Investment bankers: they come in all shapes and sizes - 1991 Rail Finance Review and Desk Book

Railway Age, Dec, 1990 by Anthony D. Kruglinski

One of the most difficult of rail finance professionals to define is the "Investment banker." In part, it's because that when viewed from a certain perspective, these professionals seldom make" investments nor are they "bankers" in the traditional sense. What they do spend their time doing, however, is probably the most important function to be found in the rail finance community - especially from the point of view of the ultimate borrower or lessee. They represent that party before the investment, lending, or leasing community that will fund the transaction. And they make sure that the deal closes. No mean task ! What do we mean when we say that investment bankers seldom "make" investments? Well, if you're in the market for outside equity for your company, in all probability, the investment banker that you decide to deal with will be working hard to assure that the equity money it finds is not its own. Can this be good? Yes - here's why: First, while most of the large investment banks-Kidder Peabody, Goldman Sachs, Merrill Lynch, etc.-have the capacity to invest their own capital, it's a limited pool of funds and, as such, would probably not be the cheapest source of the equity funding that we're talking about. As the party seeking a "private placement" of equity investments in your company or a public offering" of stock, you have one thing on your mind. That's giving up as little of the ownership of your company (in return for the infusion of the new outside equity) as possible. While most large investment banks have the capacity to "underwrite" an issue of new stock, they don't intend to buy the stock themselves as an investment. Instead, they intend to syndicate the offering to a large group of other investment bankers and their customers. As your investment banker, therefore, they want to get you the best deal possible - the most outside equity for the smallest piece of your company. Yes, part of their job when they "underwrite" an offering is to essentially guarantee that the funding at a price will be there - even if they have to provide it themselves. But their real function (and this becomes even more important when the offering isn't underwritten" but conducted on a best efforts" basis) is to get the best deal for you in the marketplace.

And, of course, investment banks aren't "bankers" in the traditional sense either. While some of the large Wall Street organizations lent temporarily to clients during the late 1980's LBO binge (and some lived to regret it) investment banks don't usually lend money. These LBO "loans" were in fact "bridge" loans designed to bridge the period between the purchase of a company and the point at which long term financing in the so-called junk" bond market was issued. Unfortunately this didn't always happen.

Class I Railroads' Investment Banks

Like most other things in the wide world of American railroading, investment banks can be divided between the large and the small. The larger firms (we named several of the biggest above) perform functions for the Class I railroads and their railroad holding companies that are similar in many ways to the functions that they perform for their large multinational industrial clients with domestic and international funding needs. And, in some ways, they provide services peculiar to railroads and railroading. For instance, the issuance of common and preferred stock by a railroad or a railroad holding company is a function that's usually assisted by an investment bank. The investment bank represents the issuer of the stock in its dealings with the investment community and manages the documentation of the transaction. In short, it makes sure the deal closes.

It's generally the same thing with medium and long term bonds, short term notes (commercial paper) and other specialty evidences of indebtedness such as debentures.

On the other hand, only a few industries raise money for new equipment through the issuance of the specialized "Equipment Trust Certificates" or ETC's." These are debt certificates evidencing several things: First, the promise to make payments with interest by the issuing (investment grade credit) railroad or railroad holding company to repay the debt used to acquire new rolling stock or locomotives; second, a collateral interest in the underlying railcar or locomotive securing the ETC's. There's something else. While ETC's are usually purchased by insurance companies seeking a fairly permanent place for long term funds (15 years to 18 years), ETC's also offer something that a traditional "loan" doesn't offer the holder of the instrument - liquidity. In the traditional ETC, the investment bank managing the offering "makes a market" or offers to buy or sell trust certificates with those who choose to do so.

And then there's leasing. Another of the services that are offered by the major investment banks is domestic and so-called "Cross Border" leasing offering the increased benefits of more than one party in more than one taxing jurisdiction being able to depreciate the property. Net/net to the lessee? Cheaper rental payments.