1993 financial guide to equipment leasing - includes leasing resource directory - A Railway Age special section

Railway Age, June, 1993 by Anthony D. Kruglinski, Michael Downey Rice

Midyear railcar forecast shows growth

It will come as no shock to railroad equipment managers that America's largest railcar builders are forecasting that new builds for 1993 will hit record numbers compared with recent years. What's a record? Try 30,000 or more units. Why the increase over last year? As Railway Age has reported in recent months, a combination of low interest rates and equilibriums in various railcar supply/demand ratios has spurred a mini-building boom. What does this mean for railcar finance lessors? Potentially, quite a bit.

First of all, although some Class I railroads may decide in 1993 that their lease vs. buy analyses dictate a purchase (and debt financing) due to their ability to use the related tax benefits to offset new profitability, a number of others will undoubtedly lease. If discussions with the finance leasing community are any indication, last year's hearty reception for rail deals will be repeated. Why? For one thing, the market for aircraft transactions is still not a desirable one for many finance lessors who lost on Eastern, Midway, Pan Am, etc. Second, used railcars and locomotives continue to hold their values and actually may be appreciating. Finally, the. credit quality of the rails is better than ever, with even some later-day LBOs achieving coveted "investment grade" status.

What about the builders? We spoke to a few on and off the record. Here's what we learned:

Trinity

Like other builders, Trinity is apparently having an excellent year. How do you measure excellent? If you want new plastic pellet cars, you'll have to wait until the first calendar quarter of 1994 for delivery on this hot car. New coal cars? Trinity has room on an available line to build additional aluminum rapid-discharge cars this year, but that may be it. Big orders for 286,000-pound weight-onrail grain cars have pushed any new orders for these cars to 1994 delivery. Finally, we'd note that Trinity is also building intermodal cars for TTX in significant numbers.

Thrall

John Carroll at Thrall Car Manufacturing concurs in the 30,000-plus estimate of new cars expected in 1993. He also tells us that any covered hopper in their inventory of actively built designs is hot. They include 3,000-, 4,750-, 5,000-, 5, 250-,5,800-, and 6,100-cubic-foot varieties. Deliveries on all of these types are into 1994. Double-stack intermodal cars are available in the fourth quarter. Thrall is also happy about the success of its coil steel gondola program and the market acceptance of a new design that they have built for the first time this year. What is Carroll worried about? Rising prices on items such trucks, couplers, etc., as well as raw materials that go into new cars.

Gunderson

Bill Galbraith of Greenbrier/Gunderson indicates that his firm's focus continues to be on intermodal cars, including double-stack (articulated as well as stand-alone). This equipment is being built for TTX, Norfolk Southern, and Burlington Northern. Most interestingly, Gunderson is building boxcars. This year they'll build over 700, with additional cars spilling over into 1994. The cars built are of 100-ton capacity and include 50-foot and 60-foot Plate C's, E's, and F's. Galbraith is most excited, however, about Gunderson's sale of 600 All-Purpose Husky Cars to NS. What's all the excitement about? This is the only car being built that has the capability of carrying either trailers or double stacked containers.

Galbraith's guess on total units built by the industry this year is approximately 33,000 units. (Articulated cars count as 5 units.) He's looking forward to a stronger market in 1994 for covered hoppers and boxcars.

Johnstown America

Johnstown's Ed Whalen is even more optimistic than our other commentators. His call for total units in 1993 is 34,000. As far as his company's building activities are concerned, he's having an excellent year for coal cars and with a few exceptions is "built out" through the fourth calendar quarter of 1993. Significant new orders for coal cars are now 1994 business. He's building intermodal cars for TTX (all-purpose spine cars) and is generally built out until the fourth quarter of this year for this car type. Whalen points out that, like most builders, Johnstown is experiencing significant levels of inquiries for new car building in 1994. This includes utility interest in coal cars as well as interest in having Johnstown build covered hoppers and boxcars--two types not currently in their line.

Conclusion

What does all of this mean for the potential operating or finance lessor? Probably different things. The operating lessor can look forward to opportunities for tack-on orders for new cars in types that may not normally be built frequently or in great numbers. For instance, it is rarely financially efficient to spread several hundred thousand dollars in production line start-up costs over only 25 or 50 cars. So, small units of cars don't generally get built until a buyer comes along that wants to buy enough cars to make things efficient for the buyer and seller (and for the tack-on operating lessor buyer). On the negative side, the operating lessor with equipment in short supply is bound to lose some pricing advantages when car types in short supply are built new in significant amounts. Where's this likely to happen? Try grain cars in 1994.