Chairman’s Bulletin Board Archives
July 21, 2009
Gone To Glory............
It isn't often that I put finger tips to keys to extol an individual other than myself..........but every so often........something becomes a moral imperative..........in this case, its..........Saying "Goodbye" to GATX's Jeff Riley.
It seems that the retirement plan at GATX is so good that one of the very best "deal people" in the industry is retiring.
Even when I told him that the only decent way to leave this industry is to die.........he still decided that retiring made sense.
So, after the beginning of August.........other than some clean-up duties in Europe........Mr. Riley will be gone from our midst.
For those of you who haven't had the benefit of dealing with Jeff, you are decidedly the poorer for it. He always told the truth. He worked his behind off to get a deal done .......and.........most importantly, he had earned the confidence of his own management and....as a result.....was listened to when he spoke.
Jeff was also someone who was shrewd enough to be able to size up others and make reliable judgments on what they were telling him.
I never worked for Jeff and GATX (GATX won't hire advisors), however, because Jeff and I were close, GATX was the counter-party in a number of deals where RFC was working for a third party. We had the "measure" of Jeff and GATX and he had the "measure" off us. In the end, it all worked out and we must have closed at least half a dozen deals over the last 10 years or so.
So Jeff.........we will miss you.
We will miss your honesty. We will miss your judgment. We will miss your deal skills. And we will miss your ability to "deliver" GATX to get a deal done.
Hopefully, the folks you leave at GATX can pick up the reins and close deals "Riley Style!"
July, 8, 2009
Things On The Other Side Of The Pond........Worse Than Here.
Well, having just come back from a trip to the UK, I can report that whatever is going on over here......it is worse for individuals involved in the freight railroading business in the UK and Europe. They are (in places) suffering through a freight drop-off that is double what is being reported in North America. Add to that the near complete loss of funding and funders.......and you can fill in the blanks yourself.Think as bad as it is over here at the moment.......and double it!
For those of you who have had something to do with the UK banks who were over here in some force in recent years past.........RBS and Lloyds are.......more or less......owned by the British government. RBS has divested itself of its big rail equipment investment.....Angel Train Contracts.....an operating lessor and Lloyds is funding passenger rail deals. Neither are.....to my knowledge......actively chasing anything outside the UK.
A word on the market for passenger rail financing in the UK and Europe.......
It is viewed, from a credit perspective, as "almost" government risk given the fact that there is generally an implicit promise of government support for the acquisiton of the equipment that is being financed. For comparison purposes, imagine getting rates of return at the low end of the spread that can be earned in North America by operating lessors.......for what is essentially government risk. Take "that" to your risk managers to smoke.....
And that's about all that is getting funded.
The outlook?
Much more grim than over here.
And you didn't think that was possible........did you?
See......read this blog to get cheered up!
June 24, 2009
AAR Treasury Division Annual Meeting Cancelled
After 94 years of running the premiere railroad financial conference, the Association of American Railroads Treasury Division has decided NOT to run their 95th Annual Meeting this fall, announcing a smaller "members only" meeting of railroads with no sponsored social events. Citing cost-cutting as its reason for canceling this year's meeting, the AAR indicated that it plans to renew the annual meeting next year.Railroad Financial Corporation has been proud support the Annual Treasury Division Meeting for more than 20 years and hope to see this important industry meeting back "in harness" next year.
Having said this.........
We are taking immediate steps to "bulk up" our already extensive rail industry economic coverage for Rail Equipment Finance 2010! For 2010 we plan to include topics of particular interest to AAR Treasury Division Annual Meeting attendees.
If you were a regular attendee at the AAR's Annual Treasury Division Meeting and as a result of some grievous error have never attended RFC's Rail Equipment Finance,we would like to extend an invitation here and now to attend REF2010on March 7-10, 2010 in La Quinta California.....it's our 25th Anniversary!
We invite you to go to our website (www.railequipmentfinance.com) to review last year's agenda, speakers list and guest list. ( More than 80% of our agenda items and speakers repeat year-to-year.)
Because of this unfortunate cancellation by the AAR, we are taking steps to open up registration for Rail Equipment Finance 2010 early on July 1, 2009 so.....
IF YOU HAVE BUDGETED $$ TO ATTEND THE AAR ANNUAL TREASURY DIVISION MEETING AND WISH TO UTILIZE THOSE FUNDS THIS YEAR TO ATTEND REF2010.........Even better, if you have attended the AAR's function in the past..... and have never attended REF.....for 2010 only we will offer a reduced attendance fee equal to last year's AAR fee as an inducement to get you to try REF!
If you are an AAR Treasury Division Annual Meeting Sponsor and you would like to discuss a one year sponsorship with REF2010 we still have one or two open. Please contact Marjorie Silverman as indicated below.
If you have any questions or would like to suggest topics for REF2010 please respond to me or contact Marjorie Silverman, our Conference Coordinator at:
msilverman@railfin.com
Or call her at 312.222.1383
June 18, 2009
Operating Leasing -- Today & Tomorrow
If you read our last blog on finance
leasing and if you are looking for some brighter picture of the “other guys”
who buy railcars and locomotives to lease to the rail industry……you can skip
this blog.
Yes, Virginia, there really is a worse-off industry than
finance leasing…..it’s called the rail equipment operating leasing
industry. On the other hand, because it is in such shambles, it is likely to vigorously rebound at the
earliest signs an economic recovery!
The result? A form of rolling disaster for operating lessors. In the words of one friend in the operating leasing industry who was asked about activity in his fleet: “We have plenty of activity….all of it involves people returning cars to us!”
Virtually all operating lessors have cars and/or locomotives parked. And, as our friend said, more are coming back every day. These parked “resources” range from brand new equipment that has never been on lease to some of the oldest equipment that may….due to economic issues….never work again. That’s to say, it will go directly to the scrapper when the economy rebounds and scrap prices come out of the cellar that they are currently in.
How are the operating lessors doing individually? The CIT and GE fleets were being marketed during 2008, but were taken off the market for a variety of reasons. We think it is reasonable to say that if anyone was willing to pay a premium over their book values….or possibly even book…..their owners might be responsive. That’s just speculation on our part….but it is educated speculation.
What about GATX? Difficult to say. This traditional market dynamo has been quiet of late, raising some $$ in the market, but not jumping into the new car market to take advantage of the low prices in a depressed market as they have done in the past.
Union Tank Car has the benefits of being controlled by Warren Buffett….so it has dry powder…..but it, too, seems to have taken a measured view of this market and appears to be limiting its acquisitions to fleet additions of the type they do year in and year out.
First Union Rail, recently acquired by Wells Fargo when it (Wells) acquired Wachovia is another lessor that is taking things slowly. We suspect that Wells, which was building its own small operating lessor prior to having First Union fall in its lap, is evaluating the First Union Rail business model before deciding what it is going to do with this industry leader.
We suspect that the lessors that are owned or controlled by railcar manufacturers are adding the occasional string of cars, but know of no larger orders being placed. We also believe that the smaller lessors may be faring a bit better due to the fact that they may be closer to and more focused on their client base. No one……however….is doing as well as they would like in this market. The pithy market for financing also has to be impacting manufacturers and smaller operating lessors negatively.
So what is going to happen?
Sooner or later some of the car and locomotive lessors that would like to sell blocks of equipment, but that don’t want to sell at a discount to their book values……will decide to sell.
The same thing will happen to those operating lessors that
are owned by parents that have a need for cash.
We keep hearing rumors of the Babcock & Brown portfolio coming to
market as a result of its parent’s financial distress in
Who will the buyers be?
Well the last time some of the big fleets were being marketed it was the venture capitalists and the Japanese trading companies who were leading the charges. The traditional operating lessors were somewhat more realistic in their valuations and for this reason most did not make the final cuts. Why didn’t these transactions close? An inability for the bidders to “get to” the values they had assumed. Issues relating to financing in a contracting market for investment and debt also played a role.
Has much of that changed today? Not really. That’s why we think that the ultimate buyers for fleet sales that may happen in 2009 will be the traditional operating lessors themselves, perhaps paired with a few new investors seeking the protection of keeping company with the market veterans.
One thing is sure. If
the CIT and GE transactions had actually occurred in 2008, the new owners would
not…….given this market…..be happy campers today!
An opportunity for
lessees…..
A good friend in the industry once claimed that this writer was responsible for one really good idea every day. (He did not opine on the value of the others.) So, here is today’s good idea for railcar and locomotive lessees:
Dial up your friendly operating lessor and do a deal today for your future long term needs.
What’s that? You think this is obvious. And you don’t need any equipment today?
Well, there is more:
Figure out what you will likely need when business rebounds….say 12 to 18 months from now and ask your operating lessor to make a deal today for the future!
Yes, this means the lessor will have to sit on the equipment for an extended period of time, but depending on what kinds of equipment you will need, and what the lessor has parked, the lessor may already be assuming that it won’t find a home for the equipment in the next 12 months and might look favorably on a guaranteed employment for a medium to long term that takes place at a set time in the future.
In any case, good luck!
June 8, 2009
Back From The GM Wars.........
Well, I have to apologize, it has been just over a month since my last blog posting. My partners and I have been up to our necks assisting General Motors in restructuring leveraged lease(to a GM special purpose company) transactions covering 964 SD70M locomotives. (Value $1 Billion+) The assignment required us to restructure transactions with 14 different investors (mainly U.S. banks) who were "Head-Lessors" in transactions with the GM SPC. (The locomotives have been sub-leased to the Union Pacific since the transactions originated in 2000 to 2002.)The "trick" was getting all 14 head-leases restructured before GM filed for bankruptcy. It took every one of the 28 days we had, but we made it with one business day to spare...........
But now I am back and have some observations on the finance lease market that I would like to share..........
Is The Finance Leasing Marketplace Dead?
Why is it important for anyone having anything to do with the rail equipment market to be aware of what is happening in the financing lease market? Simply because for the last 25 years, finance leasing has the plate du jour of many railroads and lessors when it comes to raising money to purchase new and used railcars and locomotives.
To make sure all our readers get the most from this article we should define a finance lease. For purposes of this article, it is any lease with a multi-year duration…usually 10 to 20 years…..that also gives the lessee the right to control the equipment for the bulk the equipment’s remaining life through purchase or lease renewal options.
It is, quite simply, a way of financing the acquisition of railcars and locomotives by the lessee selling off….to the lessor…the tax benefits of ownership, which, in most cases the lessee cannot use as efficiently as the lessor.
Why is the status of the finance leasing marketplace so important today?
Because the finance leasing marketplace is a shadow of its former self
and has the potential NOT to recover to its former glory at any time during the
next decade.
In its heyday the financing leasing marketplace had as many as 100 lessors seeking to make investments in capital equipment in order to shelter income earned by industrial companies, trading companies and…..most of all……banks.
Today if you looked hard they are…..perhaps…..a dozen or so left with any capacity to do large rail deals. And those that remain are generally interested in doing single investor transactions rather than the highly-tax-efficient….and much larger….. leveraged lease transactions that predominated in the past.
Single Investor vs.
Leveraged Lease Transactions
In a single investor lease transaction ALL of the money
required to purchase the equipment comes from the same source. In a leveraged lease transaction the
investing lessor will put in an “equity” investment of between 20% and 30% of
the equipment cost and a lender will lend the balance “non-recourse” with the
equipment as collateral. (The lessor’s
money at risk in a traditional leveraged lease is limited to its equity investment.) In a leveraged lease the lessor gets to
depreciate 100% of the equipment cost without putting in 100% of the purchase
price……and gets to deduct the interest from the loan.
Why are fewer lessors doing leveraged leases? Because in this tight credit market, the credit officers approving lease deals do not look kindly at being in a subordinate position behind the lender relative to recovering the equipment in a default. Better to put all the money in the deal and not have to buy out the lender to control the equipment if the transaction develops credit issues during the lease term.
But let’s get back to the future of finance leasing. Why are there so few “players” left in the industry?
- Mergers and Acquisitions. The consolidation in the banking market has been extreme. As banks merge fewer and fewer lessors are left in the market.
- Lease Losses. While there haven’t been many credit problems in the rail industry, banks that have taken significant “hits” in their leasing portfolios are less likely to continue in the business.
- Other Losses. Even if they haven’t had credit issues with their lease portfolios, many lessors are part (for tax purposes) of large organizations that are now carrying huge losses on their books. These losses can be carried forward and used to reduce taxes. Which is exactly what participating in the leasing industry used to do for the lessor.
- Income Issues. You need to have income on which you owe taxes in order for tax-affected leasing to make sense. If lessors are not making money…the need for leasing as a tax strategy goes away.
Even if a lessor does have a “budget” to do new leasing, it may have “name issues” with doing new leases with some of the large Class I’s such as UP and BN who have been active participants in the leasing marketplace in prior years. Said another way, it may have limited credit capacity for additional BN and UP credit exposure, given the hundreds of millions of dollars already invested in equipment for these large lessees.
There are also new equipment issues with which finance lessors will need to deal in the future that were not issues in the past. The most significant have to do with the EPA’s 2015 “Tier 4” locomotive emissions requirements, which will require secondary “scrubbing” of emissions. Remember, just like your auto lease, locomotive lease transactions require the lessor to estimate the residual value of the locomotive 15 or 20 years in the future. If the lessor guesses wrong…..it can suffer a loss at lease-end. A sea-change in locomotive design will severely complicate this process. The likely lessor reaction? A reduction in assumed residual amounts and an increase in the percentage of equipment cost that will need to be amortized in the rent stream……Said another way…….higher rents.
Earlier in this article I made the point that a severely
altered finance lease market will impact ANY area of the industry that is
concerned with railcars and locomotives.
With competition down, rents will go up.
(Although low interest rates are muting the impact of a reduced number
of lessors.) More and more railroads
will have to purchase their equipment resulting in the industry taking on
further debt. And yes…..all of this will
come back impacting the costs of operation of railroads and shippers. Unfortunately, the future looks grim on this
topic for the next decade or so.
A Possible “Hail
Mary” Pass?
There is one thing that could resurrect the finance leasing
industry and that would be a decision by Congress that American manufacturing
needed the kind of boost that tax incentives for purchasing new equipment
usually bring. Dangling an investment
tax credit of some sort would likely get the blood flowing in the systems of
the lessor community. Of course an
investment tax credit would reduce the amount of taxes that would be available
to reduce our growing deficit.
What to do….
So what should railroaders and shippers who will (ultimately,
one way or another) be impacted by a reduced finance lease marketplace do? Probably the one thing that they don’t want
to do at this point in time……jump into the equipment market and nail down their
equipment needs for the next 7 to 10 years.
Even if you don’t dip into the finance lease market……operating lessors
are primed to do the kind of deals you need to do today!
April 30, 2009
Still A Constricted Market For Deals
We’ve also said that there are a lot buy/sell deals that aren’t getting done because buyers are insisting on a discount when they employ ever-increasingly-expensive capital and sellers aren’t willing to give discounts. (The exception being sellers who aren’t in a position to quibble about discounts because they need to monetize their investments.)
Another thing that’s not happening is investment in rail finance by people with money who can’t find a way “into” the industry.
We’ve just spoken to a friend at a bank that is active in buying and selling rail equipment deals. He’s amazed at some of the deals he can buy in the secondary market from lessors who need to liquidate transactions for strategic reasons. He’s also a bit surprised at the amount of money that’s lined up to get into the business of rail finance but which is presently unable to do so due to the tight market or……..just the lack of contacts and boots-on-the ground confidence that they know what they’re doing.
Are you in one of those camps?
If you are………let us know…….perhaps we can help.
April 20, 2009
First Quarter Lease Finance Report
I think that we’ve mentioned
on this blog that…….unlike other parts of the world…..people seeking to finance
rail rolling stock can still find counter-parties to fund their transactions in
the U.S. and Canada. True, the ability
to do long term leveraged leases…the mainstay of rail equipment finance for the
last two decades…has been severely reduced.
(Leveraged lessors invest 20% to 30% or so of the equipment cost and
borrow the balance from a lender.)
Why? Well, some of the big leveraged leasing
investors may no longer have the “tax appetite” for these investments, but more
importantly, an investor in a leveraged lease stands behind the lender in priority in the case of default. In this kind of credit market, lessors would
rather do a single investor lease (where they put up 100% of the funding) to be
sure that if things go bad they have clear access to the equipment without
having to pay off the debt which has priority in a default.
But the question
arises……..if the cost of financing is
so high that equipment end-users hesitate when they consider it……is that really
available financing?
Here’s an example:
Let’s say that I am chemical
shipper that has a mix of tank cars, some of which are leased-in from operating
lessors and some of which I control through long term finance leases with
purchase options. My business is
reasonably predictable (even in this market) and I have to replace some old
tank cars in the next year or two. I
attended REF2009 and learned that some estimates of the North American
“build” of new rail cars for 2009 are as low as 12,000, so it seems to be a
“buyers” market for my railcar needs.
I begin shopping and find
that I can……in fact…..get a good price for the equipment I need to replace my
old cars due to the confluence of lower prices for steel and components…..and
the builders’ need for business.
For some unimaginable
reason, I don’t hire Railroad
Financial Corporation to arrange my financing and send my CFO out to get quotes
on the kind of leveraged lease financing that I have used in the past to
finance the cars that I want to eventually put in my “owned” fleet.
She reports back that
despite the fact that we are an “investment grade” credit…..no one wants to do
a leveraged lease for us and that the single investor lease quotes price out at an implicit interest rate of 8%! (Nearly double what it would have
cost us last year!)
Now this has me
thinking…..do I really want to buy “bargain” cars if the price of financing
them is saddling myself with 15 years of payments under an opportunistically
priced (for the lessor) long term lease?
After all, if I have to dispose of my old cars, I can still go to my
operating lessors for short term replacements.
Maybe the best thing to do
is to hold off building the new cars and see what happens next year when car
prices may still be low and some of the financial hysteria gripping the market
may have abated. (Maybe.)
AND THAT…BOYS AND GIRLS….IS
ONE OF THE REASONS WE ARE STILL WHERE WE ARE IN THIS MARKETPLACE!
Are there solutions to this kind of problem? It takes a lot of hustle and some creative structuring…..but the answer in most cases is yes. If you are or will be in the market for rail equipment finance hit the icon below and let me know about YOUR situation.……
April 10, 2009
What You Need To Know About Crashworthiness Regs For Older Locomotives......
“Crashworthiness” in locomotives? Simply speaking it’s the ability of the locomotive’s
design to protect the crew in accidents.
Prior to 1989 the issue of crashworthiness in locomotives was left to
the designers and builders of the equipment responding buyers’ needs.. Builders offered equipment designed to meet a
wide variety of functional requirements.
Crashworthiness was not a term generally applied with greater emphasis
than any of the design’s other functional requirements. In 1989 the
Strictly speaking, crashworthiness is a group of structural
characteristics of a vehicle which together work to increase the protection of
the occupants, in our case, the operating crew of a locomotive, during a
collision. The locomotive’s design focuses on preserving survivable space for the
crew, escape and emergency
lighting. Fuel tank integrity works to
keep the remaining space for the crew, following an accident, survivable. The sheer energy involved in a railroad
collision involving locomotives is far
too great to rely on seat belts and
airbags. The good news is that in most locomotive accidents the accidents
themselves develop relatively slowly.
This gives the crews the opportunity to move to the location in a cab least likely
to be crushed. Keeping debris and rail cars
out of the cab also is key.
New locomotives have been designed to meet these stringent
new safety requirements. Where is the
investment in crew safety? Newly
designed collision posts, anticlimbers, modern underframes, fuel tanks and cab
structures have all been redesigned for safety. As a result, these components work
as a system and have created a much improved survivable space. This was witnessed in the tragic
Metrolink-Union Pacific accident of last fall in which the train crews in this
head-on collision had vastly different fates.
The UP crew operating a new locomotive survived, the Metrolink crew
operating a Pre S580 unit perished in the crash.
If you own locomotives you should know that in the capital rebuilding of
locomotives there is a value test in the Federal regulations requiring
investment in crew cab safety in certain circumstances It’s triggered when the value of new equipment on the finished locomotive
exceeds a threshold percentage. In our experience, this threshold is not a significant issue. Even very large scale rebuilding usually
won’t trigger the regulation’s
requirements for compliance to S580/506
crashworthiness.
Great! So the
industry had dodged a bullet……no? Again…..it
depends. Different fleets of locomotives
being rebuilt can be seen from differing perspectives. If the rebuilt units are destined for yard
and local service where they are replacing units of even older design, and the
operation seldom, if ever, reaches much speed, the incremental value of installing
newly designed crew safety features might not make sense to undertake, if you don’t
otherwise have to do so.. However when
heavy rebuilds, which often utilize new cabs, are being done to produce units
destined for mainline usage, the case may be different. These units often are arguably replacing the
units which might otherwise have been purchased new (and to current cab safety standards). We know of at least one railroad that sees an
implied responsibility to the operating crews to expend the small increment of
effort needed to achieve modern crashworthiness performance in a rebuild unit…..even
if they aren’t technically required to do so..
. The incremental cost of doing
the best job is a comparatively small
investment in the advanced design work and knowledge of how to do it. One could also argue that lessors investing
in crew cab safety would find a more ready market for their product.
What should owners be
sure to watch? All too often it seems that suppliers claim a “crashworthy” cab
or tank without the analysis to prove it and rebuilders don’t realize that
buying “crashworthy” components does not insure compliance since the individual
components need to be designed to work as a system.
Readers of this blog who have questions on this subject can
contact me at:
(david.i.scott@comcast.net)
David Scott
___________________________________
Thanks Dave.......
April 4, 2009
The "AIG Effect" On Conferences
This week I would like to address what the New York Times has called the “AIG Effect” on conferences.
You know what I mean…..
Today’s corporate knee-jerk reaction to off-site business meetings in nice places. The hurdles through which our attendees may have to jump when they ask permission to attend Rail Equipment Finance 2010. The need to justify getting on an airplane and flying to Palm Springs (I shudder to even think of what that location translates to in today’s corporate-speak) for what is billed as an important industry meeting…..when people are being laid off back at the ranch.
Now…….what those who have attended know (and have attested to on this site’s “Testimonials” Page)…..is that Rail Equipment Finance pays dividends in the form of valuable advance industry information and world-class networking opportunities. The cost of our meeting is subsidized by our Event Sponsors (God bless them) and Industry Partners (Them too) and I would bet that we have a better ratio of fannies-in-the-seats than any other meeting held in any other resort venue
So, what can we do to assist our regular clientele during
the balance of 2009 and into 2010 to properly make their case for attendance at
REF2010?
Well, for one thing, we have developed and will prominently display our “Mission Statement” on this website’s Home Page. Hopefully this Statement will help our attendees make their case that REF is a serious business meeting that can actually save money in the long run by helping attendees avoid first quarter business travel by attending and meeting their customers at the Conference.
We also want YOUR input. What can we do with the website…….or the Conference itself……to make it easier for you….the attendee….to appropriately justify your attendance in 2010?
Would…….for instance……it be better if we held the Conference
in the frigid north rather than
Please let us know………
March 30, 2009
Coal Car Update
Well, we are glad that so many of you are reading this blog on a regular basis. To make your efforts worthwhile, we will try to continue to give you information and analysis on a more timely basis than that which available elsewhere.
This week I have decided to interview my partner David Nahass, who has been spending a huge amount of time in managing the acquisition and financing of coal cars for his power generation clients.
Kruglinski:
How many coal cars were built new in 2008 and how many will be built in 2009?
Nahass:
Sean Hankinson from
FreightCar America, Inc. announced at REF 2009 that in 2008 about 16,000 coal
cars were manufactured. Projections for
2009 are much weaker with total production for 2009 being forecast at 7,000
cars.
Kruglinski:
The acquisition of ANY type of railcar today is an amalgam of issues concerning car and component prices, delivery dates and the appetite of a bruised finance market to fund the acquisition of the equipment. How have these various factors changed from 2008 to 2009 and what do you predict for 2010?
Nahass:
Car prices will
respond to two things, demand and the price of raw materials. 2008 and 2009 were very volatile years for
the prices of raw materials but consistent with a high demand for new
railcars. Scrap prices soared, fell back
to earth, soared even higher and have retuned to prices not consistently seen
since 2006. There is some stability in
raw material pricing in the market’s weakness, but I think that the prices of
raw materials ultimately will rise most likely in late 2010 and into 2011. Margins on new cars being built have to
shrink, but I would say that part of the decrease in margin has already been
baked into current prices.
The financial crisis
has limited the number of parties interested in financing equipment in long
term leases at competitive rates. That
pool will probably stay rather small for the next year to eighteen months. Those parties (banks, leasing or finance
companies) with capital will try to extract maximum value as a quid pro quo for
any equipment acquisition. As additional
investors in rail equipment stabilize their financial position in 2009, 2010
should offer more opportunities to acquirers of equipment.
Kruglinski:
Has the national debate on coal burning power plants and related emissions issues impacted the coal car market? Has it impacted funding at all?
Nahass:
It has not had an
impact that is measurable to this point.
The implementation of a cap and trade program will clarify any issues on
this front. That seems to be the way
emissions regulation is headed.
Kruglinski:
Is the market for coal cars and coal car finance a surrogate for what is going on with other car types?
Nahass:
It is to some degree. The burning of coal and the business of power generation (especially the regulated utilities) are generally viewed as more stable than other industries. That helps to support coal car financing in situations (such as today) where financial parties may view new equipment acquisitions as speculative or unnecessary.
Watch this space for our weekly comments on our marketplace.
Pondering On Power (If you own or invest in locomotives.....READ THIS)
March 24, 2009
There are approximately 40,000 locomotives in
I have been a participant in, and observer of, the
locomotive marketplace in
A lot of my money and
my kids’ college funds are invested in locomotives. I am
concerned, because in ALL the years that I have been focusing on locomotives, I
have never seen the locomotive market in
What am I talking about?
Those of you who attended REF2009’s “Power-Power-Power”
program on the third day of our Conference will know EXACTLY what I mean. There was a huge amount of forward-looking
information dispensed that day. However,
THREE things….in particular….were disclosed….. that have the potential for
gutting basic assumptions on which the market for locomotive utility, planning
and valuation is based. None of these issues have anything to do
with locomotive economics or efficiency.
They all begin with the letters “EPA”:
- The EPA regs that grandfathered the level of EPA compliance for certain locos….have already been amended to require that rebuilt units meet tougher emissions standards.
- The EPA’s satisfaction with the reduced emissions levels achieved by gen-set switching locomotives (utilizing engines derived from those used by the trucking industry) is leading to future emissions level requirements that can most likely only (based on today’s technologies) be met by gen-set locomotives.
- The EPA’s “Tier 4” rules designed to go into effect in 2015 will require a secondary “scrubbing” of the emissions of new locomotives that could double the price of the engine within the locomotive. Locomotive costs will be impacted dramatically as builders also face the challenge of packaging all this new equipment.
Now……no one is running around yelling “fire” in a crowded theater over these changes. Apparently the OEMs feel that they can develop…….by 2015…..technologies that will meet the EPA goals. (Apparently the “reality” of what the OEMs can and cannot do is what is keeping the EPA from going even further.) It also seems that the OEMs will be able to sell you a kit to upgrade the emissions levels of your previously “grandfathered” locomotives this time around. The end-user will just pay more.
The PROBLEM is that NO ONE seems to have given any thought to what these long term changes will do to the locomotive marketplace that has been supporting railroad needs for the last 30 or so years with a combination of leasing and long term finance.
What do I mean?
For the last 20 to 30 years, long term finance lessors have been buying most of the new locomotives built. They then lease them to the railroads under finance leases which…..for the last 20+ years or so, at least……..left the issue of “control” of the units in the hands of the railroads. Whether through so-called EBO’s (Early Buy-Out Options) or FPO’s (Fixed Purchase Options) railroads have been eventually acquiring virtually all of the locomotives which they have been leasing long term. AND THE BANKS AND FINANCIAL COMPANIES THAT HAVE BEEN LEASING THESE UNITS HAVE COUNTED ON THAT REALITY WHEN THEY CALCULATE RESIDUAL RISKS.
But what happens when emissions “grandfathering” turns out to be a moving target? Will railroads opt not to exercise their options to buy the units they have been leasing?
Or……will the potential for much more expensive…..and probably less efficient…..Tier 4 locomotives mean that the incentive to buy existing locomotives without Tier 4’s secondary emissions scrubbing……..will be all that much greater? Or will secondary scrubbing become such a “social” mandate that the Class I’s will dump the older locos as soon as they can?
The guys REALLY behind the 8 Ball are the locomotive operating lessors that have thousands of SD40, SD40-2 and Dash 7 & 8 locomotives presently parked due to reduced needs at the Class I’s!
What do THEY do?
Do they keep investing in the technologies underpinning their 25 to 30 year old locomotives and rebuild them “in-kind”? Or do they attempt to repower their units with more modern technologies? (Currently being offered by both OEM’s) OR DO THEY JUST SCRAP THEIR OLDER UNITS? Or if they don’t scrap them will these older units be a drag on the building of new ones?
And what about the banks and other traditional long term locomotive lessors? How will these developments impact their view of the residual risk they have traditionally been taking in the high horsepower locomotives they have been buying to lease to the Class I’s? Depending on how they read the tea leaves……their risk could be greater……or smaller!
My view is that there will be a “little of this” and “a little of that” as people feel their way in the dark on these issues. What happens soonest will have a lot to do with the economy and railroad operations. If the economy rebounds briskly and the Class I’s have trouble handling it……older locos from the parked lease fleets will find their way back into the system and rebuilding “in kind” without a lot of “future think” will be the norm.
If the economy continues to drag……..or picks up without Class I operating issues…..I predict that one or more of the operating lessors will look long and hard at more modern repowering options.
What about the finance lessors? That’s a good question and one that may answer itself. After all, after the present financial debacle is taken into consideration, there will be FEWER of these lessors around. (Due to mergers and acquisitions.) Many of them may find that their “tax appetite” (their ability to use the tax depreciation that is the corner stone of their interest in equipment leasing) is massively reduced due to the losses that are and will be on their books for years to come.
What do you think?
March 14, 2009
Reflections
It's been just over a week since we wrapped up REF2009. It turned out to be a great meeting which jammed (during the receptions and general sessions) despite the fact that we had about 80 fewer attendees than we had in 2008. The "news" was profoundly grim. Just about every commodity that is carried by rail is down and there are hundreds of thousands of railcars and thousands of locomotives parked in the grass, some storied ready for service and some that may never see service again. The mood of those in attendance was similarly somber with one wag commenting that: "It's a good thing this conference is in a building with only a ground floor........." (We've maintained the 2009 Agenda on this site and "Archived" my reports from the Conference itself on the Archive section of this blog.)Our speakers, who were as good as we have ever had, made their points. displayed their statistics, and offered their opinions. The "Big Question" was when will things "turn" and there were few, if any, of our speakers willing to make that prediction. The big prediction that WAS made was that the number of new railcars that will be built in North America this year may be as low as 13,000 or as high as 30,000. In either case a big drop from 2009.
The big news for this observer was planned 2015 EPA mandated changes to the Nation's new locomotives. They will have to have secondary scrubbing abilities and are likely to cost twice as much as the current locomotives sold by EMD and GE. The impact of this change on new power as well as the existing fleet which will be grandfathered will be huge. (I'll attempt to explore this further in both this blog and in my column "The Financial Edge" in Railway Age Magazine.)
For now, my advice is to keep the faith........think positive thoughts.......and keep an eye on this space where we will continue to try and keep you updated on important developments impacting our industry
March 4, 2009
Power - Power - Power Day At REF2009
Well, we are winding up REF2009 in Palm SpringsHere's what's happening:
Jeff Wood (EMD) indicated that EMD's main focus was to restore its position as the market leader in locomotive manufacture. He reported that EMD was completing a record year in 2008, but also sees 2009 as a good revenue year despite a fall of in orders for new domestic locomotives. Jeff reported that new frieght locomotives deliveries for North America (both manufacturers) would be between 400 and 500 units this year. He also reported an 80% growth in EMD revenue since 2005 and that EMD is continuing to invest in its facilities.
Jeff's principle comments were focused on EMD's 710 ECO Repower Solution for repowering existing locomotives:
- EMD has produced two prototypes and are currently in full production on their first commercial order.
- A "Repower" consits of an 8 or 12 cylinder 710 T2 Engine, an AR10 Alternator, Separate Loop Aftercooling, an EM2000 control system and Automatic Engine Start Stop.
- Current prototypes have been built on EMD GP40 and GP9 frames.
- Emmissions Compliance can be Tier 0 to Tier III.
- Commonality with over 8,000 existing 710's currently in service.
- Fuel savings 20% to 40%.
- Lube oil savings of 50%.
- Emmissions Reduced by 50% to 70%.
- Improved traction moter life.
- 184 Day Maintenance Cycle.
- 15% increased all-weather adhesion
- State funding available for conversions.
(General Electric elected not to participate in this year's Conference.)
David Brann (EMD) gave a very illuminating presentation on Emerging Emissions Regulations and....particularly....the emerging regs on the next "Tier" (Tier 4) of emissions regulations that will come into effect in 2015. He went into significant detail on the likely solutions that the OEM's will use to reach Tier 4's new requirements. In response to this writer's questions.......David suggested that the cost of adding a "scrubbing" aspect to diesel locomotive might add costs equal to the cost of the locomotive's engine itself while reducing the performance of the unit.
Thomas Mack (Alternative Hybrid Locomotive) discussed his firms design of an Ethanol/Hybrid Locomotive
Dave Scott (Dave Scott Consulting) discussed his firm's work for a major Class I relative to required locomotive cab safety improvement that are required to be applied in connection with overhauls of certain vcalues.
The Conference continues............
[Check Archives for Blogs on March 2nd and March 3rd.]
.
March 3, 2009
Reports From REF2009
Well, for those of you who read yesterday's blog (if you missed it, hit the "Archive" button below) and came away thinking that the "theme" of the first day of presentations at REF2009 was one of doom and gloom.....that pretty much sums things up:- A drastic decline in new car building with production dropping to as low as 13,000 cars in 2009.
- Massive traffic fall off for railroads with respect to most types of commodities moved.
- Significant changes in how the rail industry finances itself and its equipment needs.
- Hundreds of thousands of cars parked in the weeds.
- Material declines in car values
There was one bright note. The grain car panel reported that Americans are shifting their eating habits to the point that they are consuming increased amounts of pasta.........causing an uptick in the employment of cars moving grain and flour!
This morning's presentations included some extremely positive views by the COO of Poet Nutrition on the future of the ethanol industry........
So things are looking up.
REF2009 has awarded Desmond Hayes President of Trean Leasing the Norman W. Seip Award For Industry Excellence. Awarded annually the "Normie" honors industry stalwarts for their years of service to the rail equipment and rail finance industry.
More follows as the day progresses.......
March 2,2009
Reports From REF2009 UPDATED AS OF CLOSE OF BUSINESS MONDAY MAY 2ND
For those of our industry friends who cannot be with us here
in
These reports from the Conference itself ARE NOT intended as a replacement for attending the Conference. They are intended to both give a “flavor” of what is going on here as well as to provide reports newsworthy subjects advanced by our presenters.
North American Fleet
Analysis……Alan McDonald (Railinc):
- There are presently 1.6 million cars in the North American Railcar fleet
- 2008 stats show that fleet is relatively static with no decline or growth year over year.
- Boxcar fleet is down 10% due to retirements with 8% of the fleet not having moved within the last year.
- Covered Hopper fleet: 7% of fleet has not moved in one year.
- In the North American Fleet 62.7% of the fleet is owned by non-railroads.
- The average age of a railcar in the North American Fleet is 19.2 years for 2008, in 2007 the average age was 19.3 years……an improvement.
- The covered hopper fleet has grown over the last year due to ethanol industry needs.
- The intermodal flatcar fleet has shown a decrease in platforms for 2008.
- The average length of haul for 1997 was 850 per car per car; in 2007 the average length of haul was 912 miles per car. A significant improvement.
Individual Comments:
Keynote Speaker Chris
Ragot (CEO of FreightCar
Kurt Feaster (CFO/DM&E) reports that his railroad has experienced 3 customer bankruptcies to date and a general increase in aging of accounts receivables but that these events are being handled in the normal course of business. With respect to rolling stock, he is returning unneeded short term leased equipment and buying out leases on favorable terms if offered. Kurt predicts an increase in grain movement on his railroad due to the movement of stored grain stocks. The DM&E’s coal movements are actually up at this point.
Paul Weyandt (Treasurer/KCS) indicated that access to credit markets by the rail sector continues to be better than general corporate borrowers due to the nature of the rail business. In addition, railroads continue to enjoy comparatively low interest rates. Paul reported, however, that even railroads are not immune from downward ratings adjustments due to potential needs for refinancing of existing debt.
Mark Adiletta (Carrden Group/ Financial Advisor) reported a significant increase in secondary market transactions by investors in existing leveraged leases at the end of 2008 continuing into 2009. For 2009 he predicted a continued decline in leveraged lease transactions. He also reported an absence of firm budgets from the investor community insofar as leveraged lease targets for 2009.
Michael Dockman (M&T Bank) pointed out that medium to long-term funding for banks is difficult except for Federal programs……making deposit growth very important to support lending. M&T is looking favorably at shorter term deals because the funding of long term leasing is so questionable. Rail continues to be favored due to excellent loan loss experience for rail equipment transactions.
Tony Hatch (Rail Analyst) talked on key Class I issues:
- Re-Regulation
- Rates (versus volumes) including shipper challenges to rate structures
- The Economy, on which railroads usually have a 6 month advance window, is presently NOT being predicted by railroads.
- Service Levels….presently high……will railroads back off during 2009?
- Green Ramifications……national coal policies….What effect will they have on freight railroads?
Tony also predicted that ’09 Class I revenues would be flat for 2009……a HUGE positive result for any industry segment this year!
John Winner (Consultant) made the following predictions for 2009 and beyond:
- Housing traffic will be weak for years (4?)
- Auto traffic will also take years to recover and is presently suffering through sales drop-offs of 50%
- The political situation will also be tough for rail in 2009 and beyond.,
John also pointed that the fall-off in rail is worldwide with significant fall-offs in China and a 33% reduction in traffic in Russia.
Dennis Neumann (BNY Capital Funding) made the following observations about the market for long term rail equipment finance:
- Money is hard to come by;.
- Where available money is expensive.
- There are only very limited opportunities to employ financial structuring techniques.
- It is likely that future funding will come from infrastructure funds and private equity (which….Dennis observes…..has a huge amount of capital dammed up.)
Betsy Snyder (S&P) observed:
- That the recession will be long and deep;
- An even deeper recession may be possible if the financial sector remains locked up.
- S&P’s predictions concern economic recovery are more pessimistic than those of the Federal Government.
- Unemployment rates predicted to be 8.6% in 2009 and 9.3% in 2010.
Ron Sucik (Intermodal Consultant) reported:
- Intermodal loadings are down 3%
- Container
volumes at
- Retail container traffic forecast to decline at 11.8% in first six months of 2009
More to come as the Conference continues........
March 1, 2009
Watch This Space................
As we kick off Rail Equipment Finance 2009 I want to thank the 225 attendees who have signed up this year and journeyed to La Quinta for their support.For those of you who couldn't make it this year, I will be positing news reports and observations gleaned from speakers and panels here on the Chairman's Bulletin Board.
These reports will not be comprehensive so reading them WILL NOT be a substitute for attending and asking your own questions, etc. However, I do intend to report news and opinions as they are expressed so the "faithful" who are reading this blog regularly get some sense of what is going on at the Conference and what is coming around the corner at them in this very unusual year!
Check the blog daily for reports and the Archive for earlier entries made during the Conference.
You can check the AGENDA, SPEAKERS and ATTENDEE pages on our website to see our final program and who is attending and speaking.
February 27, 2009
Where Are All The Deals?
With the final agenda for REF2009 in place and the speakers briefed on their assignments, we are still scratching our heads at the dearth of transactions in the marketplace. Where are all the deals? One thing is certain .....among the market facts that will likely be revealed and discussed at REF2009 will be the existence of blockage in the normal deal flow in the rail equipment market.What is going on here?
It's our belief that students of rail rolling stock as investments or as security for borrowing really understand the intrinsic value this equipment holds. They also understand that today's marketplace is seeking substantial discounts for transactions..........due to increased costs of capital and the absence of much of the leverage that was available in prior times. THIS is the disconnect that is most likely behind the lack of the normal deal flow in our industry. The only people doing deals are those who are desperate or those who find counter parties who do not insist on discounts to close a transaction.
What's likely to happen next?
That's one of the reasons that we run REF2009..........to find out!
Keep an eye on this blog as we will report developments daily during REF2009 next week in Palm Springs.
February 23, 2009
Chris Ragot To Be Keynote Speaker
Chris Ragot, CEO of FreightCar America, will be REF2009's Keynote Speaker on Monday, March 2nd. Chris joins a stellar cast of senior officers of railroads, rail suppliers and financial institutions who will be attending REF2009 to share their view of our industry in this unique economic time.If you are already reading this blog, we invite you to the top of this Home Page to review our Revised Agenda and Speaker List as well as the current list of our attendees.
There are a lot of places where you can spend or not spend your business development $$ in this economy.
NOT attending REF2009........NOT experiencing the networking opportunites.........NOT learning what is coming around the corner in this market.......Would be a mistake!
February 6, 2009
Railroad Financial Corportion To Advise In Restructuring 10,000 Car Fleet
Railroad Financial Corporation, organizer of Rail
Equipment Finance 2009, has been engaged to advise a large chemical corporation
in restructuring its plastic pellet covered hopper fleet. RFC’s assignment includes participation in a
strategic review, assessment and realignment of the fleet of more than 10,000
plastic pellet cars. The present fleet
is diverse in its capacity and age profile.
RFC will assist in a review of the fleet with the lessors
that are currently leasing their cars to this customer. Major goals include decreasing immediate and
total rent expense and aligning fleet size with current business demands.
RFC’s client is also seeking to discuss the availability of plastic
pellet cars not currently in its fleet as replacements for cars that may be
returned to existing lessors.
“If there are lessors with plastic pellet cars parked……or lessees with
idle plastic pellet cars that can be subleased….we would like to hear from
them.” Said RFC’s David Nahass.
David Nahass can be reached at 312.222.1383 or dnahass@railfin.com.
February 3, 2009
33 Lenders & Lessors Register for Rail Equipment Finance 2009!
During the past few weeks we have repeatedly fielded questions on that availability of funding for rail deals. We've responded that for the transactions in which Railroad Financial Corporation is involved there appears to be sufficient funding to get the job done. True.......there are far fewer "participants" in this market on the funding side, but there are still enough out there to get the job done in a competitive fashion.The INTERESTING thing that we have just noticed in reviewing the early registrants for Rail Equipment Finance 2009 is that more than 33 different financial institutions and lessors have already registered !
Yes a good number of these institutions are veterans of this meeting, but there are significant numbers of new players and new individuals.
These stats would seem to indicate that there is both interest and activity in this segment........
No?
If you want to check out this year's attendance list on a "real time" basis check out the Attendees icon above........
Janury 13, 2009
Ethanol News: Jim Hansen, COO of Poet Nutrition to Speak at REF2009
Of all the questions we receive about the state
of and prognosis for the rail car market in this period of economic downturn,
the most penetrating ones are often about equipment dedicated to the ethanol
market
- Where is this market that was so HOT in 2007 and
early 2008 going?
- Are food issues going to force a rethink of
ethanol as a fuel?
- Is the drop in oil prices a doomsday note for
ethanol as an alternative?
- What about proposals to use non-grain substances to make ethanol?
- What’s going to happen to all the purpose-built
ethanol rail equipment?
To
answer these and other questions, Rail Equipment Finance 2009 has
arranged for Jim Hansen, Chief Operating Officer of Poet Nutrition to speak on
Monday, March 2nd. Poet is an
acknowledged industry leader in manufacturing and marketing ethanol and its
byproduct distillers dried grain (DDG) and has 2,000 covered hoppers and 3,000
tank cars in their fleet!
Jim
will speak on the future of his industry as well as strategies he and his staff
have implemented in the rail equipment area.
Don’t
miss this on point of discussion of issues likely to directly impact our
industry in 2009 and beyond!
January 1, 2009
Happy New Year!
Happy New Year to all of REF's attendees and industry friends.But what kind of year will 2009 be for our industry?
Well, Rail Equipment Finance 2009 in La Quinta on March 1-4 will go a long way to answering that question, but that is two months off at this point in time. To start the year off, we thought we would suggest some general directions in which things might develop as well as alert our readers so that they will be aware of some of the market indicators that we'll be watching ourselves:
- The General Economic Climate. Make no mistake about it. While the rail finance industry will have activity all during 2009, it won't begin to PERK UP until the overall economy starts showing some signs of rebounding. Want details on what WILL be happening in 2009 in the rail equipment and rail finance areas? So do we! That's why we're running REF2009.......
- Asset Sales. We've already reported that some owners of rail rolling stock who would like to convert their assets to $$ are waiting until the market recovers before trying to sell them. Keep your eyes open. Any attempt to flog these assets in a continuing poor market will indicate that the owners couldn't wait!
- Class I Railroad Behavior. So far we have NOT seen huge retrenchment by the Class I's in their behavior in the equipment market. Yes, new locomotive orders for the second half of 2009 are tailing off, but that is most likely due to the need that the Class I's have to digest the huge number of new units they have been buying the last few years. Railcar orders are also down somewhat also following on years of hyper-building. The point is that despite dramatically falling volume numbers the Class I's are still investing in CapX. Keep an eye on their behavior in the first half of 2009!
- Finance Options. We have been talking to our friends overseas and in many markets (arguably smaller than North America's) sources of financing have...more or less......dried up. We're lucky that our market place was relatively well served with lenders and lessors who like rail when this economic tsunami hit so that today there are still sources doing business. We will need........however.....a lot more to return to this market before things really turn around.
Join us for REF2009 to learn volumes more from our more that 50 industry speakers!
December 29, 2008
Is the Venture Capital Model Broken?
Last year at Rail Equipment Finance 2008 we introduced a panel of venture capitalists for the first time. (They like to be called "Private Equity" or "PE" so I'll refer to them that way in this blog installment.) In any case, it was a big success and we are having them back again this year with.....perhaps.....an addition or two.In any case, in preparation for this year's program I contacted one of last year's speakers.....Reg Jones (Check him out on our Speakers List on this site).....who not only agreed to speak, but offered up the possible topic of whether the PE investment "Model" was broken..........or not.
By this I believe he meant to question the continued viability of a model that has allowed......sometimes dramatic.....leveraged PE investments in a multitude of industries.......including ours!
While we are all experiencing a lessened ability to borrow to leverage our rail industry investments, the possibility that a vast pool of equity may not find its landing zone in rail to be inviting enough to consider jumping from the plane.....is a bit of a potential revelation!
Sooooooooo
Join us for REF2009 in La Quinta, California on March 1-4 to learn how much or little the PE guys have been impacted by today's severely dented economy and what this may mean for all of us rail industry types!
December 21, 2008
Used Car Prices Likely Dropping
We presently know of at least two situations were informal sales activities are continuing without formal requests for proposals or the generation of broadly disseminated data from which a potential seller could make such a proposal. Apparently these equipment owners are not hiring sales agents nor requesting proposals from market “players” in the hope that they can find someone (perhaps a new market entrant) who will pay them the book value or better for their equipment. In the absence of that kind of buyer being found…..no formal offer of sale is being issued.
In this situation, what are the assets actually worth?
Well, we’ll take our cue from the real estate market and our experience with that. Any veteran homeowner will realize that EVENTUALLY there will be sales in a down market and that these sales will probably evidence a dramatic decline in property values (at least for sales that actually occur under some kind of pressure like death or foreclosure.)
We’ve heard rumors of one sale in this market that is supposedly to have been priced at approximately 85% of the value of those assets on the books of the seller. (We are told this sale occurred under some pressure to sell.) Our source also speculated that this sale price was due, in part, to an absence of buyers during the sales process.
If the above is true, it would indicate that there is presently a discount of 10% to 20% of book value built into potential railcar sales situations. The discount might be even greater for used locomotives not under lease due to the fact that there are estimated to be more than 1,000 parked by lessors at this time.
In the past, we’ve had lessors tell us that their target for a return on investment in railcars or locomotives offered for lease is approximately 15% per annum. If our guess at the likely discount to book value is correct, buyers who can put together a deal with a (potentially pressured?) seller should be able to generate returns of between 15% and 20% if they can get appropriate financing.
There may be potential railcar and locomotive investors out there, but their ability to leverage their purchase 80% or 90% is probably long gone in this market. A 70% advance against value (assuming that the buyer is looking for “non-recourse” financing) may be a better guess today. Perhaps this is the reason that there were so few buyers stepping up to the mark on the one small reported sale about which we heard rumors.
What does this all add up to?
Well, perhaps if someone REALLY has to sell……the big discounts on sales of existing fleets that some potential buyers have been seeking…might become a reality.
Or potential sellers could just decide to sit on assets until things improve.
December 17, 2008
GATX Announces AllCapital Fleet Acquisition
December 12, 2008
On The Track of Declining Values.........
Those of you who have been reading this blog since we started it in September will be familiar with my current "Quest" to be the first industry observer to report on declining values in the secondary car market. (We have already reported softness in the pricing for most new car prices.)The truth of the matter is that sometimes we come into contact with information that we can't report on in detail.
Soooooo.....it happens that the first material evidence of softness in used car prices comes from a confidential transaction of more than 2,000 cars where the reported sale price is said to be less than 85% of the book value of the cars. That's all we can say other than the cars are relatively new and that the transaction in question was one done under pressure.
One of the alleged reasons for the low offer was a lack of bidders for the cars.......which if true is surprising.
None of this bodes well for the potential transactions that are said to be in the wings........
December 2, 2008
Greetings From Down Under
I am presently in Australia "attending" to rail related opportunities down under. Those of you who read my Railway Age column "The Financial Edge" regularly will already know that after decades of government ownership, all but one of the state owned railroads have been privatized under an "open access" scheme that allows qualified start-up roads to operate virtually anywhere. Having said this, there are only a dozen or so rail operators and only a couple of lessors to date.One of the reasons I came down was to attend a commercially organized meeting that draws most of the industry to commercial, engineering and equipment presentations.
While there were a great number networking opportunities and some excellent executive presentations, the format and presentation of the meeting differed materially from Rail Equipment Finance 2009:
- The Australian meeting's format......primarily executive presentations.....lent itself to a series of policy statements which in-and-of-themselves were interesting but not particularly designed to motivate interaction with the audience. REF 2009 encourages interaction between its industry presenters and the audience. If the RIGHT questions don't come from the floor of the meeting......one of our staff will ask them!
- While an effort was made to solicit the text of presentations so that participants could take them home in hard copy........there were many "holes" in this process. REF 2009 delivers a data disk with virtually all of the presentations included.
- Interestingly.........the promoters of the Australian meeting used supposed attendee "privacy" as a reason not to distribute an attendance list. (You had to visually scan it on a bulletin board.) From this writer's perspective, failing to provide this kind of information diminishes the networking value of such a meeting. REF 2009 not only provides this information in hard copy at the meeting, but it also provides the same data on the conference website to facilitate contact with our speakers and attendees!
- Our food was a Hell of a lot better too........
November 24, 2008
Looking For Mr. Good-Deal.........
If you have been reading the blogs that we've been posting to this site, you will know that we've been on the hunt for evidence that our current extreme financial environment is having an impact on railcar prices in the secondary market. When last we wrote on this topic.....a couple of weeks ago......there was no significant evidence that prices were being impacted by the economy. We still haven't seen any explicit evidence that railcar values are coming down in any material way in the few transactions that we have seen.On the other hand, there are enough clouds on the horizon to suggest a weather report calling for rain.
What do we mean? To begin with......and this is something we all are observing......the financial crisis that our industry is navigating along with the rest of the world......continues unabated. EVENTUALLY, its impact on the financing of railcar acquisitions in the secondary market may be so profound.....assuming there is no turn-around.....that it will be seen in reduced railcar values.
What's going on as we write this? We've been told that access to bank financing for these transactions continues to exist......but at much lower loan-to-value ratios. For instance, 90 days ago this writer would have felt comfortable with getting financing at a 75% loan-to-value ratio in an otherwise uneventful financing. Last week I received a report that a 60% loan-to-value ratio was being required by at least one bank. There has been no new evidence that financing rolling stock is inherently more risky than it was 6 months ago. But, we're told, that as a general matter rail deals are being structured .......and priced........more conservatively because they are being rolled into a general credit retrenchment by the lending community.
What's next?
Well before there is any material value erosion we will need to see some of the potential new entrants to our operating leasing market have their appetite satiated or be otherwise scared off the hunt. At the moment the ACTUAL investment record in our industry is so good.....compared to other capital equipment industries....that new investors are still seeking investment opportunities.
Keep an eye on the market with us and join us at Rail Equipment Finance 2009 in California on March 1-4, 2009!
November 19, 2008
Babcock Fleet In Play?
If you are one of those.....like this writer.......who try to keep tabs on what is happening to "players" in our industry, the goings-on at Babcock & Brown are starting to read like a novel. Less than two weeks after Allco (AllCapital Rail's parent) "called in the receivers" in Australia to begin selling off assets.....and, presumably to proceed with the already rumored sale of AllCapital Rail to GATX.........B&B.....another Aussie company.... is fighting for its corporate life. Reports in the press suggest that B&B is facing imminent prospects of "blowing" covenants in their financing which is having the effect of announced asset sales. And while these reports suggest that the aircraft portfolio is on the block, informed sources suggest that the North American railcar leasing business will also be on the list of assets to be sold.The B&B fleet which is young (reputedly less than 6 years in average age) and made up of a variety of car types would come with its own experienced management team should a new owner need such human assets. Size? The fleet is reputed to be approximately 22,000 cars in size.
Readers of this blog will note that we've discussed pricing of rail assets in this economic climate and ......to date.....haven't reported deeply discounted sales of any kind. Rail rolling stock is like that.....It holds its value. Having said this, we'll be watching the B&B situation closely to see if its ultimate resolution "telegraphs" anything about railcar values in this highly unusual market!
Don't forget to joins us for Rail Equipment Finance 2009 in La Quinta on March 1-4, 2009. We'll be covering industry M&A activity along with all the other equipment topics we usually tackle.
November 12, 2008
Liquidity Report.......
Lately, we’ve been talking to participants in the equipment
marketplace about market “liquidity.”
For our purposes, we’re using the term “liquidity” to mean the ease…..or
difficulty….of finding the financial resources to structure and close equipment
transactions in this market.
In earlier posts to this blog we’ve made the point that
deals are still getting done despite the current inhospitable financial
climate. That’s still the case. As we reported earlier, it costs more
today…..sometimes 200 to 300 basis points (2% to 3%) more……to get these deals
done than it did earlier this year.
Other “terms” for such financings ….including the term of the financing….are
also more restrictive than in the recent past.
But deals are still getting done.
But are ALL deals getting done? Here…….the answer…….we believe…….is no.
There appear to be two major areas where the current
financial climate is impeding some transactions: The first is one-off equipment transactions
where someone is trying to sell 50 or 100 or 1,000 cars presently under
lease. We’ve said in prior blogs that
rolling stock values have held firm in this period of financial turmoil. Unfortunately, many of the leases under which
this rolling stock is being sold contain rents that ……at today’s financing
rates…..make it hard to support the purchase prices being demanded. Said another way.......the buyer could
purchase and finance the cars or locomotives, but the cost of doing so takes a lot
of “luster” off the potential deal.
The second area where today’s financial climate kicks in has
to do with the capacity of the market to support very large transactions
involving large fleets with total purchase prices running into the billions of
dollars. It appears that the lack of
liquidity in the market may make it hard to raise the debt that an acquirer
might need to make such a large acquisition.
Best guess on how much debt is out there for a single deal? Not more than US$1 billion. (Not enough to do the biggest of deals that
might come to market, so deal-doers will have to get creative!)
What should you do? Join
us in La Quinta,
November 10, 2008
Where Are New Car Prices Going??
That’s a good question.
Knowledgeable sources peg the 2008 “build” of new cars in
There are many components that go into the pricing of new cars. Competition is clearly one of the major factors in the ebb and flow of new car prices. When the new car manufacturers have full order books…..and they are cranking out 70,000+ new cars a year……there is very little impetus to reduce prices to sell cars. At a North American “build” of 40,000 or so cars…..you would expect prices to decline markedly.
However our friends in the new car building fraternity point to uncertainty in the cost of plate steel, aluminum and scrap steel which goes into the melt for specialty items (trucks, wheels, etc.) as a factor retarding the reduction of new car prices.
If you believe that a worldwide reduction in the demand for these raw materials will continue unabated……scrap prices have dropped like a stone from more than US$500 a ton to less than US$100 a ton….then you will find yourself in the camp of those expecting a parallel drop in car prices. If you are not sure what will happen…….then you are in the same camp as the new car OEM’s who are still including provisions in their proposals that allow adjustments in new car prices for potential increases in plate steel, aluminum and scrap.
Join us for Rail Equipment Finance 2009 in March
at La Quinta to hear for yourself what the experts predict in the new year!
October 30, 2008 / Installment #10
So How Much Business Is Actually Out There??
So how much business is actually out there?That's the question we have been researching these last few days in conversations with lessors and lenders.
The answer? Somewhere in the neighborhood of US$1 Billion in railcar and locomotive financing. (We estimate that approximately 50% of that number is finance lease business seeking a home and 50% or so operating lease requirements that have come to market or which are in process of coming to market.)
How does this compare to last year? We talked to the President of one of North America's largest operating lessors and his estimate was that his "new" business is down a bit from last year, but not.....as far as he can see today.....following the general economy into a deep plunge.
Of course, all of what we have learned needs to appear with a huge asterisk next to it representing the fact that there could be a lot of "business as usual" activity out there that is a lot more "iffy" than it usually is at this time of year. If the plunge mentioned above actually comes to pass.......many of these requirements could disappear....
Join us for Rail Equipment Finance 2009 in Palm Springs on March 1 -4 2009 and hear the market makers explain what is in the offing............
Octobber 28, 2008 / Installment #9
AllCapital Assets Sold
We've just heard on the jungle telegraph that Australia's Allco, owner of AllCapital Leasing here in North America has identified a buyer for AllCapital's 3,600+ freight car fleet. While we can't as yet report the name of the buyer, we are told it is one of North America's larger general purpose freightcar lessors. We're told the runners-up were two Japanese trading companies also currently in the business.AllCapital's fleet is somewhat unique in this market due to the fact that the bulk of its cars were new or nearly new having been put in service by AllCapital during the last 2.5 years of AllCapital's existance. We are told that the bulk of the fleet has been leased (full service and net) for medium to longer terms at rents generally prevailing during the last two years.
Said another way, this fleet is one of the newest in the market deployed art rents that were (generally) seen by the market as non-concessionary in nature.
Were they sold at a discount? While we are not completely sure, it would be unlikely for a relatively new entrant into the market.....with it's up front costs, etc........to come out of a sale in the first 3 to 5 years.......completely whole.
Net/net? We don't see this sale as setting much of a precedent for the other older fleets that are being marketed or are reputed to be coming to market.
October 13, 2008 / Installment #8
Can Rolling Stock Be Considered Distressed Assets?
The other day, I was having a conversation with a buddy in the venture capital business concerning a leasing company’s rail equipment assets. I told him that these assets were not perceived by the market as being “distressed” assets. He responded immediately: “Tony (in this market) everything is distressed!” Given the fact that my buddy and his VC comrades may be the only people with “dry powder” in this market, it isn’t hard to imagine just how he came to that conclusion. With all the deals that “need” to get done…the multi-layered onion called AIG comes to mind…you certainly couldn’t fault a private equity investor from thinking that everything that was for sale…..was distressed.
The question is........in our industry……..is that true? Can rolling stock be considered distressed assets in today’s market?
Well, CIT would likely give that question a rousing “No!” for an answer. If some of the rumors are true, it didn’t get the prices it thought appropriate for its fleet of railcars and locomotives when it offered them for sale during the summer. The deal was eventually pulled. (We’ve heard nothing about GE Rail’s reported sale for some time…..but this a much more complicated asset mix.)
Perhaps the issue is one of timing. Maybe we don’t have assets that are trading at distressed prices yet because it’s too early in the cycle.
That’s not to say that “players” in today’s rail equipment finance market aren’t seeing negative changes in the amount and cost of $$ available to them. (Or in the number of institutions willing to quote on a deal.)
What do you think?
October 5-11, 2008 / Installment #7
Who Will End Up Owning First Union Rail?
Citigroup’s argument?
It had an agreement giving it the exclusive right to negotiate for the acquisition of Wachovia until
October 6th………
According to Sunday’s New
York Times the current status quo has the judge’s order extending that
October 6th deadline until further court action. The New
York Times also reports that Citigroup has been reported to be demanding
$60 Billion in damages from Wells Fargo for interfering with its transaction.
So what is likely to happen here? Who will end up owning one of the largest
railcar and locomotive lessors in
Like so many things in life…….it depends.
Speaking as a recovering lawyer…….it would seem that money
damages would clearly compensate Citigroup for any losses it has (or will)
suffer if the Wells Fargo transaction goes forward. For this reason, it is difficult to see this
injunction staying in effect forever. On
the other hand, if Wells Fargo determines that it may well be liable for
significant amounts of money damages……..then the cost of its Wachovia
acquisition could go up exponentially.
Whatever happens, the survivors of this fracas will be in
[The latest news as of Sunday afternoon? A hearing on Tuesday to either settle the matter or schedule a trial.]
[The Wall Street Journal reported on Monday, October 6th that discussions were underway between the parties to split up Wachovia's assets between Citigroup and Wells Fargo.........There were no reports on where First Union Rail would fall in such a regrouping.........]
[Late Monday The Wall Street Journal reported that the parties to the dispute had agreed to a stand still until noon Wednesday. The Wall Street Journal also reported continuing efforts to divide Wachovia's branches between Citigroup and Wells Fargo to settle the dispute. No word on assets such as First Union Rail.]
[Late Wednesday, the Associated Press reported that the parties to the earlier stand still agreement had agreed continue it until Friday morning]
[Thursday's New York Times reported that Citigroup and Wells Fargo were near a deal to split Wachovia's branches between them with Citigroup ending up with 20% of the total deposits. There was no information on the balance of the assets generally or First Union Rail specifically.]
Citigroup announced it would no longer stand in the way of Wells Fargo completing its acquisition of Wachovia, but would, instead, pursue its claims for damages.]
[Saturday, October 11th: Wells Fargo receives regulatory approvals to proceed with Wachovia acquisition, which is expected by year-end.]
September 26, 2008 / Installment #6
Rising Car Prices Reflect New Value Paradigm
Historically, railcar prices climb during periods of car builders’ full order books and drop……often like a stone…..when those order books thin out. And just as a rising tide raises all boats, rising car prices generally result rising rental rates and rising values for existing cars. This pattern has been a “given” for the last three “cycles” including the last one that ended…….more or less……in 2007.But not today……… Today new car building has dropped from the 65,000 to 75,000 range that we saw at the top of the last building cycle to a predicted 45,000 this year. Yet prices continue to rise on the new cars that are being ordered and built. (We were told a week ago that car prices had jumped 15% in the last three months alone!)
The reason? Increased materials and energy costs that are being passed on to buyers by the car builders. Even more interesting is the fact that rental rates for new and used cars are not following the increased sales prices of new cars up. (See Installment #4 in Chairman’s Bulletin Board Archives)
So what does all of this mean for the future?
Well as this is being written, scrap prices are coming down and there is some indication that recent railcar price increases are moderating.
One thing is for sure…….car price volatility …… and its impact on overall fleet values….will be a topic of significant focus at Rail Equipment Finance 2009! Won’t you join us in La Quinta in March 2009?
September 22, 2008 / Installment #5
Is There A Locomotive Repower In Your Future?
Lately, there has been a lot of "buzz" in the marketplace concerning innovative locomotive strategies. Several builders are already offering "gen-set" locomotives that replace traditional diesel locomotive engines by two or three truck engine/generator sets that "kick in" as needed when the diesel electric loco calls for power. Though these innovative units are principally being sold for their state-of-the-art emissions compliance, fuel savings are also advertised. Well over a hundred are already in service.
What's the next emerging strategy?
Repowering older EMD and GE units with new engines packages (engine/turbo/control systems) to achieve significant fuel savings as well as EPA emissions compliance!
(There are also significant performance and maintenance improvements advertised.)
EMD is offering both 8 cylinder and 12 cylinder versions of its modern 710 engine. GE is offering a package based on its popular Evolution Series engine for low horsepower applications and Union Pacific is operating five SD40-2 units repowered with Caterpillar's 3516, 3005 hp engine.
Join us for the Power-Power-Power program (Day 3) at Rail Equipment Finance 2009 to learn more about these repowering strategies and the impacts that they will likely have on the North American locomotive fleet.
September 15, 2008 / Installment #4
What's Driving Operating Leasing Rates?
Well, in putting together The 2009 Railroad Financial Desk Book for Railway Age magazine.....which appears in the October issue of RA....I have come across a bit of anomaly: Railcar prices are continuing to rise (even in a “down” economic market) due to increases in the cost of raw materials.....but operating lease rates are depressed! The interesting thing is that customers are still placing orders for new cars..........but fewer of them seem to be operating lessors. That seems to make sense given the depressed state of operating lease rates......no? Why buy cars......especially on “spec” if you can’t get an initial lease at rents that justify the purchase?
For those of you who are new to our industry, a rise in car prices usually brings with it a rise in rental rates for the new equipment......and a concomitant increase in used car values and used car rental rates. This time that is not happening. What’s the reason? One reason cited by operating lessors we contacted seems to be the practice by one builder of keeping production lines going on spec. The builder’s affiliated railcar lessor then has to offer what the lessors feel are concessionary rents to get the cars out working. Is this a trend? Will it shortly die out? If so, what comes next?
Join us for Rail Equipment Finance 2009 and learn the answers to these and other important questions on railcar lessors and their products!
September 8, 2008 / Installment #3
Credit Capacity For Rail Deals........
Those of you who read my last “Financial Edge” column in Railway Age magazine learned that, despite the current credit crunch, there is still funding availability for rail equipment financings. As I pointed out in that column, the funding is there because of the nearly bulletproof nature of rail equipment secured loans. Few if any defaults. Ever. I did point out, however, that the term lengths for such deals where getting shorter and the cost had risen with the general rise in the cost of credit worldwide.
Recently, we had a conversation with one of REF 2009’s sponsors who agreed with that premise......that rail deals can get done........albeit at greater cost and for shorter periods. This source, however, made a point of commenting on the “depth” of the bank market for such fundings. It was his view that one reason some of the larger deals reputed to be in the market seem to be having trouble finding funding is that there may only be $1 Billion or $2 Billion of bank funding available for a single large deal. That wouldn’t be enough for such large deals as GE Rail and CIT. Where would a buyer get the rest from? Other debt markets......at greater expense!
One thing is sure. YOU will get the entire story credit capacity and deals done during 2009 at REF 2009, if you join us there!
September 1, 2008 / Installment #2
As Many As FOUR Operating Lessors Rumored In Play!
Today there are rumors that there could be as many as FOUR (4) operating lessors/fleets "in play." What's going on here? Is the rail equipment market in trouble? Far from it. The assets that are rumored to be "offered for sale" are, in most cases, the "jewels in the crowns" of the companies that own them. They are being sold to raise $$ to repatriate capital to the mother ships when they are in need. There are problems, however, as several of these rail equipment lessors have used secured financing structures to finance segments of their fleets. Shouldn't a long term lease with purchase options on railcars or locomotives be a valuable asset for a secured financing???? Not...apparently... in this market. How will these assets be reconfigured? That's yet to be seen.........
We have just 180 days til Rail Equipment Finance 2009 in La Quinta. A lot of what is unclear about this market and its short, medium and long term directions will undoubtedly become clear by then.........and REF 2009 will cover every ounce of it! The top. The bottom. And the middle of the story. Join us on March 1st to 4th for a real-time briefing on the rail equipment operating leasing market as it is reconfiguring itself!
August 25, 2008 / Installment #1
Let’s lead off with our decision to slice 50% of our usual attendance fees for railroaders who want to attend REF 2009. We would be the first to admit that the railroaders in our lives.....whether they are buyers, lessees, suppliers or partners in joint ventures...are a very busy group of professionals. With industry consolidation they are all wearing multiple hats and have little free time and tight budgets. On the other hand, they have important roles to play at REF 2009. So.....to encourage them to attend we have reduced their fees by 50%. (And if they have managerial jobs in areas targeted by our Agenda......they may be able to attend free as speakers.)
So........if you work with railroaders who should be at REF 2009.....let them know about this site and that we are working......and will continue to work.......to get them to La Quinta in March 2009. Look forward to seeing you there!