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

Then there's the big "L" issue--legal fees. Ted notes (and this writer agrees) that one of the biggest hot buttons for rail lessors today are legal fees in lease transactions and the control thereof. It is therefore incumbent on an otherwise winning bidder not to shoot itself in the foot by ignoring the lessee's need for a cap on legal fees and other expenses. We'd suggest that a lessor's chosen counsel might want to belly up to the bar with some form of contribution to expense control in return for employment if their lessor client prevails in the bidding.

We asked Ted for a final valuable piece of advice for aspiring rail equipment lessors. Here's what he chose as most valuable to tell you: "Lessors should identify their main issues and divide them into A issues--very important; B issues-- somewhat important; and C issues--nice to have. Spend time on the As only. It's a lessee market in rail and these lessees can secure favorable terms from a variety of lessors. You won't be able to change the market and get everything you want just because you're writing the check."

Wait Demaree (Babcock & Brown)

Walt had many of the same comments as our friend (and Walt's competitor) Lachowicz, but expressed some of them from a different point of view and added others. For instance, he feels that most lessees are NPV players, which puts a sharp point on lessor return requirements, lessor state tax rates, and residual assumptions. Walt also feels that EBO (early buyout) strategies are also important here.

Want to win in the lowest NPV sweepstakes? Try shooting for the longest lease term possible. Walt feels that most railroads rank a proposal by present value and that it's no secret that the longer the lease term the lower the present value. A review of historical information and data on the current fleet make-up should provide support for the lease terms assumed.

What next? Propose an optimized all-in present value that includes an early buy-out option. (Lease optimization involves asking a computer program to solve for a payment structure that provides the best deal for the lessor and allows the lessor to pass on the best deal to the lessee.) Walt feels that most railroads will desire to control the asset at the end of the financing and will therefore look to an EBO to limit the future cost of acquiring the asset. An optimized EBO proposal is a balance between required lessor economics, lease term, tax test needs, and appraisal information.

Walt also puts terms and conditions high on his list of important issues for both parties. For instance, most railroads can only offer their current insurance program and can get quite nervous about additional lessor needs in the insurance area.

And then there's return and storage. Walt points out that most railroads need to have operating flexibility on the back end of a lease to return equipment efficiently (perhaps at the end of a revenue move without additional non-revenue mileage) or to store it somewhere that is efficient for both the returning railroad and the lessor. Finally, most railroads have maintenance and repair systems that manage the maintenance of their equipment to assure that it is in the condition necessary to meet the shippers' needs as well as interchange requirements of the Association of American Railroads. Changing these practices is time consuming and potentially expensive, and most railroads won't easily go along.