New twist in car leasing - BASF Corp. leases rail tank cars at floating rate, with option to move to fixed rate

Railway Age, Feb, 1989

New Twist in car leasing

BASF is one of the largest chemical companies in the world, with over 132,000 employees working in 160 countries. The company is broadening its North American operations (BASF Corp., with headquarters in Parsippany, N.J.) with a $1.7 billion five-year capital spending program. BASF Corp.'s current fleet of 2,000 tank cars is being expanded with the lease of 30 custom-designed aluminum cars built by Trinity Industries, Inc. With options available to buy, finance, or lease these new cars, the company's decision to lease was encouraged by a proposal with an interesting approach.

Four leasing companies received BASF Corp.'s request for proposals. Pitney Bowes Credit Corp. (PBCC) responded with an unusual offer not previously made outside the home mortgage field: a floating rate, with a contractual fixed rate option. As Charles D. Miller, manager of long-term finance for BASF Corp. puts it, "This is a $3 million investment. As a big company, we can obtain money as cheaply as PBCC. But they offered us a 20-year lease structure in which the rate structure is based on floating interest rates, with an option to lock in a fixed rate at some point in the future based upon capital market conditions at the time. When the business cycle comes around, and interest rates come down somewhat, we can benefit. PBCC was willing to write a 20-year lease. As a well-established company, we knew they would be around to service us during those years. And we foresee continuing market growth for our products; therefore we want the best financial deal."

* Cars built for "quality expectations." Quality and environmental considerations led BASF Corp. to the use of aluminum cars in the early '70s. M.H. Keiffer, the company's rail and marine operations manager, says, "A little bit of rust or moisture in a car could cause problems. We must transport chemicals under precise conditions to help customers achieve their quality expectations."

The company prefers aluminum cars because acrylic acid is corrosive to carbon steel; stainless steel, which can be used, is heavier, meaning cars would have to be smaller, reducing the amount of product loaded and transported each trip. The Trinity car has a 23,777-gallon capacity.

"Trinity has worked closely with us in designing and building these cars to our needs," Keiffer says. BASF is adding an environmental control feature that it feels may become a rail industry standard. "We're having a protective close-loop, vapor-return feature added to the new cars. When 23,000 gallons of our product are unloaded into customers' tanks, we displace 23,000 gallons of vapor, saturated with the product. Unless the vapor is captured, it is released into the atmosphere. The logical thing is to have a closed loop. Although this is not a government requirement for some of our major chemicals, like caprolactam or acrylic acid, we put it on anyway. Our customers can then recycle the vapors and send them back to the plant."

When it came to financing the new Trinity cars, Miller examined all the possibilities. "If we were to buy them we would own the cars and take all the residual risk when we no longer needed them," he explains.

"Leasing, on the other hand, places the remarketing responsibilities on someone else's shoulders. We made a value analysis and determined that leasing would give us the lowest overall cost. And our parent company has a large leasing operation and liked this arrangement."

BASF Corp. has used shorter-term, full-service leasing for part of its fleet, but, as Miller says, "This is our first floating-rate lease where we were able to get a contractual formula to determine a future fixed rate, very uncommon in this industry. We feel our cost of money will move with the transaction. The rationale is to achieve the lowest cost over the life of the lease."