EUROPE: Rolling stock lessors in Europe are benefiting from continued rail traffic recovery and have resilience to higher interest rates, adequate leverage and long-term funding profiles, according to a report from Fitch Ratings.
Fitch says European policies favouring environmentally friendly transport will support both the passenger and freight sectors, although slower economic growth and intensifying competition could put pressure on lessors’ financial performance.
Fitch expects rolling stock lessors will manage the risks of rising funding costs and inflation, helped by extensive hedging strategies and long-dated funding profiles, minimising immediate refinancing risks. High interest rates increase barriers to entry, while continuing inflation supports the residual value of existing fleets.
Government interventions have encouraged the recovery of passenger traffic, and Fitch expects substantial subsidies to continue over the next few years.
The agency does not expect the UK’s draft rail reform bill to have immediate significant impacts on leasing companies. A potential increase in government involvement could weigh on margins, but Fitch believes this would be offset by the benefits of longer contracts, lower counterparty credit risk exposure and more predictable revenues.
In continental Europe, Fitch expects continuing liberalisation to provide growth opportunities for private lessors.
Sluggish industrial and trade activity could lead to stagnant freight volumes in 2024, but the long-term effects will be smoothed by fairly long-dated leasing contracts. A pronounced economic slowdown could put pressure on locomotives’ residual values, particularly if over-production coincides with freight volumes falling significantly.
Fitch uses leverage as a key metric for assessing financial discipline among rolling stock lessors. It says tolerable leverage is higher for the rail sector because it has more predictable cash flows than other leasing sectors.
