Considerations for lessor borrowers in the rail sector

Posted: 4 November 2021 | | No comments yet

In comparison to other asset classes, operating lessors in the rail sector have had a relatively ‘good’ pandemic, and deal activity remains strong. Here, Louise Mor, Partner in WFW’s Assets & Structured Finance Group, sets out some of the key areas for operating lessors to consider when planning their financing arrangements.

Considerations for lessor borrowers in the rail sector

Type of financing

Put simply, what do you need and what can you offer? Lender requirements will differ, depending on whether the borrower wishes to finance a single fleet which is tied to one operator or a mixed portfolio of varying types of assets operating in different jurisdictions, or to implement a multi-currency, multi-product corporate platform which is intended to run for many years – to name just three options. 

Is the financing a true asset financing, where banks will place great importance on the operation and management of the rolling stock, or is it a corporate financing, where the focus is more on the credit of the borrower and its sponsors than on the assets themselves? The latter should allow more operational flexibility, but may not be available for start-up entities where lenders cannot yet see a proven track record of asset management, operation and profitability.


Clearly, the banks will want to ensure the borrower is properly maintaining and preserving its assets, running its business sensibly and providing sufficient information to enable the banks to monitor compliance. Borrowers need to think carefully about what they agree to, to ensure they retain sufficient operational flexibility to run the business and that their reporting obligations do not create an excessive administrative burden for them. 

Borrowers need to think carefully about what they agree to, to ensure they retain sufficient operational flexibility to run the business and that their reporting obligations do not create an excessive administrative burden for them.

For example, consider any requirements relating to the terms of new leases – are they sufficiently flexible to allow the lessor to negotiate departures from its preferred position without lender consent? Are any minimum lease criteria in line with what would always be expected from a lessee, or is some flexibility necessary?

Operational flexibility is key from a borrower standpoint, and should be considered in order to ‘future proof’ the loan document as far as possible. For example, if the borrower hopes to branch out into other jurisdictions, or into complementary areas such as provision of maintenance services, then the finance documents need to be drafted broadly enough to allow that.

Other key points include the ability to get cash out of the borrower and up to shareholders. What restrictions should apply? Give careful consideration to necessary carve outs – for example, does the borrower need to make payments to its shareholder in respect of administrative amounts, or for employee or pension costs? Restrictions should be limited to payment of dividends and ‘disguised dividends’, rather than to true operating expenditure. Thought should be given to the scope of carve-outs to any restriction on the upstreaming of cash.

Generally speaking, the more well-established the borrower, the more flexibility they will be able to negotiate. 


Corresponding with operational flexibility, it is worth making the obvious point that the borrower has to run its financing for the life of the loan – therefore it is worth keeping things simple. For example, streamline the conditions precedent and utilisation process as much as possible, and make sure that the borrower is not so tied up in knots managing the reporting requirements and information requests, that they have no time to actually run the business.

Equally, pay attention to the process for obtaining waivers and consents to amendments, and to the level of consent required. Waivers may be required not only to deal with problems arising in the business, but also to deal with new opportunities or issues which simply were not foreseen at the time the loan was signed and hence were not contemplated by the document. It is in everyone’s interest to be able to resolve such requests on a timely basis.

Security – rolling stock

Unsecured finance is the preserve of the corporate giants. For everyone else, security will be required. Rolling stock security can be difficult for various reasons, not least of which is the limited number of countries an asset will be homologated for. With other assets, such as aircraft, it is accepted that the security must be effective in the state of registration, but that (clearly) the aircraft might then fly to a country where that security is not recognised. However, for cross-border rolling stock which travels between only a few countries, there can be a desire for the security to be valid and enforceable in all countries where the rolling stock is permitted to go. Depending on the countries, this may simply not be possible. There are other reasons too why security over particular rolling stock may not be feasible, such as high registration taxes or a requirement that the asset is owned by an entity incorporated in that jurisdiction. 

…for cross-border rolling stock which travels between only a few countries, there can be a desire for the security to be valid and enforceable in all countries where the rolling stock is permitted to go.

As a result, borrowers should aim to provide a workable, but not necessarily perfect, security package. This may take the form of agreeing a minimum level of security (calculated by reference to the portfolio value, or to the debt outstanding). Alternatively, lenders could accept security that is enforceable in the primary jurisdiction of operation, even if not enforceable in all countries of operation. In formulating this ‘good enough’ package, borrowers should be mindful not only of what they can offer now, but what they can provide in the future based on their operational plans and expectations. If the security package is based on most assets operating in Germany, what happens if a prospective new lessee wants to operate them in France? Can the borrower still comply with its obligations in respect of the required level of security? It is vital that there is a workable balance between the banks’ security requirements, and the borrower’s ability to operate its business in a way that maximises its ability to seize opportunities and generate revenue.

In contrast, where financing is required for a single fleet operating in one jurisdiction, asset security will almost certainly be required. Care should be taken in structuring the corporate organisation to enable this – it may be advisable to own the assets through an SPV to enable that specific financing to be kept ‘clean’ from the rest of the group. The jurisdiction of incorporation of the owner should also be considered, as certain jurisdictions do not permit security to be registered unless the grantor is also registered or incorporated in that jurisdiction. This should obviously be considered at an early stage in the planning process.

Security – general

In addition, lenders may require security over the borrower and its subsidiaries or, if different, the asset-owning entity. Consideration should therefore be given to the corporate structure so as to enable, if needed, future financings or business which is non-compliant with the terms of the present finance to be placed elsewhere within the group.

Lenders may also require security over the underlying leases, or the rent and other receivables. This security will follow the governing law of the lease, and so depending on the scope of the portfolio, multiple security agreements may be required. Perfection of the security may require notification to lessees, therefore thought should be given as to how and when that is communicated. Will lessees be notified on granting the security, or only on the occurrence of an event of default, for example? Where lease ‘churn’ may be high, it can be onerous for the borrower to have to keep giving notices, or to frequently enter into additional security documents to secure new leases. It may be desirable to limit the administrative burden by providing, for example, for security to be granted on a periodic basis (rather than on the entry into each new lease).

Future plans

In addition to allowing for changes to the business, borrowers should consider whether the ability to upsize or extend the facility to fit with future plans is needed. If so, borrowers should consider whether to incorporate this on day one, or to wait until they may be in a better position to negotiate obligations and restrictions under the document (as well, of course, as pricing). 


A final – but vital – point to consider when planning a financing is reliability of execution: do the banks, lawyers and other advisors involved have the necessary experience to get the deal done in a commercial, pragmatic and timely manner? Many of the issues arising during the financing negotiation will not be legal points at all, but will be practical, commercial points. Having a legal team that truly understands the specificities and nuances of the sector is therefore essential.

Louise Mor WFWLouise Mor is a Partner in WFW’s Assets & Structured Finance Group in London, with significant expertise in the rail and aviation sectors. Her transactional experience includes portfolio, secured debt, common terms platform, ECA-supported and Islamic financings, leasing company and asset acquisitions, operating leases and sales. She has represented several of the world’s largest leasing companies, operators and banks and has recently acted for Alpha Trains, Ermewa, NatWest and UKEF.

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