The CTC has been of significant importance to the aviation industry, in particular to the emerging market of low cost airlines globally, with associated need of financing a growing fleet of aircraft. The CTC has been ratified by 73 countries, including jurisdictions like the US, UK, Canada, China and India. The CTC and the aircraft protocol have been in force in Norway since 2011, and since 2016 in Sweden and Denmark.
In today’s aviation finance market, it is rare to find a transaction without any security filings on basis of the CTC. The time has now come for the railway industry, and it will be interesting to see to what extent the CTC may play the same role as in the aviation industry with respect to providing financing to the this industry.
The Luxembourg Rail Protocol was concluded in 2007 (the “Protocol”), and together with the CTC, it provides for an international regime of acknowledgment and enforcement of security interests in rolling stock – in the same way as the existing system within the aviation industry. In order to come into force, four countries need to ratify the Protocol. Gabon and Luxembourg were the first movers with respect to ratification. Sweden ratified the Protocol in 2018, and only one jurisdiction is now missing in order for the CTC and the Protocol to become effective. France, Germany, Switzerland, UK and Mozambique are all signatories to the Protocol, and are all said to be moving towards ratification. The growing interest in the Protocol is most likely due to longstanding lobbying by organisations like the Rail Working Group.
It is expected that the Protocol will become effective in 2020, and arrangements have already been made in order to establish an international registry for registration of security interests against rolling stock. The registry will be located in Luxembourg, and will be similar to the International Registry in Dublin already established with respect to aircraft.
According to figures from the Rail Working Group, it is estimated that the worldwide annual spending on new rolling stock is approaching EUR 60 billion. This is currently mainly financed, directly or indirectly, by governments. However, as the railway industry to an increasingly extent is being privatised, both in and outside of the EU, the Protocol will become important to the private sector creditors providing loans or leasing arrangements for railway equipment. When it comes into force, the Protocol will make it easier and cheaper for the private sector to finance railway rolling stock. According to a recent survey prepared for the Rail Working Group, the Protocol will deliver direct micro-economic benefits of EUR 19.4 billion to 20 selected states in Europe.
The Protocol will apply to leases and security created on a broad range of rail equipment, from high-speed to light rail trains, from freight locomotives and wagons to trams and metro/subway trains, and from people movers at airports to gantries and cranes running on rails at ports.
Countries with a strong financial services sector will benefit from the Protocol even when they have a very small or no domestic rail system, because the benefits of the Protocol are based on the domicile of the debtor and not where the rolling stock is physically located. To some extent we have seen the same in the Aviation industry, where Ireland has become an international hub for aviation financing.
In addition to registering security interests in rolling stock, the international registry, when up and running, will also offer third parties the possibility to search against any item of rolling stock to ascertain if another creditor has a claim on the asset concerned. Not only will this ensure that the creditor’s security can be enforced more effectively, it should also help to avoid errors and even fraud if financed equipment is offered for sale or as security for another financing.
For the reasons set out above, many expect the Protocol and the international rail registry in Luxembourg to play an important part in future financing of rolling stock. So far, Sweden is the only European country that has ratified the Protocol. Others will follow, and this is also something we hope Norwegian authorities will be looking into. As in other European countries, Norway is privatising its rail network, and new operators are moving into the Norwegian domestic rail market.
In May 2015, the Norwegian government presented a new railway reform as a step towards an improved railway. Since then, operators like the British Go-ahead and the Swedish SJ has been awarded long-term contracts on passenger routes on the Norwegian rail network. Simonsen Vogt Wiig assisted Go-ahead with the ten-year contract on routes in Southern Norway. Recently, SJ was given several routes, including Oslo – Trondheim and Trondheim – Bodø. Norwegian authorities are also in progress of organising bids for the operation of the profitable routes around Oslo. These are all examples of operators establishing themselves on new routes in new jurisdictions, something which most likely will be accompanied with a need for new equipment that needs to be financed. It is in this context we believe that the CTC and the Protocol could play an important role.