Don't miss an opportunity to secure funding

Railway Age, August, 2004 by Howard Capito

Lessons from my banking career have shown that capital availability smaller companies can be a make-or-break issue. The small-road industry is a prime example of an undercapitalized, underserved market ha need of long-term capital investment. Several potentially costly issues face these operators: As soon as 286K becomes common, 315K is waiting in the wings; track and road structures await rehabilitation; the relentless disinvestment by Class I's in revenue rolling stock pushes equipment needs down the "food chain"; and costly technology investment is required to communicate efficiently with shippers and Class I connections.

You may have a satisfactory relationship with your local bank and find equipment-secured loan capital relatively easy to obtain, but how many bankers do you know willing to lend you low-cost capital (less than 6% today) for up to 25 years? Even if you win a 25-year amortization schedule, those pesky five-year renewal intervals will keep you on a short leash. How many of you have heard a banker say: "We don't understand your business," "Your company operates out of our market," or simply, "You're too small" or "too big"? While the FRA must thoroughly evaluate your railroad's ability to repay a Railroad Rehabilitation and Improvement Financing Program (RRIF) loan and pose tough questions, you will not hear any of these banking cliches.

Early this year, the FRA reorganized the RRIF, committed new staff and resources, refreshed its organizational commitment to funding infrastructure needs, and apparently convinced its federal partners, the Office of the Secretary of Transportation and the Office of Management and Budget, to begin reviewing and approving what promised to be more loan applications.

Joseph Pomponio, appointed acting director of the Office of Freight Programs (OFP), now leads an enlarged, energized staff. By December 2003, the FRA's RRIF staff complement was two: a supervisor and an analyst. Since its creation during the Clinton Administration, the RRIF program closed just three loans, totaling a little over $15 million---excluding the Amtrak advance--out of the $3.5 billion authorized.

Since December, Pomponio and his staff have obtained approval and closed $240 million in new loans and are now working on another eight loan applications totaling approximately $200 million. The OFP's RRIF staff includes Pomponio, three full-time analysts, and three part-time support staff who cover such specialties as engineer- hag and environmental. Additional resources will be directed to OFP as loan applications increase.

The RRIF program's long-term, fixed-rate debt may dramatically lower a short line's cost of capital while improving its cash flow through extended principal repayment and operational cost reductions realized with completion of the RRIF-funded project. Improved cash flow will, in turn, enhance the value of the business. The ERA expects to see direct, tangible operational economies resulting from the RRIF project.

In addition to the RRIF program's new positive attitude, the calculations for the required credit risk premium (CRP) have been favorably modified. The CRP is a deposit the borrower, or a surrogate, must pay at each RRIF loan advance to the federal government to defer future program loan losses. The FRA's website (www.fra.dot.gov) provides a CRP estimator to evaluate the economic benefits to your railroad using RRIF debt. Compare this upfront payment to the fees your bank or finance company charges, then amortize that cost over 25 years. (The CRP is described as a deposit rather than a fee; however, don't embrace hopes of its return. A refund would be made if there is money left after all the loans in your group are repaid or liquidated, if in default. But, a determination will rake at least 25 years.)

The FRA's recent CRP quotes have fallen since implementation of OMB-approved changes. After writing my first independent financial analysis in 2001 for a RRIF loan applicant, I advised private clients (with no public debt ratings) to plan--until told otherwise by the FRA---on a 5% CRP. Depending on the FRA's evaluation of the quality of the proposed loan collateral, 5% is a range that most Class III railroads would experience. However, I now tell clients to plan on a 2% to 3% CRP, or about one-half. The CRP is governed by the prospective borrower's financial condition and the net liquidation value of the offered collateral.

The RRIF program will provide funding for a variety of railroad and railroad-related capital projects. The FRA's application requirements are specific and clear, though somewhat more exhaustive than your usual commercial bank's, and you'll find the basic information requirements reasonable and appropriate. The RRIF program offers small roads a unique opportunity to properly capitalize balance sheets and match long-life assets with long term debt. As Delta Airlines once advertised, it "is ready when you are." Don't miss this unique opportunity to secure funding for your railroad's capital needs while there's still money available.