Ann: Update on Reliance Rail , page-6

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2 July 2010
UPDATE ON RELIANCE RAIL
Downer EDI Limited (Downer) today received advice from Reliance Rail Finance Pty Limited (Reliance Rail) regarding the $357 million bank debt facility for the Waratah Trains project.
Reliance Rail confirmed that the financial arrangements established in 2006 for the Waratah Trains project remain in place and Reliance Rail reiterated its ability to fulfil its contractual obligations to the Downer EDI Rail Hitachi construction joint venture. Reliance Rail obtained approximately $2.4 billion in debt and equity in 2006 to fund the manufacture of 78 trains, a suite of training simulators and a fleet maintenance facility. Of this funding, 85 per cent is drawn and the remaining 15 per cent is committed and will be drawn down progressively from 2012. Refinancing of Reliance Rails debt does not begin until 2015, two years after the last Waratah train is delivered.
Reliance Rail also advised it is in receipt of a reservation of rights notice from its banking syndicate, noting that the financial position of Syncora Guarantee Inc. (Syncora) may constitute a financial guarantor event of default and the banks are reserving their rights in relation to an order issued by the New York Insurance Department and a potential financial guarantor event of default which could lead to a subsequent triggering of a Switch Date in respect of the undrawn bank debt facility.
The bank debt facility, which is scheduled to commence drawdown in February of 2012 to fund the balance of the Rolling Stock Manufacturing (RSM) contract, contains a specific provision that in the event of default by the financial guarantors, the banks have a right to terminate any undrawn commitments under the Reliance Rail bank debt facility. This is referred to in the debt documentation as the occurrence of a Switch Date.
Reliance Rail have advised Downer that a Switch Date has not occurred as both financial guarantors need to default before the bank facilities could be terminated.
Downer states the following:

Reliance Rails funding arrangements are on a non-recourse basis to Downer and the other Reliance Rail shareholders, and this continues to be the case;

Downer is not obligated to provide further equity to Reliance Rail;

Downer has ample liquidity, with in excess of $700 million in available facilities and cash balances;

Downer is rated investment grade BBB- (stable outlook) by Fitch Ratings;

Downer believes that its current share price is significantly undervalued; and

Downer has no current intention of raising equity.

BACKGROUND
In December 2006, Reliance Rail established debt financing of $2.257 billion comprising $357 million of committed but undrawn bank debt financing and $1.9 billion of bond financing. This financing was guaranteed by specialist financial guarantors, FGIC (UK) and Syncora (Monolines), with each party guaranteeing 50 per cent of this debt. At that time, each Monoline was rated AAA/Aaa and as a consequence Reliance Rails debt attracted the same ratings from both Standard & Poors and Moodys rating agencies.
The Reliance Rail debt facilities were established at a peak in the Australian credit markets. The Monoline financial guarantees provided Reliance Rail with significant benefits including AAA/Aaa pricing, longer debt tenors and the required volume of funding to fully fund the project.
As a result of the global financial crisis Syncora announced in April 2009 that the New York Insurance Department, which regulates insurers such as Syncora, had issued an order pursuant to section 1310 of the New York Insurance Law requiring Syncora to immediately suspend payment of all claims and take certain other remedial actions. A subsequent press release, issued by Syncora on 21 June 2010, indicated that while the order has been lifted, Syncora is continuing to evaluate whether it can resume claims payments.
Downer will continue to keep the market updated on material changes to the status of Reliance Rails bank debt facilities.