Rolling into the Future? Will U.S. Financing of Railway Rolling Stock Change Under the Luxembourg Protocol

October 2017

Sixteen years ago, grand plans were laid to facilitate financing of mobile equipment with the introduction of the Cape Town Convention on International Interest in Mobile Equipment of 2001. The concept was to introduce uniform practices and remedies for lenders and manufacturers to open up new markets for financing certain classes of assets. The first changes came with the adoption of the “Protocol on Matters Specific to Aircraft” in March 2006 when the protocol was ratified by more than eight countries, including the United States. In fact, U.S. manufacturers and lenders were a driving force behind the adoption, and by many measures, the Aircraft Protocol is a rousing success. Twelve years later, there are currently 73 contracting states that have ratified the protocol and it is estimated that half a trillion dollars of aircraft transactions have been registered.

The Convention was also intended to introduce uniform financing practices for other mobile assets, and two other protocols were initially introduced: the “Luxembourg Protocol,” as to railway rolling stock, and the “Berlin Protocol”, as to space assets. The Luxembourg Protocol was adopted in March 2007 by 42 countries and created a worldwide framework for the registration and recognition of security interests, leases, and other interests in railway assets. Currently, nine European and African countries and the European Union have signed the Luxembourg Protocol and the E.U., Luxembourg, and Gabon have ratified the protocol.[1] At a minimum, a fourth ratification is required for the protocol to go into effect, but proponents expect the protocol to become effective in 2018.

The United States is not currently a signatory state to the Luxembourg Protocol and there does not appear to be any clamoring for the ratification of the protocol in the U.S. Despite the lack of U.S. backing, the railway rolling stock protocol has been steadily steaming ahead in other parts of the world. So why should U.S. participants in the industry care about the status of an international railway protocol not yet in effect?

First, whether or not the United States ratifies the protocol, the adoption of it may open markets for U.S. lenders, lessors, and manufacturers. In order to finance rolling stock in a protocol jurisdiction, three things need to have occurred when an international interest comes into effect as to the assets: (1) the protocol needs to be in force; (2) the protocol needs to be in effect in the jurisdiction where the debtor is principally located; and (3) the financed assets need to be identified with a unique identifier so that they can be tracked. This latter step involves the Luxembourg International Registry issuing a unique number per item of railway rolling stock which will be required to be permanently affixed to the relevant item of equipment. This unique, identifying number will be issued under the Unique Rail Vehicle Identification System (“URVIS”) and it will be used to register interests in that asset from the time of the initial registration through the life of the asset.  Provided that these pre-requisites occur, the registration of a financing to a properly identified asset should protect the lender’s interest in that asset whether or not it is located in the jurisdiction. As a result, sale and financing opportunities may open up in markets where U.S. parties might have been reluctant to do business previously.

Second, the creation of the International Registry and the URVIS system may add discipline to identifying and tracking assets in an industry that was previously bereft of such a feature. Unlike with aircraft, rolling stock manufacturers have not followed a single set of universally accepted rules as to the identification of their assets. To date, rolling stock assets can vary widely among passenger and cargo cars, cable cars, people movers, and various other rail mounted equipment. Once the protocol is in force, the industry should see the implementation of common identifiers that will not be capable of being changed or recycled.  The hope is that this will become ubiquitous throughout the industry.

Third, once ratified and implemented in the U.S., the protocol will theoretically simplify and reduce the costs of financing railway assets domestically as well as extend protections internationally as to assets financed here. Currently, a lender wishing to perfect an interest in a railway asset in the U.S. must do two things: file a UCC-1 Financing Statement in the appropriate jurisdiction under the Uniform Commercial Code, and file and record a security interest or security agreement with the Surface Transportation Board of the United States. These filings, assuming that the collateral is properly described on the financing statement, perfect a lessor’s or financier’s interest in a rail asset and place the rest of the United States on notice of their interest. In theory, these processes would be exchanged for the International Registry process under the protocol, both simplifying the process and allowing registrations electronically 24 hours a day, seven days a week.[2] Whether or not simplified, however, the existence of International Registry registrations will provide notice that is available to the world of an interest in that collateral, unlike the less accessible filings with the UCC and the Surface Transportation Board.

For these reasons, among others, it is worthwhile watching the progress of the Luxembourg Protocol as likely it slides quietly into force next year. If things follow the course of the Aircraft Protocol, acceptance will continue slowly but continue to build in a manner that becomes increasingly important to U.S. lenders, lessors, and manufacturers. Even if ratification does not follow quickly in the U.S., opportunities should become available to U.S. industry players that pay attention.

If you need further information on these or related matters, contact Kevin Johnson at 952-995-9576 or or Conor Gaughan at 952-995-9500 or Click here to learn more about our Transportations and Logistics practice group.

[1] France, Gabon, Germany, Italy, Luxembourg, Sweden, Mozambique, Switzerland, United Kingdom and the European Union.

[2] Based on the experience of the Aircraft Protocol, this is not a foregone conclusion.  When the US adopted that protocol, it adopted the International Registry process in addition to the existing FAA registry processes. As a result, the work was in fact multiplied.