The case for financial advisors - use of advisors by railroad companies

Railway Age, June, 1992

Since this writer's principal income comes from a career as a financial advisor to railroads and leasing companies, explaining why a company should hire-and pay-a financial advisor to represent it in connection with the funding of a transaction is nothing new. A financial advisor can have a list of references and accomplishments a mile long, and his prospective client still finds it hard to believe that outside talent is needed in connection with a particular transaction! It's even more difficult when you have an in-house financial professional who needs not only to become convinced you can add value to the transaction at hand, but who will have to explain to his management why the firm should undertake the expense involved with an outside advisor when they have their own captive financial pro. In such a case, the though of going to the boss with the suggestion that an outside professional might be appropriate can send a shiver up the spine of some of the less secure chief financial officers.

"Good grief, Al! Isn't that what we have you for?"

And so it goes.

On the other hand, not realizing that you and your deal can be helped by using an outside financial advisor could be more dangerous.

Here's what we mean.

Finding Time

Most entrepreneurs-and where companies are big enough to have them-chief financial officers are quite good at what they do. But few railroaders would argue that financing large equipment transactions or buying a new property is a regular occurrence.

Instead, there is a day-to-day business to run, financial controls to put into place and to monitor as well as near, mid and long term business strategies to develop and implement. We know of few folks in this category with the surplus time needed to develop a side line in becoming a financial expert.

So, it's generally the realization that each of us can only do so many things well at the same time that will force insiders to at least question the wisdom of going to sea in a do-it-yourself row boat when there's a commercial ferry about.

We'll even go so far as to say most inhouse financial professionals with experience in financing rail equipment or railroads also understand when they don't have the time to devote the energies such transactions require, or when being intimate with current market conditions can be crucial to getting (and closing) the best deal!

Market Knowledge

When they think about it, most railroaders will readily admit they rely on experts for most of what they do. For instance, a railroad CEO will have a good feel for the track structure of his property and its overall condition. On the other hand, we don't know of any who believes he can do without a chief engineer or the equivalent outside professional. Similarly, a chief financial officer certainly understands how his books are set up and what his financials are likely to look like from time to time as a reflection of the ongoing activities of the business. However, we don't know of any in-house financial chief who thinks he can or should audit his books himself, or who doesn't understand the value an external auditor lends to the situation.

It's really no different with an external financial advisor. When you consider using one, you'll be picking up the telephone to call someone who spends 100 percent of his or her time in the financial or equipment markets or both, arranging financing. They will know which funding sources are currently "in" the market and the kinds of deals for which they will "sharpen" their pencils. They'll discriminate between those potential funders who can perform under their advertised terms and those who, for one reason or another, have a track record of not closing or (even worse) saying one thing to get a deal and ultimately offering another!

Market knowledge also includes understanding what kinds of "terms" the market is allowing various parties to a transaction to extract from the others. For instance, what kinds of end-of-lease provisions have other lessees of equal credit been able to extract from their lessors in contemporaneous transactions? No kidding. This kind of thing can change from month to month.

Finally, if you are contemplating a sale-leaseback or a loan secured by equipment where the amount advanced will be a set percentage of the equipment's appraised value, a financial advisor who knows the market for such transactions can be invaluable. How so? After all, isn't it all up to the appraiser? Yes and no. First, the equipment may be worth one thing in the eyes of the owner and possibly another in the eyes of a prospective purchaser/lessor or lender. It's important to know if your potential funder can get the deal done on the terms you want. Even if they can, what has their track record been? Is yours the first such deal they've done with this kind of equipment? Or for this length of time? Or, did the chief credit officer back at the head office lose money on similar collateral?

If you're trying to do a deal yourself, you might be able to get all these answers from the proposed funder, but from our experience, there are a lot of marketing people out there and none of them have a 100 percent record of closing all the deals they are ultimately awarded. This translates to a lot of disappointed lessees and borrowers. It's better to have an edge.