TfL to end lease and buy class 378 ?

[Snow1964]

A paper has appeared in TfL Board Finance committee regarding class 378s

The Committee is asked to note the paper and the exempt supplementary paper on Part 2 of the agenda and to:
(a) approve unbudgeted Financial Authority at the sum set out in the paper on Part 2 of the agenda for Rail for London Limited (RfL) terminating the existing 2007 lease and the 2013 lease relating to the Class 378 fleet;
(b) approve unbudgeted Financial Authority and Procurement Authority at the sum set out in the paper on Part 2 of the agenda for the lease termination and purchase of the Class 378 fleet as described in this paper and the related paper on Part 2 of the agenda; and
(c) note that any new borrowing and existing hedging arrangements associated with the termination of the leases and the purchase of the Class 378 fleet will be authorised in accordance with the TfL Treasury Management Policy.

4.1 As set out above, the Class 378 fleet was built for the provision of services on London Overground and specifically, the section of the London Overground infrastructure owned and operated by RfL (the upgraded East London Line infrastructure) and is currently the only fleet providing operational service across this part of the London Overground network. This section of infrastructure includes narrow single bore tunnels, for which the Class 378 fleet has the required narrow nose end door detrainment mechanism to operate through. There is no other existing fleet that could operate on this section of infrastructure.
4.2 Due to the specific requirements of this section of the London Overground infrastructure, RfL will need to retain use of the Class 378 fleet or procure a new fleet in the future to ensure continued operation of services across this route.
4.3 The Class 378 fleet was specifically designed for London Overground operations including high intensity services operating along designated commuter routes with specific operational and infrastructure requirements.
4.4 Current demand on the London Overground is at 87 per cent of pre-pandemic levels and is predicted to grow over the Business Plan period. The Class 378 fleet is a key part of servicing this demand. The operational and fleet strategy is to retain the Class 378 fleet in operations on the London Overground until life expired in 2044. This approach is also assumed in TfL’s Capital Strategy as approved by the Board in December 2021, and subsequent updates which were noted by the Board in December 2022

https://board.tfl.gov.uk/documents/s19641/fc-20230308-item13a-class378-lease-part1.pdf

https://board.tfl.gov.uk/ieListDocuments.aspx?CId=171&MId=683&Ver=4

 

[Mikey C]

Haven't TfL sold off any trains they might have owned to raise cash anyway? It's not as if the 378s are in danger of being leased elsewhere.

 

[WarrenTManager]

Haven't TfL sold off any trains they might have owned to raise cash anyway? It's not as if the 378s are in danger of being leased elsewhere.

Didn’t they chop in the 345s?

 

[Dstock7080]

Didn’t they chop in the 345s?

Sale and lease back arrangement of 345s:

TfL completes 'sale and leaseback' of Elizabeth line trains to 345 Rail Leasing Consortium

Transport for London completes ‘sale and leaseback’ of Elizabeth line trains to 345 Rail Leasing Consortium

tfl.gov.uk

 

[Snow1964]

Although the values aren't available (they are in non-public part 2), ir seems that the initial leases expire 2027.

It says TfL are then exposed to interest rates etc, but have purchase option, the option of buying replacement trains also is mentioned, but appears want to continue using 378s until 2042

At a wild guess the extension to the lease at todays high interest rates is likely to see an unacceptable jump in costs over the period of 2027 to 2042, and TfL see it as cheaper to own them for these 15 years

I have no idea why it has suddenly appeared as unplanned and unbudgeted, unless lease company did something odd like offer them to SouthEastern to replace networkers at the 2027 break point

 

[Meerkat]

Was there a break clause? ie the lease charges are about to go up, but they have a set price buying clause and can get the money cheaper themselves???

 

[LNW-GW Joint]

At a wild guess the extension to the lease at todays high interest rates is likely to see an unacceptable jump in costs over the period of 2027 to 2042, and TfL see it as cheaper to own them for these 15 years
I have no idea why it has suddenly appeared as unplanned and unbudgeted, unless lease company did something odd like offer them to SouthEastern to replace networkers at the 2027 break point

Well the lease payments for 2027-42 must have been planned and budgeted.
If a purchase option is cheaper than long-term leasing, then it looks attractive.
But it's difficult crystal-ball-gazing interest rates into the 2040s.
The 2007 lease rates would have been at a high level, like those at about the same time for classes 350/2 and 379.

 

[Peter Mugridge]

Predictably, the media have picked up on this and are presenting it as meaning the 378s will be scrapped and replaced with brand new trains...

TfL considers replacing over half London Overground trains within next 4 years

The trains were specially built for the dimensions of the Overground network

www.mylondon.news

The 57 Class 378 'Capitalstar' trains which provide the majority of services on London Overground could disappear as soon as June 2027, as Transport for London (TfL) officials decide what to do with them as their leases expire. The five carriage walkthrough trains have helped revolutionise the Overground network, being built to special dimensions to fit the unique profile of the suburban routes they run on - notably the East London line, where trains use the narrow single-bore Thames Tunnels.

TfL's finance committee is to assess the options for the fleet's future in a private section of a meeting on March 8, involving commercially sensitive information. The working assumption in TfL's current fleet strategy is that the fleet will be kept on, with a new lease taken out, as the lifespan of these type of trains is around 40, and the oldest train will be just 18 when the current lease expires. The strategy envisages running the Capitalstar trains until 2044.


If the committee decides with the information available that a new lease is not in TfL's best interest, it will need to source replacement trains within four years, which is a tight deadline, meaning a decision needs to be taken imminently. Such a decision is not improbable - leasing costs are very high, so in recent years new commuter trains for London have replaced rolling stock which hasn't yet met its initially expected lifespan.

 

[D365]

I wasn't aware that loading gauge is a specific constraint of the Thames Tunnels.

 

[Gerald Fiennes]

These vehicles are not on a normal mainline-type lease, but one which is more like a finance lease and is with a different counterparty. So this may be something to do with expecation of interest rate rises in future, which would otherwise lead to higher rents. Government generally often has some capital budget avaiable at year ends (and practically no revenue budget) so the inference is that this is some kind of 'quickspend' arrangement that is being backed by HMG. In the days of yore, quickspend went on carpark tarmacking.... ! The 'gauge' constraint they are referring to looks like it is more to do with the need to have an emergency evacuation route through the end cabs, with steps down, rather than the bodyshell width per se. In other words, evacuation to the side of the tunnel is not possible (as it is on Crossrail...): some thing that Brunel père inexplicably seems to have overlooked! The 807s have a similar arrangement (but maybe too wide to fit through the ELL?)

 

[Nicholas Lewis]

These trains are leased by QW Rail Leasing on an operating lease to TfL who pay c24m in leasing charges in financial year ending March 22 for the 57 trains. QW have them in the books for 255m and are depreciating them at c 11m pa so maybe worth 200m by June 27. They financed them initially with a 50% loan by their parent company running to 2044 and 50% with EIB which expire in 2027 and they have to make annual repayments. Seems TfL have the option to buy them in 2027 but surprised they want to find 200m given all the financial challenges they have currently.

QW rail Leasing 2022 accounts

 

[Starmill]

Seems TfL have the option to buy them in 2027 but surprised they want to find 200m given all the financial challenges they have currently.

To be fair, simply borrowing the money themselves and buying the trains is likely to be cheaper than negotiating an extension. They have three years to get the capital in place.

 

[pdeaves]

Sale and lease back arrangement of 345s:

TfL completes 'sale and leaseback' of Elizabeth line trains to 345 Rail Leasing Consortium

Transport for London completes ‘sale and leaseback’ of Elizabeth line trains to 345 Rail Leasing Consortium

tfl.gov.uk

I think that shows how complicated leasing agreements can be. On the one hand, stop the lease and buy outright. On the other hand, sell what we have and lease back. No single simple solution!

 

[Snow1964]

The TfL Board budget 2023/24 seems to include the price of buying the class 378 trains on page 24, although not clear if already bought or about to be

Other: 22/23includes the purchase of the London Overground class 378 rolling stock (£281m),which will reduce cost and risk compared to the current leasing arrangements.

https://board.tfl.gov.uk/documents/s19826/TfL%20Budget%202023-24.pdf

£281m is just under £1m per vehicle based on 57 x 5car

TfL state elsewhere in Board papers end of life is currently planned for year 2043. So would be about £14m per year depreciation charge, which is lot less than the £24m leasing @Nicholas Lewis mentions above

 

[SynthD]

To be fair, simply borrowing the money themselves and buying the trains is likely to be cheaper than negotiating an extension. They have three years to get the capital in place.

They have debt limits, this may not be an option. I can’t find if the limits are set by law or by the credit rating agencies and the loan offers based on that.

 

[swt_passenger]

I wasn't aware that loading gauge is a specific constraint of the Thames Tunnels.

I agree. The Thames Tunnel requirement is for end evacuation doors, which is why six extra 710s were ordered to allow six 378s to be transferred to the ELL for extra services.

 

[Starmill]

They have debt limits, this may not be an option. I can’t find if the limits are set by law or by the credit rating agencies and the loan offers based on that.

It's based on an agreement with their creditors. However the reality is that all of the above projects need a budget to be set well beyond the current period to which additional support has been negotiated. If this support isn't extended then no new spending is going to be agreed on any of these projects, so it's a moot point what their market position is. They may be authorised to use market borrowing or asset sales to support operating expenses for a year however.

 

[Snow1964]

They have debt limits, this may not be an option. I can’t find if the limits are set by law or by the credit rating agencies and the loan offers based on that.

The limits are set by the Government, as they are effectively backed (or Bailed out with subsidies) and thus forms part of Government debt figure.

The good news for TfL is they managed to get loans and issue bonds before the interest rates went up.

But looks like 378s are effectively being bought using current cash and revenue, not by increasing borrowing (although some other projects are deferred, so presumably money is being juggled from their unspent funds). There are some charts at end of budget report showing extra costs and savings elsewhere.

 

[Joe Paxton]

Just seems like a sensible financial management exercise to me.

 

[ShadowKnight]

These vehicles are not on a normal mainline-type lease, but one which is more like a finance lease and is with a different counterparty. So this may be something to do with expecation of interest rate rises in future, which would otherwise lead to higher rents. Government generally often has some capital budget avaiable at year ends (and practically no revenue budget) so the inference is that this is some kind of 'quickspend' arrangement that is being backed by HMG. In the days of yore, quickspend went on carpark tarmacking.... ! The 'gauge' constraint they are referring to looks like it is more to do with the need to have an emergency evacuation route through the end cabs, with steps down, rather than the bodyshell width per se. In other words, evacuation to the side of the tunnel is not possible (as it is on Crossrail...): some thing that Brunel père inexplicably seems to have overlooked! The 807s have a similar arrangement (but maybe too wide to fit through the ELL?)

Are you saying that an 807 could work down the ELL?

 

[Gerald Fiennes]

My bad, I meant Class 717s....!

 

[ThameslinkUser]

TfL FY22/23 Q4 report:

The unbudgeted purchase of the London Overground train fleet was completed to mitigate against various financial risks associated with leasing the trains, delivering a reduction in the whole life cost of the trains.

Towards the bottom of the table on page 11 shows it to have cost £281m.

 

[Nym]

If TfL where to purchase them, who would they look to nominate as a design authority one wonders? (This is traditionally a ROSCO job).

 

[LNW-GW Joint]

If TfL were to purchase them, who would they look to nominate as a design authority one wonders? (This is traditionally a ROSCO job).

The impression I get is that under the original deal 378 maintenance lay with Bombardier, who would have been the design authority.
The QW Rail Leasing deal seems only to have been on finance and ownership, with maintenance staying with Bombardier (now Alstom).
So I imagine that remains the situation despite ownership passing to TfL.
I could be wrong though.

 

[swt_passenger]

If TfL where to purchase them, who would they look to nominate as a design authority one wonders? (This is traditionally a ROSCO job).

It’s not “If” though, they’re reporting that they have purchased them.