Dealing With The AIG “Effect”

Earlier this year, the New York Times coined the phrase “AIG Effect” to refer to the negative impression that is created in corporate America when a conference or meeting is held at a resort location.

For the last 8 years, Rail Equipment Finance has been held at the La Quinta Resort & Spa. We are very, very aware of the “AIG Effect’s” potential impact on many of our corporate attendees.

While La Quinta is a golf resort, the primary purpose of our attendance there are the two and half days spent in “school room style” meetings on industry subjects of vital interest to those in attendance. I would estimate that 90% to 95% of those in attendance actively participate in the business sessions each day. The golf outing and the evening receptions are much-needed networking opportunities because the business sessions during the day go from early morning to early evening with precious few breaks.

Our contract with La Quinta continues until 2011 and was last entered into after some significant polling of our regular attendees as to their preferences. Our friends at La Quinta have “been there” for us in prior years and we intend to support them in this very unusual timeframe for industry off-site meetings.

If you need support to convince your firm to allow you to attend REF2010, please review the “Who Should Attend?,” “Testimonials” and “Q & A” sections of this website. If you still hit resistance to your attendance......give me a call......perhaps there is something I can do to help.

Remember, the most important reason to attend REF2010 is to materially increase your chances of doing your share of the business that we will all need to do to get ourselves out of this economic malaise!

Mission Statement:
25 Years Serving The Rail Industry

Over the last quarter century, Rail Equipment Finance has established itself as the premiere industry meeting addressing issues relating to the North American railcar and locomotive fleets. REF provides the most current information on fleet demographics as well as proven accurate predictions for the future. This data is presented in a concise format by the top experts in the field and is paired with information on the leasing and finance industries that support these fleets. Our attendees receive not only the experience of REF, but presenter’s statistics, diagrams, and presentations on a CD Data Disk.

For 2010 and beyond, Rail Equipment Finance will continue with this proven format, providing information vital to our industry as well as world class networking opportunities for our attendees. It will be done at a cost, subsidized by our Sponsors and Industry Partners, that represents significant value for our attendees and their companies.

“Here’s what some people say about
Rail Equipment Finance Conferences...”

“The program offers real meat. RFC is able to attract first rate speakers who have in depth knowledge of the railroad and rail finance industries.” “The conference is ideal for new comers wanting to learn more about these industries, as well as veterans who want to keep current.”

“There is no comparable opportunity to share views and to interact with the major players in this industry.” “The 2009 presentation on recent changes to EPA requirements for locomotives was worth the trip alone!”

“The networking opportunities are a must and alone are worth the price.” “The presentations provide information that would take me months and dozens of interviews to collect.”

Chairman’s Bulletin Board / January 9, 2010

This blog will be updated regularly........so visit it often!

The Buffet Effect

If you are like this writer, over the past weeks and months you have been pummeled by kith and kin concerning Warren Buffet’s Burlington Northern strategy and what it may mean “for” and “to” you.  It’s pretty clear that we are all getting these questions because our friends and family don’t really understand exactly how we make a living in this industry and now (they think) they have something to discuss with us!  God bless them.

 

But, I would suggest that we need to go beyond the easy “Buffet” answers that we give friends and relatives…

 

“It’s a vote of confidence for the American economy and an important industry that supports it.”

 

“He recognizes the long term role railroads play and the long term growth that is possible for the knowledgeable investor.”

 

…and ask some serious questions that need to be asked.  These questions have NOTHING to do with Mr. Buffet’s investing wisdom

 

We should ask, for instance, how Warren Buffet’s very public endorsement of the future of the railroad industry in North America will…in-and-of-itself…affect us?

 

Let’s start with some basics:

 

• Savvy industry participants know all about the vibrant future freight railroading will have when the economy rebounds.
• Investors in railroad stocks are now benefiting from the “rising tides lift all boats” result of Warren Buffet’s BN strategy.
• Railroad industry wannabe investors have been sitting on the sidelines looking for opportunities to jump into a depressed market for rail equipment (in particular) but have found their options severely limited due to the absence of sellers willing to take a haircut on prices.

 

The question is, will the spotlight that Mr. Buffet has put on our industry suggest to potential investors (who have been on the sidelines, studying the industry for months or years) that waiting for better opportunities……..may just cause them to miss the proverbial train?

 

We think that is a good possibility.

 

Everything in life needs to be taken in context with what is happening and what can be perceived as likely to happen.

 

For instance, in the second half of 2008 several large railcar operating lease portfolios were (formally and informally) offered for sale.  We are told that none sold because potential buyers were unwilling to offer up pricing at or close to the sellers’ book values.  The only sale that occurred was a small 3,000+ fleet that sold (for a discount of about 25%) when its parent entered liquidation.

 

There is every indication that one or more operating lease fleets could be on the market in 2010 if the interest and pricing rebounds in the marketplace.  Both CIT and AIG are possible candidates for sale.  There could be others.

 

Now……if buyers continue to hold back, waiting for a “deal” on discounted assets……these potential sales will only occur if the seller hits a wall of some sort and absolutely has to sell. 

 

But what if....keying on Mr. Buffet’s view of the long term investment value represented by the railroad industry…some of these buyers decide that the time to invest is now before that the train leaves the station?

 

We think that possibility is a real one.

 

Residential real estate sellers and buyers ultimately reach agreement based on mutual perceptions as to the state of a moving market.  We believe it is very possible that efforts to market existing operating lease portfolios of equipment in 2010 may be more successful than in the past simply because Warren Buffet has started playing face-up poker regarding his long term view of our industry.  (A side-issue?  Debt markets need to rebound to lend into these potential acquisitions.)

 

Now, who will these likely buyers be?

 

Well, we think that many of the new investors that took a look…..and a pass….at buying operating leasing fleets will be back and, perhaps, may be more willing to realistically consider the seller’s minimums.   Remember, investors who invested side-by-side with Mr. Buffet in the BN are now due to earn a premium materially larger than any discount sought by potential lease fleet investors in 2008!

 

Timing is everything.

 

What about the stocks of railcar builders that have been depressed due to the miserable market for new car sales?

 

Here we are not sure that any Buffet vote of confidence will be able to boost stock prices unless and until order books begin filling up.  Unfortunately, hundreds of thousands of parked freight cars would suggest that is not about to happen.

 

How about investments in other rail industry suppliers? 

 

Here we believe that there will be an increase investor interest due not only to Mr. Buffett, but to passenger rail funding that is coming from Washington.  (Arguably, the Federal largesse has already started M&A activity in this sector.)

 

In conclusion, I am going to steal a line from Marylyn Monroe’s serenade to JFK on his 45^th Birthday   While I don’t have the dress, but I am “breathy” in my praise,  (Sung to “Thanks For The Memory”):

 

“Thanks, Mr. Buffet.

For all the things you've done,

You’ve invested by the ton.

You’ve led the way.  You’ve sold the Street

To us you’re #1

We thank you so much!”

 

tkruglinski@railfin.com