Financing older cars: what a difference 10 years makes - regulations on refurbishing of old railroad freight cars - The Financial Edge - Brief Article - Column

Railway Age, Jan, 1998 by Anthony Kruglinski

Don't you like new things? Recently, this writer was involved in financing a fleet of approximately 1,000 railcars that averaged approximately 30 years in age. These 50-foot, 70-ton cars were part of a fleet that had been and, arguably, always would be deployed in the same service of bringing paper products from Canada to the U.S. While I'd like to give you some market information on the cars and the price my client paid, unfortunately that's confidential.

What I can discuss are the issues we faced when we went to the financial markets with a financing for this equipment. I have financed older cars before. However, this was the first time I financed a sizable fleet this old for what might be considered to be its remaining economic life -- in this case up to 10 years -- and at the same time engineered a residual value materially in excess of scrap.

Just how long a useful life did my fleet actually, have under AAR rules? Regular readers of this column will know that recent changes in AAR rules allow for 50-year interchange lives for railcars (providing that they otherwise qualify for interchange) if the cars were built on or after Jan. 1, 1974. Cars built between Jan. 1, 1964, and Dec. 31, 1973, may qualify for a 50-year interchange life if it is decided by the appropriate AAR committee that they were originally built to a sufficient standard.

Did my cars qualify, as 50-year cars under AAR's permissive rule? We had some positive feedback from an appraiser and a consulting engineer that the cars to be financed were, in fact, good candidates for the permissive part of the 50-year rule. We were told there were three potential ways to proceed. First, we could contract for a stress analysis and engineering review to determine if the cars as constructed and maintained met AAR M1001 standards. Second, we could contact the manufacturer to determine if it would certify that the cars as originally constructed met the same M1001 standards. Finally, we were told that car owners have the option to wait until the car is between 37 and 40 years old and then apply to AAR for a 50-year fife. Unfortunately, we didn't have time to do any of this. We needed the best possible evidence of present and future value for this fleet as soon as possible to secure the best financing. (As it turns out, our appraisal and engineering reports ultimately were our most important evidence of present and future value.)

What other choices did we have?

What about Rule 88? While there is still something on the books called Rule 88, the old methodology that proscribed a series of modernizing events that, once effected, resulted in a 50-year interchange car is no longer around. Instead, we're told that if you have cars built between Jan. 1, 1964, and Dec. 31, 1973, and know that the mechanical and stress test procedure will not result in a permissive 50-year interchange life without additional investment, you can make that investment to get the permissive 50-year interchange life. Apparently the result is the same.

In the end, we shortened the absolute term of our financing to less than ten years and negotiated a provision for renewals based on the useful-life situation at the end of the base financing term.

However, before, during, and after this financing I continue to ponder the following issue: What is the likelihood that a fleet of 1,000 traditionally well maintained cars, required for the service in which they are currently employed, mill be arbitrarily taken out of that service and replaced by new cars costing six or eight times as much solely because the current equipment has reached 40 years of age?

Not high.

What's likely to happen then? It appears that it would be possible for the railroads involved to agree bilaterally to continue to exchange equipment more than 40 years old but less than the FRA's 50-year limit. This would work provided that no one ever sent the cars off the lines of the agreeing railroads mistake.

If this happened, it's likely there would be a significant amount of trouble getting them back from railroads that would consider the cars non-interchangeable. And if they were running around on someone's road that wasn't a party to a bilateral agreement and had an accident? The legal ramifications would likely be ugly.

So where does this leave us? We either have to get the cars certified as permissive 50-year candidates (one way or the other investment-wise) or negotiate a bilateral agreement covering them after their 40th birthday, or what? Stop running them once they are 40 years old?

That would appear to be the case, but I'll come back to my original thesis: No industry is going to scrap or under-utilize a fleet of cars that can otherwise be safely operated under FRA rules, just because of a birthday issue.

My bet is that they would just change the rules.

(On the other hand if you only have a few cars, or are not a major railroad that can lobby for such a change, you may be out of luck.)