Summer sampler: foreign markets; car prices; a coming of age - railroad finance - Column

Railway Age, August, 1996 by Anthony Kruglinski

For all of our readers who have taken their most important reading to their camps or beach houses (or on the road) and who have brought along this month's Railway Age in addition to that trashy novel, thanks for including us. We've chosen a series of disparate topics upon which to comment, in the hope that the sum total of our wisdom will make easier reading. Here goes:

Overseas news. Those of you who follow the financial press closely will have noticed a small article in late June reporting that the Electro-Motive Division of General Motors Corp. had reached an agreement to sell 250 new locomotives to the new English Welsh & Scottish Railway Ltd. Reading on--as we know you did--you would have learned that this new railroad comprises several former British Rail freight operations recently acquired by an investment group that includes a Wisconsin Central affiliate. What's going on here?

As we've told you in prior columns, American railroads and railroaders are among the most prominent players in an international game of privatization bingo which has seen most available rail freight properties and concessions won by American bidders or by local investors with American partners. And what have we said American railroaders want when they're away from home? Yes, they want Coke and Pepsi, but they also want American rail equipment--or at least rail equipment built to American standards.

We don't know how long EMD has been marketing diesel electric locomotives in the United Kingdom (approximately 18 modern units are currently owned by shippers, but that's the extent of EMD's penetration). However, we are sure that it's no accident that less than four months after the WC-led group acquired the properties that would become EW&S, an order for state-of-the-art, North American style locos was forthcoming. How did EMD pull off this marketing coup? We're sure it took financial creativity and aggressive pricing, but we're also sure that the WC fleet experience with EMD in North America and New Zealand had a lot to do with it.

At least one Latin American road with U.S. involvement is in the process of having a half dozen or so used U.S. locomotives rebuilt and retrucked for use south of the border. Besides the technical challenges involved, we're told that arranging international financing for these remanufactured units was also a feat.

Add to these international requirements the desire for North American style radios, signaling systems, and railcar component design, and we believe we're just seeing the tip of the iceberg when it comes to exporting North American products and technology to areas of the globe that have attracted American railroaders!

Railcar prices level off. Both new and used railcar prices have--as we predicted--leveled off and continue to do so. Why? Blame the significant numbers of new-builds over the last few years, coupled with the perception that the economy may be slowing. But there are clearly many forces at play. Here are a few that we've noticed (in no particular order):

1) In the last year or so, we've seen a number of 15 and 20 year old cars sell for 90% or more of their original equipment cost. This can only go on for so long before sellers begin lining up to cash out.

2) On the other hand, several operating lessors including First Union Rail, Helm Financial, and CIT have been aggressively accumulating fleets of cars for lease on short to medium term operating leases. This has tended to keep prices up. (We expect additional financial institutions to follow suit and target rail equipment operating leasing as a growth industry in the year to come.)

3) Spot surpluses of some cars--notably grain cars for short term lease and western, gon-type coal cars have taken some of the steam out of the marketplace.

4) On the other hand, grain is expected to pick up and even the worst steel, eastern coal cars are seeming to find a home.

We could go on and on, but we won't. Suffice it to say that we continue to feel that the prices for many used car types--including grain cars and boxcars--have topped out. We expect only modest inflation to impact the price of new cars in the coming months.

Rail finance comes of age. Recently, someone asked this writer to provide an overview of the state of the railroad finance marketplace. Now, since I wasn't certain of the direction from which this question was coming, I had not a clue on how to answer it, other than to say that never--in my experience--have railroad and rail equipment financing deals found a better reception in the financial community. America's largest, most creditworthy roads are borrowing money (or more accurately having it thrust upon them) at 50 to 75 basis points (100 basis points = 1%) over what the U.S. government pays for comparably termed funding. And it seems that even comparatively weak regionals and short lines can do no wrong when it comes to financing rolling stock--used or new.

Why? For all of the standard reasons: extremely low perceived industry risk, extremely high perceived collateral value in new and used equipment, and poor performance of other transportation sector borrowers and lessors whose funders are then drawn to rail. One exception: Amtrak--whose future is somewhat uncertain given the pronouncements of certain Washington powers.