On 6 August 2008, a consortium advised by Babcock & Brown announced that it had reached financial close on the purchase of Angel Trains from the Royal Bank of Scotland for an enterprise value of £3.6 billion.

The consortium included Babcock & Brown European Infrastructure Fund (BBEIF), AMP Capital Investors, funds advised by Access Capital Advisers, Deutsche Bank and Babcock & Brown Public Partnerships.

Anthony Kennaway from Babcock & Brown writes about the transaction that saw his company acquire Europe's leading rolling stock provider.

The Acquisition

At acquisition, Angel Trains was split into distinct and stand alone UK and European entities.

These businesses will target the UK's mature, but growing market, and the rapidly developing continental European market that has been stimulated by the liberalisation mandated by the EU's Open Access Directive.

Haydn Abbott, incumbent chief executive of Angel Trains was appointed CEO of the European Business and Rob Verrion, ex-COO of UK gas distributor Transco, was appointed chief executive of the UK business.

Angel Trains is a leading provider of railway rolling stock in the UK and in continental Europe. In the UK, the company is one of three rolling stock companies more than a decade after the UK's privatisation of the rail fleets. It provides about 4,100 passenger train vehicles and 280 freight locomotives to passenger and freight operators.

The final close announcement was the product of many months of concerted effort from the consortium members, requiring the structuring expertise born of Babcock & Brown's nearly 20 years experience in infrastructure investment as well as strong rail leasing and asset management skills.

In very tough debt market conditions, the advisory team assembled more than £2.8 billion in acquisition financing and secured consensus from two clubs comprising a total of 17 initial debt providers and 6 equity providers.

The transaction is the largest European infrastructure transaction and the largest transport transaction worldwide this year to date.

The Opportunity

From the outset, Babcock & Brown and the consortium saw Angel Trains as a significant investment opportunity.

Its customers include 18 of the 20 train operating companies in the UK, including major fleets placed with South West Trains and Virgin West Coast. In continental Europe, Angel Trains has operations in 11 countries and provides about 240 locomotives and 180 passenger trains to various operators. It also has a significant order book of passenger trains, locomotives and wagons in build.

Demand for passenger railway services in the UK is forecast to continue to increase in the foreseeable future, driven by favourable demographic factors as well as further improvements in train operator service quality and reliability. To meet sustainable growth of passenger demand, substantial investments are needed in the sector. There is a strong incentive for Department for Transport (DfT) and other related authorities to remain committed to support the expansion of rail modal share and in particular an increase in capacity though the expansion of available rolling stock - accentuated by the recent NAO report.

The UK rail network is operating near capacity, not only in terms of track, station and signalling capacity, but also rolling stock.

DfT forecasts that rail passenger km will increase by 2.6 per cent per annum from 2006 to 2014 compared to 0.6 per cent per annum for all modes of transport. The department has stated that establishing sufficient capacity to meet growing passenger demand is a key priority.

The 2007 White Paper and 2008 'Rail Technical Strategy' outlined the Government's long term aspirations for rail vehicles and identified a requirement for a further 1300 railcars for existing franchises. In addition, the Intercity Express Programme is expected to require a further 500 to 2000 vehicles and Crossrail a further 600.

The recent National Audit Office report on the UK rail franchise market has added further impetus by concluding that the franchise system provided good value for money and called on government to speed up the procurement of new rolling stock to ease overcrowding.

There are also strong incentives for the UK and European governments to support the expansion of rail freight, which produces 80 per cent less carbon dioxide per tonne carried than road haulage and has also higher reliability levels (95 per cent) compared to 80 per cent of road for comparable haulages.

DfT forecast for freight volume (in terms of tonne km) is to grow at CAGR of 2.66 per cent per annum until 2014.

In the EU, the European Market for privately owned and leased rolling stock has developed strongly over recent years and is driven by the positive effect of EU-directive based market liberalisation, a supply side shortage, road traffic congestion and rising environmental concerns.

Angel EU enjoys a leading position in the freight locomotive market, and regional passenger train leasing markets - conferred by its early entry into the European market and high investment in rolling stock since 2000.

The nature of Angel EU's business model provides a high degree of income stability and visibility especially as Angel EU has established strong relationships with a diversified customer base of predominantly private train operators.

The Transaction

Angel Trains was a complex transaction, involving, ultimately, 6 equity partners:

• Babcock & Brown European Infrastructure Fund
• AMP Capital Investors
• Funds advised by Access Capital Advisers
• Deutsche Bank
• Babcock & Brown Public Partnerships
• a further institutional investor

Long term debt facilities were arranged by Babcock & Brown and a series of debt providers including:

• BNP Paribas
• Banca IMI SpA
• Calyon
• Commonwealth Bank of Australia
• DEPFA Bank plc
• Dexia Credit Local
• HSH Nordbank AG
• ING Bank
• KfW IPEX-Bank GmbH
• Lloyds TSB Bank plc
• Natixis
• NORD/LB Norddeutsche Landesbank Luxembourg S.A.
• RBC Capital Markets
• The Royal Bank of Scotland
• Sumitomo Mitsui Banking Corporation
• Unicredit/HypoVereinsBank
• Queensland Investment Corporation, an institutional funds manager

The Consortium's legal advisers were Freshfields Bruckhaus Deringer LLP. 

The nature of credit markets, even at the time of the transaction meant that it was not possible to assemble a small underwriting group to provide the required debt facilities. Consequently, Babcock & Brown advisory structured a 'club' deal where debt was substantially syndicated prior to the completion of the transaction.

Conclusion

Very few other investment businesses offer investors the operational expertise (infrastructure, transport and rail leasing) as well as the structuring ability that has made this opportunity possible.

The Angel Trains transaction provides an interesting precursor to the rumoured sale of the UK's other two rail leasing businesses, Porterbrook and HSBC Rail.

Despite the turbulence in credit markets it is clear that with the right structure, both investors and debt providers are still prepared to invest in high-quality assets with strong cash flows.

There is significant potential for growth in the UK and continental rail markets. The recent plans for high-speed rail announced by the Conservative party indicate cross party consensus on investment in rail.