Approximately A$2.3 billion of debt securities affected Sydney, March 10, 2010 -- Moody's Investors Service has today downgraded Reliance Rail Finance Pty Ltd's ("RRF") senior debt ratings to Ba1 from Baa1 and its subordinate debt ratings to Ba3 from Baa3. This concludes the downward rating review that commenced in December 2009 due to concerns surrounding the company's funding profile. The ratings outlook is negative.

The downgrades reflect Moody's expectation of higher risks in the company's financing structure, associated with the ongoing stress in the monoline sector.

"RRF could be exposed to a potential funding gap from early 2012 or higher funding costs or both, if Syncora Guarantee Inc. (rated Ca, negative outlook) and FGIC UK Limited (unrated) were to enter insolvency", says Paul Ovnerud-Potter, a Moody's Vice President, Senior Analyst, adding that, "The risk of potential funding gap - which could be triggered by the insolvency of both monolines - arises from provisions in RRF's financing documents for its A$357 million bank facilities, which are required to be drawn from February 2012 in order to complete the project".

"Moody's also believes that RRF's financial profile will be weaker due to higher long-term funding costs, given uncertainty surrounding the longer-term availability of an active monoline market to support the project. The company's original financial forecasts had been predicated on the availability of Aaa-wrapped debt," says Ovnerud-Potter.

"This raises considerable uncertainty which is not consistent with the ratings remaining at investment grade levels. At the same time, Moody's understands the company is working on ways to overcome these challenges, and thus the problem could be resolved over time", says Ovnerud-Potter.

Syncora and FGIC have been ordered by their regulator to suspend all claims payments until they can implement a capital strengthening plan. Both companies potentially face insolvency, pending restructuring, and subject to them working with the regulator to avoid such outcomes.

"The company's high leverage means that it has limited flexibility to overcome these funding challenges. These problems are compounded by a complex legal structure."

"At the same time, project delays, which are not expected to improve, further constrain the ratings," adds Ovnerud-Potter.

The negative outlook reflects the potential for further rating transition risk related to RRF's funding challenges, which remain largely outside of its control.

The ratings would be downgraded in the remaining delivery phase of the project in the event of the insolvency of one or both of FGIC and Syncora in the absence of appropriate third-party support. The ratings could also be downgraded if there is further evidence of delay in the delivery phase; or if there is deterioration in the credit quality of Downer EDI (not rated), Hitachi Ltd (rated A3, negative outlook), or the State of New South Wales (rated Aaa).

There is the potential for the ratings to be upgraded if RRF is able to overcome the funding challenges that it currently faces, subject to steady delivery phase performance.

The last rating action taken with respect to the underlying ratings was on 14 December 2009, when Moody's placed them on review for possible downgrade.

The principle methodologies used in rating Reliance Rail Finance are: (i) Construction Risk in Privately--Financed Public Infrastructure (PFI/PPP/P3) Projects; and (ii) Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects, published in December 2007, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory.

Reliance Rail Finance Pty Ltd is the funding vehicle for the Reliance Rail Group ("Reliance Rail"). Reliance Rail was the successful consortium appointed by Railcorp in 2006 to deliver the NSW Rolling Stock public private partnership (PPP) project. Reliance Rail is in the process of manufacturing 78 eight-car "Waratah" trains for the Sydney suburban rail network and completing an associated maintenance facility. Reliance Rail will also maintain the trains and the maintenance facility from completion until 2043.