 2.060 million senior debt was given a credit rating by Standard and Poor’s CCC+ in May 2013, and the AUD100 million junior debt was rated CCC- reflecting a weakened credit position and operational problems and delays.
Source: Project Finance: Transactional Evidence from Australia (2014). http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1064&context=pib