John Laing Infrastructure invests in UK rail rolling stock

FTSE 250-listed John Laing Infrastructure Fund has agreed to buy a 6% stake in a UK high-speed rail project, its first investment in rail rolling stock, from John Laing Investments for £42.4m.

The investment in the first phase of Great Western mainline's Intercity Express programme will be financed from the fund’s revolving credit facility and is expected to complete in the new year. It will have the option of buying John Laing Investments' remaining 30% interest in the project.

Andrew Charlesworth from John Laing Capital Management, investment adviser to JLIF, said that the rail project was a “cornerstone project” of the company’s rail first offer agreement with John Laing.

He said that although the company had anticipated acquiring the project in full, John Laing offered 20% of their share of the project, at a stage of around two thirds of the way through its construction phase, which would allow the company to secure the project early and benefit from the potential capital uplift from the project moving from construction into operations.

Charlesworth added: “Rail rolling stock is a sector of significant interest and targeted by many infrastructure investors."

The rail project involves 57 new high speed intercity trains on the Great Western mainline, which runs from London's Paddington station to the west of England and south Wales, and its contract with the Department for Transport has a 27.5-year concession from acceptance of the first train, which is scheduled for next year.

Revenues are received in return for the trains being made available for use and for certain performance and reliability criteria being met.

Japanese conglomerate Hitachi are contracted as both manufacturer and maintainer of the trains for the duration of the concession period, and are also a 70% shareholder in Agility Trains West, the project company which will retain ownership of the trains at the end of the concession period.

The first set of trains, which have a life of 35 years, is scheduled for delivery in 2017 with the remainder delivered over the following 15 months.

The company said that the current and projected demand for the modern trains is “strong” and around 10% of the consideration amounts to the residual value of the trains.

It also said that the discount rate applied to the forecast cash flows to establish the valuation is “well above” the equivalent discount rate for a fully-operational UK based project, and a higher discount rate has been applied to the residual value elements to allow for additional uncertainty in cash flows.