THE recovery in passenger traffic, the ability to deflect higher interest rates, reasonable leverage and long-term funding profiles are all working in favour of European rolling stock leasing companies, according to a new report by Fitch Ratings.
Fitch says that European Union (EU) policies supporting green transport will benefit both passenger and freight markets. However, the financial performance of leasing companies could be impacted by a slowdown in economic growth and intensifying competition, according to Fitch. As a result, the credit rating agency’s outlook for the European rolling stock leasing sector in 2024 is neutral.
Fitch expects lessors will manage the risks of rising funding costs and inflation, helped by extensive hedging strategies and long-dated funding profiles which minimise immediate refinancing risks. High interest rates increase barriers to entry for potential competitors, while continuing inflation supports the residual value of existing fleets.
However, Fitch anticipates increased competition among private leasing companies in the German passenger sector, in particular, as new entrants join the market. Additionally, contract maturities will drive more releasing events in 2024 than in previous years.
The report notes that government intervention in the wake of the Covid-19 pandemic has assisted the recovery of passenger traffic, and Fitch expects substantial government financial support for the rail sector to continue over the next few years.
Growth opportunities for private lessors
Britain’s draft rail reform bill will enable the transfer of franchising powers to a new integrated rail body, but this is unlikely, according to the report, to have an immediate significant impact on the rail leasing sector. In mainland Europe, Fitch expects continuing liberalisation, spearheaded by EU policy, to provide growth opportunities for private lessors.
A risk for European train leasing companies in 2024 is sluggish industrial and trade activity, leading to stagnant freight volumes. However, the report says that this effect will be smoothed over the longer term by long-dated leasing contracts.
Another risk is a pronounced economic slowdown, although not currently forecast, that could put pressure on the residual value of locomotives, particularly if over-production coincides with freight volumes falling significantly.
Fitch focuses on leverage as a key metric for assessing financial discipline among rolling stock lessors. It says tolerable leverage is higher for this sector, reflecting more predictable cash flows than for other leasing sectors. According to the report, both Alpha Trains and Eversholt UK’s leverage is sensitive to increases in capital investment or pressure on lease rates and utilisation.
While Fitch assesses the overall outlook for the European rolling stock leasing sector as neutral for this year, it recommends that those active in the market consider three key areas of potential change:
rapid liberalisation of mainland Europe’s passenger markets would require large private investment and could attract new entrants to the market
overheating in the freight sector, followed by overproduction (not currently forecast), could destabilise the market and undermine residual values, particularly for younger electric locomotives, and
upcoming British rail reform might lead to changes in typical contract length, the public and private-sector status of lessors’ counterparties, and the specifics of tendering processes, all of which could negatively affect revenue and business stability.
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