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5 years ago
TEXT - S&P cuts European Co for Financing of Railroad Rolling Stock
January 15, 2013 / 6:32 PM / 5 years ago

TEXT - S&P cuts European Co for Financing of Railroad Rolling Stock

(The following statement was released by the rating agency)

Overview
     -- Following our review of the European Company for the Financing of 
Railroad Rolling Stock (EUROFIMA) under our revised criteria for multilateral 
lending institutions, we are lowering the long-term issuer credit rating on 
EUROFIMA to 'AA+' from 'AAA'.
     -- The stand-alone credit profile for EUROFIMA is 'a+', reflecting our 
assessments of its "strong" business profile and "strong" financial profile.
     -- The long-term issuer credit rating on EUROFIMA is three notches above 
the stand-alone credit profile, reflecting the company's combination of 
callable capital and sovereign guarantees on behalf of shareholders.
     -- The stable outlook reflects our view that EUROFIMA will maintain its 
risk-adjusted capital adequacy over the next few years, despite the risk of 
deteriorating economic environments in its shareholders' countries.

Rating Action
On Jan. 15, 2013, Standard & Poor's Ratings Services lowered its long-term 
foreign currency issuer credit rating on the European Company for the 
Financing of Railroad Rolling Stock (EUROFIMA) to 'AA+' from 'AAA'. We also 
lowered our issue rating on EUROFIMA's senior unsecured debt to 'AA+' from 
'AAA'. At the same time, we affirmed our 'A-1+' short-term rating on the 
company. The outlook is stable.

Rationale
The rating actions reflect the adoption of our revised criteria for rating 
multilateral lending institutions (MLIs) and not a recent deterioration in 
EUROFIMA's creditworthiness. (For more details of our related criteria, see 
"Multilateral Lending Institutions And Other Supranational Institutions 
Ratings Methodology," published on Nov. 26, 2012, on RatingsDirect on the 
Global Credit Portal.) The ratings on EUROFIMA, a Switzerland-based 
specialized supranational that finances railway equipment for its members, are 
based on our assessment of its "strong" business profile and its "strong" 
financial profile, as our criteria define these terms. We assign a stand-alone 
credit profile of 'a+' when we combine these assessments.

We base our "strong" business profile assessment on our view of EUROFIMA's 
governance, role for its members, and public policy mandate. EUROFIMA is a 
joint-stock company created in 1956 by treaty, and owned by the national 
railways of 25 continental European countries. As of December 2012, railways 
based in countries with 'AAA' sovereign ratings held roughly 37% of EUROFIMA 
shares and callable capital, down from 62% at end-2011, following the 
downgrade of France (AA+/Negative/A-1+, Unsolicited Ratings) and Austria 
(AA+/Negative/A-1+) in early 2012. With total assets of Swiss franc (CHF) 34.4 
billion ($36.5 billion) at year-end 2011 (down from a peak of more than CHF40 
billion in 2008), EUROFIMA's primary activity is financing acquisitions of 
railroad rolling stock by on-lending borrowed funds to shareholders.

EUROFIMA has not received a new capital subscription since 1997. Since the 
onset of the global financial crisis in 2008, EUROFIMA has introduced measures 
to shrink its balance sheet and build capital internally. These have included 
discontinuing dividend payments, increasing loan charges, and applying lending 
limits designed to make it more difficult to extend new equipment financing 
contracts, particularly to lower-rated countries amid deteriorating economic 
conditions. We expect that the process of deleveraging that is currently 
underway will continue at least until the middle of this decade, with the loan 
portfolio shrinking by one-third in the five years to 2016. The shrinking loan 
book--in net and gross terms--risks weakening the company's public policy 
mandate.

However, the company's asset quality is extremely strong. EUROFIMA has 
traditionally enjoyed preferred creditor treatment, including in the recent 
Greek private sector involvement. The company has never experienced a loan 
loss or required immediate payment under a government guarantee. Since 2001, 
there have been only two very small shareholders that have continually run up 
arrears, both located in Macedonia (BB/Stable/B). The absolute amounts of the 
arrears have been small; the most recent (in 2011) was just 0.005% of the 
portfolio and was cleared in 2012.

Our assessment of EUROFIMA's financial profile as "strong" reflects our 
calculation of the risk-adjusted capital (RAC) ratio before MLI-specific 
adjustments at 19% at year-end 2011. When taking into account the MLI-specific 
adjustments under our new criteria, the ratio decreases to 7%. (We estimate 
that this ratio will be broadly unchanged at fiscal year-end 2012.) This is 
primarily due to EUROFIMA's high single-name concentration. As of year-end 
2011, six borrowers each owed to EUROFIMA outstanding amounts exceeding its 
adjusted equity. Of those, two are in countries that we rate below the 'A' 
category: The largest borrower was Ferrovie dello Stato Italiane SpA (not 
rated), a railway company based in Italy (BBB+/Negative/A-2, Unsolicited 
Ratings), with 17% of the principal outstanding (2.7x adjusted shareholders' 
equity); and exposure to RENFE Operadora (not rated), a railway company in 
Spain (BBB-/Negative/A-3) represented 12.2% of the principal outstanding (2x 
adjusted shareholders' equity).

EUROFIMA has strengthened its liquidity over the past few years, and our 
liquidity ratio indicates that the company will be able to meet its financial 
obligations and continue disbursing its scheduled loans over a one-year 
period. Our liquidity ratio factors in stressed market conditions, under which 
we assume the company would not have access to the capital markets. EUROFIMA's 
medium-term financial plan calls for further gradual strengthening of the 
company's liquidity position.

EUROFIMA benefits from several tiers of protection on its loan portfolio. The 
company's ordinary equipment financing contracts secure its loan assets with 
title to the equipment, which EUROFIMA holds until full repayment. If a 
payment is delayed for more than three months, EUROFIMA can repossess the 
rolling stock without restitution of installments received. (No such 
repossession has ever occurred.) Furthermore, under the terms of the company's 
founding convention, sovereign members are liable for, or guarantee, the 
obligations of their national railways under EUROFIMA's financing contracts. 
If the defaulting railway's member state does not honor these obligations, and 
if obligations exceed EUROFIMA's guarantee reserve of CHF556 million, other 
shareholders guarantee the performance of all EUROFIMA's financing contracts. 
Proportionate liabilities are capped at the value of subscribed capital, which 
is 5x paid in capital and in addition to amounts due at call.

After we incorporate the potential for extraordinary shareholder support, we 
raise our assessment of EUROFIMA's financial profile to "extremely strong," 
reflecting the company's callable capital as well as the extensive coverage of 
its secured loan assets by sovereign guarantees. EUROFIMA recently adjusted 
its statutes to simplify a capital call, should it become necessary.


Outlook
The stable outlook reflects our view that EUROFIMA will maintain its RAC 
adequacy over the next few years, despite the risk of deteriorating economic 
environments in its shareholders' countries. The outlook balances our view of 
EUROFIMA's strong asset quality with its still-high leverage compared with 
peers. We expect that management will continue to pursue its strategies to 
further strengthen capital adequacy, and that it will maintain asset quality 
as well as liquidity. In our view, underperformance in these aspects could 
lead to downward pressure on the rating.

A privatization of one of the major shareholders' railways or its departure 
from EUROFIMA membership could also put pressure on the ratings, as would an 
unexpected deterioration of EUROFIMA's asset quality. However, we consider the 
likelihood of such events to be very low over the coming years.

Upward pressure on the rating could arise if, for example, explicit 
shareholder support materializes through a large cash capital increase, 
enabling EUROFIMA to build on its policy importance. 


Related Criteria And Research

     -- Into The Weeds Of The Revised Multilateral Lending Institutions 
Criteria, Dec. 19, 2012
     -- Multilateral Lending Institutions And Other Supranational Institutions 
Ratings Methodology, Nov. 26, 2012
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010
     -- Callable Capital Is No Substitute for Paid in Capital, Dec. 31, 2009


Ratings List
Downgraded/Rating Affirmed

                                        To                 From
EUROFIMA European Company for the Financing of Railroad Rolling Stock
Issuer Credit Rating
  Foreign Currency                      AA+/Stable/A-1+    AAA/Stable/A-1+
  Senior Unsecured Debt                 AA+                AAA
  Commercial Paper                      A-1+               A-1+

 (Caryn Trokie, New York Ratings Unit)

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