Raising capital for rail projects in today’s world – Part One

By Jennifer Perry

While WestNet Rail did not escape the economic downturn, Cleland told delegates at the recent AusRAIL PLUS conference that the company’s focus on cost management and delivering to the needs of its customers and the help of a good grain crop allowed the business to deliver a record result in 2008-09 and continue to perform well against a tough budget.
With traditional debt and equity markets “barely been opened for business” in the past 12 months, Cleland said the cost of debt and the required rates of return from equity holders increased substantially during the GFC, seeing many businesses delay or indefinitely shelve projects.
Still, WestNet Rail has had a number of projects in various stages in the last 18-24 months that spanned the height of WA’s resources boom, the sharp downturn of 2008-09, and the very public recapitalisation process of its owner, Babcock & Brown.
This process saw the injection of approximately $1.8b of new equity capital as well as the final severing of ties with the former Babcock & Brown group of companies. The Canadian investor, Brookfield Asset Management, took a cornerstone shareholding in prime infrastructure. For WestNet Rail, this resulted in 100% ownership by the recapitalised prime infrastructure and an immediate reduction of 165% of asset level debt – something that Cleland believes will see WestNet Rail emerge as a “stronger, well capitalised entity backed by an owner with considerably more financial clout” and a move that illustrates that at the right price, transport assets, particularly rail assets, remain an appealing investment.
“Brookfield’s vote of confidence in WestNet Rail should be interpreted as a vote of confidence in the rail sector as a whole, and follows the successful capital raising undertaken by Asciano earlier this year and is a sign that investors see the long-term benefit of well managed and well positioned rail assets as part of their portfolio,” he said.
Cleland moved on to talk about the benefits of the customer contribution model as a source of funding.
“The realities of the GFC and limited access to capital required businesses to share risks and find more cooperative commercial approaches to get projects done – WestNet’s project with Cliffs [to upgrade 120 km of the Kalgoorlie to Esperance line] is one such example of this,” he said.
“Cliffs understandably wanted to ensure the upgrade could be done quickly without interruptions to its delivery schedules and saw value in funding the project via an arrangement with WestNet Rail that included reduced access tariffs over the life of its contract.
“The benefits for WestNet were very clear – an enhanced asset requires less reactive maintenance and a reduced risk of derailments and associated lost revenues.”

To read Part Two of this story click here.