Page 4: Managing risk
ALSTOM’s role is to build and maintain trains until the end of the period of Virgin’s franchise in 2012. It is also hoped that they can continue to maintain the trains after the franchise. The financiers of the Northern Line project did not take out asset risk. However, the financiers for the WCML project, representing banks and other financial institutions, are taking releasing risk after 2012, beyond the date of the first franchise. Up to 2012, financiers have a guaranteed income stream from the project. The risk comes after 2012 - will the income generated for rest of the lifetime of the asset be sufficient to fund the financing structure and generate a profit on the investment in new trains? It is the financiers, having made the building of the trains possible, who take the credit risk of supplying trains for Virgin.
For the financier, the asset sits on their balance sheet and is a finance lease. A rate of interest is charged for the money used to buy the asset. The risk is simply the credit rating of the operating company and its ability to pay the rate of interest in the form of a rental payment. The operating lease between the asset manager and Virgin is only for the period of the asset covered by the franchise. At the end of the period of the franchise, income has to be found from re-leasing the asset to Virgin or other train operators who may not operate on the West Coast Main Line.