PFI - Eurostar wraps financing

* Train order financed

* Third successful Channel Tunnel financing after initial problems

* Channel Tunnel now a success, give or take a few billions

By Rod Morrison

LONDON (Project Finance International) - The £600m financing backing the acquisition by Channel Tunnel passenger operator Eurostar of the Siemens (SIEGn.DE) e320 trains has reached financial close. With both Eurostar and Channel Tunnel owner Eurotunnel (GETP.PA) reporting a buoyant first quarter this week, the infrastructure asset is now making money rather than consuming it.

The Eurostar financing is a hybrid deal involving a corporate financing for Eurostar but with a structured finance overlay, given that Eurostar itself is a joint venture company. The financing is non-recourse to Eurostar's three shareholders - SNCF of France, SNCB of Belgium and London & Continental Railways (LCR) of the UK, all state-owned.

The Siemens contract totals £612m. In addition, Eurostar is spending funds on refurbishing its existing stock, through design house Pininfarina, to bring its capital expenditure programme to £700m. The new loan finances the capital expenditure. The deal runs for 15 years and has a 25% balloon (ie principal remaining) at the end, given the residual value of the trains. Pricing on the loan is said to start at above 200bp over labor and ends just below 300bp. The loan is to Eurostar and is secured on the new Siemens trains and on some of the existing trains. Overlaying this corporate-type structure are structured finance-type covenants with lock-ups, partial repayments and a cash sweep mechanism on downside scenarios. The average debt service cover ratio (ADSCR) is around 1.8x.

The deal is a revenue risk deal, banked on Eurostar's financial performance. The operator has about 9.5m passengers at present from London to Paris and Brussels and under its forecasts expects to get to 11.5m. Some banks that looked at the deal felt this was ambitious. However, the company's revenue streams are more complex than simple passenger numbers, given its ticket and revenue pricing mix.

Eurostar has succeeded in capturing most of the cross-Channel Tunnel passenger traffic from the ferries and the airlines. Its main competitive threat now comes from other potential Channel Tunnel operators. Deutsche Bahn has talked about launching a service from Frankfurt to London using Siemens trains in 2103. This was the main threat analysed on the financing. Eurostar's fixed costs are fairly set, making a price war a challenge. What is more, the tariffs charged by the rail infrastructure operators are important and are said to be rising in France.

The deal was arranged by Credit Agricole, KfW Ipex, Bank of America, Deutsche Bank, National Australia Bank, Royal Bank of Scotland and Santander. The European Investment Bank (EIB) has committed to providing a £300m direct loan to the financing but has yet to sign into the deal, so the commercial banks are carrying its position for a short time. And the deal is still subject to some conditions precedents before funding. The loan has sterling and euro tranches.

In its last annual results, Eurostar reported revenues up 12% in 2010 to £760m and passenger numbers up 3% to 9.5m. The upward trend has continued into this year with Eurostar's first quarter results revenues up 10.7% to £197m. Most of the revenue uplift came from the recovery of the business passenger market. The company has now become a single entity, owned by the three shareholders, and has just relaunched its branding. It is adding Amsterdam, Frankfurt and Geneva to its network.

The Siemens train order has been controversial. Alstom (ALSO.PA), which built the existing stock, lost out on the order last autumn and immediately went to court. The European Rail Agency has given its approval for the Siemens trains to use the Channel Tunnel. However, Alstom is still due to have its court hearing in October.

The latest Channel Tunnel financing is the third successful deal on the transport network, which had been struggling commercially before and since its opening in 1994. The cost of the Channel Tunnel construction itself was double the £5bn original estimate and the private company which built the link, Eurotunnel, needed to constantly restructure its finances and nearly wiping out the company equity. Then UK government plans to let the building of the high speed rail link from the Channel to London to the private sector LCR team floundered in the 1990s and the rail link had to be nationalised and built with state funds.

But in 2007, Eurotunnel successfully restructured its £6.1bn debt pile with a new more manageable £2.9bn of senior facilities, effectively writing down half of its debt into other instruments. Then last year, the UK government sold HS1, the high-speed line between the Channel Tunnel and London. The link had cost £6bn to build and was sold to Canadian-led investors for £2.1bn. And now Eurostar has been able to raise £600m of third-party debt for new rolling stock. With the new Siemens trains, journey trains from London to Paris will be cut to just over two hours. Eurostar is buying 10 sets, which will have a capacity of 900 passengers, 20% more than the existing trains. The prize for the Channel Tunnel passenger operator market is now the wider continent, which still has 10m passengers opting to fly instead of taking the train. But at the same time the threat from new operators has become real - now the Channel Tunnel is a European infrastructure success story, give or take a few billions of sunk private and public funding.

This week, Eurotunnel reported its revenues up 24% in the first quarter from its business to £157m - mainly freight and car shuttle services plus the usage fees it charges Eurostar - and perhaps one day, other operators. The Channel Tunnel was established via a treaty signed in Canterbury in 1985 between French president Francois Mitterrand and UK prime minister Margaret Thatcher. One favoured a statist approach, the other a free market approach. In the end, both prevailed.