12 th JUNE

PRESS DAY

Press Release

East Somerset Railway Negotiates
Major Refinancing Deal

 

Background

The East Somerset Railway was established by David Shepherd and a group of his friends in the early 1970s.  Under David’s inspirational leadership the Railway developed rapidly and the core of what is here today was created.  The Railway went through a period of rapid growth in the early years, and the investment required was a steady and substantial drain on David’s resources.

There were many major achievements in this period, including the acquisition of the site, the construction of the engine shed, workshops and carriage shed, the negotiation of running rights into Cranmore Station, and the extension of the line in stages to its current terminus at Mendip Vale.

By the mid-1990’s, David felt that his other major interest, wildlife conservation, had to take priority over the Railway and that the time had come for the East Somerset Railway to become self-supporting.  Accordingly he withdrew into the Railway’s background and a full-time salaried General Manager was appointed to take the reins.

The Recent Past

The period of tenure of the first General Manager was characterised by exciting and ambitious expansion plans which failed to materialise in reality.  The loss of the financial ‘safety net’ which David had provided meant that the Railway had to operate in a much more difficult financial climate, and with hindsight it failed to adapt to these circumstances.  Substantial financial losses were incurred year on year, the position worsened, and matters came to a head in 1997 when the General Manager resigned.

Following the departure of the first General Manager, the Board of Directors asked one of their own number to take over as acting General Manager.  By this time the Railway was in a deteriorating financial position, with income consistently failing to cover operating costs.  The increasing pressures involved in trying to run the Railway under these conditions led to Board resignations and great difficulty in finding replacement directors, with a consequent reduction in their number.

Against a background of mounting debt, in early 2000 the locomotive ‘The Green Knight’ was sold to raise much-needed funds, but the respite this provided proved to be only temporary.  By the mid-2000, the Railway had six-figure debts and many creditors were pressing for payment.

In addition the Railway had at this time come under very close scrutiny from the Charity Commission, which was expressing disquiet about several aspects both of the management structure and the conduct of the Railway’s management.

As a result of the Charity Commission’s involvement, a new Board of Trustees was co-opted in October 2000, and immediately commenced an intensive review of the business activities and financial circumstances of both the East Somerset Railway Company and its trading subsidiary, the Cranmore Railway Company.  At the same time the Trustees took immediate and fairly drastic steps to reduce overheads, which included a reorganisation of the management structure to return the Railway to volunteer management.

As the full extent of the financial problems became apparent, the Trustees felt that they had no choice but to the close the Railway whilst they established whether it was technically and legally solvent, and sought advice on how the situation could be improved.  Happily, the expert advice was that the Railway was not – quite – insolvent and could reopen and continue to trade whilst seeking a more permanent solution, provided that in doing so the debts were not increased.

When the Trustees had completed their initial business and financial review, their conclusions were that the Railway’s operations could be made to become profitable, but that to do so would require very careful management and strict financial controls.

Standing in the way of this, however, was the substantial burden of debt that had been allowed to build up.  Whilst the creditors had been, and were continuing to be, extremely patient, it was clear that a way had to be found to pay them before the Railway could move forward.  Since the Railway’s bank, itself the largest single creditor, had made it abundantly clear that further credit would not be forthcoming, the future did not look good.  Furthermore, since the sale of ‘The Green Knight’, the Railway’s only remaining asset of any significance was the real estate over which it operated, and although the value of this exceeded the aggregate debts, it was an asset which clearly did not fall into the ‘disposable’ category.

The Search for A Solution

Due to the sums involved and the speed with which they were required, fund-raising was not considered an option.  The Trustees then set themselves to find someone who would be prepared to invest a sizeable sum in the Railway.  Despite the Trustees’ conviction that the business was viable, the Railway’s poor financial record made it virtually impossible to attract any form of normal commercial investment.

In April 2001 the Railway’s fortunes took a dramatic turn for the better when the Trustees were introduced to a potential benefactor in the form of David and Pamela McCleave. The McCleaves generously agreed in principle to inject a substantial sum into the Railway, but only with the eminently sensible provisos that -

w          the Trustees should convince them that the Railway did indeed have a viable business case and a reasonable prospect of success

w          the deal should be a sound commercial agreement so that at least a substantial part of their investment would be safeguarded in the event that the Railway did subsequently fail and had to be wound up.

The McCleaves

David and Pamela McCleave run a successful London-based property company.  They are lifelong railway enthusiasts, and have been regular visitors to the East Somerset Railway for some years.

David and Pamela immediately expressed a willingness to help the Railway if they could, and negotiations between them and the Trustees commenced immediately to formulate a commercial agreement that would be satisfactory not only to both the parties directly involved, but also to the Charities Commission, which continued to take a close interest in the proceedings.


The Deal

The deal that has been arranged involves the sale of the freehold of the East Somerset Railway’s land and buildings to the company run by David and Pamela McCleave at a price approved by the Charities Commission, and the coincident leaseback of the same property by the East Somerset Railway.  This has in effect unlocked the capital of these assets, and will enable the Railway to pay off all its creditors.

The terms of the leaseback have been carefully formulated to provide the East Somerset Railway with the security of tenure necessary to satisfy the Charities Commission.

It is important to note that these arrangements affect only the real estate of the ESR and not the Railway’s business operation.  The McCleaves have become the Railway’s landlords, but the East Somerset Railway – the business – has not been sold.

The Trustees are delighted to be able to announce that the arrangements were completed on 21st May 2002, and that as a result most of the Railway’s creditors have already been paid in full, and the remainder are in the process of being paid.

It should be stressed that the McCleaves have entered into this arrangement as a commercial transaction borne from a desire to see the East Somerset Railway succeed, and - as the Railway’s landlords - they have a vested interest in the success of the ESR.  The Trustees also recognise that the McCleaves have a wealth of business experience which they could share with the Railway to the benefit of both parties.

Implications for ESR

The Railway remains a registered charity and continues to operate as such.  The burden of debt is removed, but the basic problem of running the business profitably remains. The Railway has not been ‘saved’ by this deal, but it has been given another chance.  Furthermore, the ESR has no substantial remaining assets, and so this is - in fact – probably the last chance.

The Trustees firmly believe that the keys to the future success of the Railway are

w          improved publicity and marketing to increase visitor numbers

w          making the Railway more attractive to visitors

w          targeting the Railway’s activities on those aspects of the business which can be shown to be successful

w          ensuring that the routine train services are operated as effectively as possible.

It is probably appropriate at this point briefly to review the business activities of the ESR.  First and foremost, the Railway’s purpose is to offer the ‘heritage railway experience’ to the general public by existing as an operating steam railway.  This core objective is supported by a range of other activities, including -

w          Footplate Experience Courses

w          Special events, including the popular ‘Day out with Thomas’ weekends

w          public and private “Wine and Dine” and static catering events

w          the commercial restoration of carriages and rolling stock

w          retail activities including a specialised art gallery.

After we restarted operations last year, and whilst the deal was being negotiated, we therefore put the emphasis on these activities, and the period was marked by a number of really very successful events.  The time taken to complete the deal was considerably longer than had been expected, and the Trustees have been greatly reassured by the fact that the Railway was able not just to survive but in fact to prosper whilst trading under very difficult circumstances, with no working capital, and on a week-by-week basis.  The 2001 Santa Special season was particularly successful with over 3,000 tickets sold, and the “Thomas the Tank Engine” weekend in May 2002 was the most successful event in the ESR’s history, with in excess of 2,800 visitors over three days.

The Trustees therefore wish to pay a special tribute to everyone who has worked so hard to ensure that the Railway has survived against the odds, and this includes not only the hard-core of volunteers which has continued regularly to turn up to keep the place running, but also those who have been equally busy behind the scenes. 

In particular, we are grateful to the small band of people actually employed by the Railway, who faced extreme stress and uncertainty, and all of whom have demonstrated a degree of loyalty to the Railway which the Railway had no right to expect.  These people spent many weeks of last year working under notice, and all also worked for some time without being paid.  It is difficult to think of another business which would attract this level of loyalty, from its employees. 

We are very grateful to the McCleaves, both for giving us a further chance, and for their great patience whilst the prolonged negotiations were underway, and we are very grateful to those creditors whose generosity and patience has given us the time needed to achieve this.

Finally, we wish to express our profound thanks to our friends and neighbours in the area, who have helped us in many ways and whose support has been unflagging, and many of whom are present in this room today.

Future Plans

In conclusion, the priority for the Railway is, without doubt, to consolidate and strengthen the business.

There is a huge backlog of maintenance which must be brought under control, and this includes not just structures, but also the rolling stock itself.  For the Railway to flourish, it must once again become an attractive place to visit.

There is a need for more visitor attractions, and a wider range of events to interest a broader spectrum of patrons.

The Railway needs to become more attractive to volunteers both by giving them a greater involvement in operational issues, and by making it easier for new volunteers to become involved.

And from a management perspective, there is an urgent requirement for a proper business development plan, and this will now become the focus of our attention.  This will include the short term aims, including those already mentioned, and also the longer term aims and aspirations of the Railway, including the possibility of extending the line to give us a presence in Shepton Mallet, a development which would be of considerable benefit both to the ESR and the local community.

Above all, at the moment, there is a pressing need for more volunteers to achieve these aims.  The refinancing deal has given the Railway an unique opportunity which can only be fulfilled if it has an enthusiastic and growing membership which is committed to success, and there has never been a better time to join us, to rise to this challenge and make a real difference.

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