Friday, March 13, 2009

Financial Edge: How is 2009 shaping up?

Written by 

By Tony Kruglinski

I don’t think it will be much of a stretch to tell you that nearly all of the questions I have been fielding lately have to do with the state of the economy and its likely impact on rail equipment finance. To alert our readers about some of the market indicators that we’ll be watching, here’s how we see things developing:

anthony_kruglinski_web.jpg • The general economic climate: Make no mistake about it. While the rail finance industry will have activity all during 2009, it won’t begin to perk up until the overall economy starts showing some signs of rebounding.

Don’t forget that the people who buy railcars and locomotives and the people who are in a position to finance them are consumers, as worried as the rest of us about what is around the bend. When they start feeling better about things, and exhale, they will be in a better position to pass that confidence along to the marketplace.

Think about it. Who is going to go out on a limb and place anything but a modest order for new equipment when all they see, hear, and read about is doom and gloom?

• Asset sales: We’ve already reported that some owners of rail rolling stock who would like to convert their assets to cash are waiting until the market recovers before trying to sell them.

Keep your eyes open. Any attempt to flog these assets in a continuing poor market will indicate that the owners couldn’t wait. On the other hand, if the normal market activity continues but at a seriously constrained level, deals that should be getting done now will pile up, making people even more nervous. We may well be looking at predictions of a dam bursting at some point.

• Class I behavior: So far, we have not seen huge retrenchment by the Class I’s in their behavior in the equipment market. Yes, new locomotive orders for the second half of 2009 are tailing off, but that is most likely due to the need that the Class I’s have to digest the huge number of new units they have been buying the last few years.

Railcar orders are also down following  years of hyper-building. The point is that despite dramatically falling volume numbers, the Class I’s are still investing capital.

Keep an eye on Class I behavior in the first half of 2009. What are they buying? What are they renting? As we have said in this column in the past, Class I’s invest when they can when it comes to capital expenditures. We need them to keep doing that as long as they can.

• Finance options: We have been talking to our friends overseas and in many markets (arguably smaller than North America’s). Sources of financing have, more or less, dried up. We’re lucky that our marketplace was relatively well-served with lenders and lessors who favored rail when this economic tsunami hit, so that today there are still sources left doing business.

We will need, however, a lot more to return to this market before things really turn around. What happens if the reverse happens? What happens if the banks that like to invest in rolling stock for lease don’t make the profits they need to support the equipment depreciation that comes along with leasing deals? What happens if the various forms of economic stimuli being targeted at our lenders and lessors fail to work?

Let’s hope that the latter doesn’t happen.

If this column asks more questions than it answers, it is because at this early point in the year, we may know where to look and what to look for in the way of answers, but we aren’t actually seeing enough to give us a clear indication of what’s down the road.

We hope to have some answers following the Railroad Financial Corp. Rail Equipment Finance Conference early this month. Each year we use this meeting and the 50 or so industry speakers who make presentations to gauge what happened in the prior year and what is likely to happen. It’s where we get a lot of the information on which we run our business, and from which we glean information for this column.

Since most of our speakers repeat year-to-year, they are acutely aware that their predictions in the prior year will be analyzed against actual results. As a result, they are generally correct, and this year should be no exception.

Tony Kruglinski is president of Railroad Financial Corp. Contact him at tkruglinki@railfin.com.