New year. New deck. New deal

Railway Age, Jan, 2004 by Anthony Kruglinski

The older this writer gets--I'm 56--the more I'm amazed at how dramatically and quickly the financial markets that support our industry evolve. This is particularly true in equipment finance. Of course, some of what we face in financing rail equipment merely mirrors what's going in other financial markets. When long-term, fixed-rate mortgages are cheap, it's not surprising that long term, fixed-rate equipment finance is, too.

But you don't have to look far beneath the rail equipment finance market's surface to find a much more complex and difficult-to-navigate maze of conflicting requirements, interests, and needs. Put another way, the next time you ask your finance professional about the market for financing (debt or leasing) new or used locomotives or cars, he or she will be apt to describe a Byzantine series of factors that are likely to impact the deal you're contemplating. Here's what you may hear:

The overall market for equipment finance is evolving almost daily. A number of tax-affected finance lessors have dropped our of the market due to losses on airplanes and in other soft industries. Others are out because unrelated losses have changed their tax profiles so that they no longer have the appetite for the leasing deals they once had. Then there are mergers, which have eliminated market players. Acquisitions and mergers also have kicked the stuffing out of the very rarefied market of fixed-rate, long-term equipment lenders to the industry.

With this narrow field in view, you have to take into consideration the additional limits that the teams playing have. For instance, the huge appetite that the Class I railroads had for finance (both equipment finance and term loans and credit facilities) in the 90s led to a situation in which the remaining rail equipment finance players are bumping up against the "name" or exposure limits they have put institutionally on various railroads. What do I mean? An otherwise creditworthy railroad may have trouble interesting a major funder in its next deal only because the funder did the last one (and, perhaps, the one before that). And since long-term equipment financing transactions--particularly the tax-affected ones are difficult or impossible to "participate" with other financial institutions once they're closed, there aren't usually easy solutions to these exposure issues.

Now assuming you have funders interested in your deal, the next issue you may collide with is pricing. Historic pricing models for long-term equipment finance (lease or loan) are evolving to take into consideration new risk oriented bank capital allocations and accounting standards. It's possible that the very nature of a term financing for rail equipment may make it difficult to justify--or justify at reasonable pricing-for a bank that has to allocate additional capital to such deals raider evolving international standards on risk capital allocations. (Please note that I wrote "evolving." It's still unknown what the results of these new rules will be.)

Assuming you have a bank or other financial institution willing to give you a deal on your rail equipment financing that meets your needs and expectations, you're "there," aren't you? Maybe. It could be that when you go to your board for approval of the equipment acquisition and financing, a board member asks:

"Why do we have to make a 20-year bet on this equipment when it appears that the operating leasing market is willing to make similar equipment available for far shorter term commitments and at prices that--at the moment--aren't too bad? How can we be sure that we'll need this particular equipment for 20 years? What will be the impact of putting this deal on our balance sheet? Even if it's being booked as an off-balance-sheet operating lease, what will be the impact of the deal with our rating agencies who will consider the 20 years of payments in rating us? Why are we doing this?"

Or--if you're like many senior managers and their finance professionals--you may be asking these questions yourself before things ever get to the board presentation stage.

Clearly, the entire rail equipment finance market is not going to evolve to something totally new over a period of months or even years. There still will be lease financing and ETC (Equipment Trust Certificate) lending available. There still will be operating lessors making intelligent and, frankly, stupid bets on new and used equipment. My point is that to do the best job, railroad financial professionals MII have to keep their eyes tax afield and their ears to the ground to determine what's coming in 2004 and thereafter. If they don't, "surprises" and busted deals may become more common. The times they are a-changin.'

Tony Kruglinski is president of Railroad Financial Corp., a Chicago investment banking concern that facilitates railroad and rail equipment transactions. Contact him at: tkruglinski@railfin.com.