Friday, December 14, 2012

Thoughts from a well-positioned operating lessor

Written by  Tony Kruglinski
This month, we turn to an old friend in the operating leasing fraternity to see what we could learn: Harry Zander, Senior Vice President, Sales and Marketing, Macquarie Rail. Since 2006, Macquarie has built a 10,000-car portfolio of general freight cars, including boxcars, covered hoppers, ore gons and coal gons, and open-top hoppers. While much of that has been organic growth, last year the company closed on an acquisition of more than 4,500 cars as part of a lender sale that capped off a notable year of growth.

Kruglinski: What’s your view on the marketplace you are serving? How about starting with the coal industry?

Zander: In late 2011, the North American coal fleet returned to equilibrium after over two years of oversupply and lack of investment. Many saw this as a welcome return to health in this market, forecasting more stable lease rents in 2012 and beyond with support for new investment. Early in 2012 it was apparent that the confluence of extremely warm weather combined with historically high gas production and low sale prices led to a dramatic turn of events in the first and second quarter of this year for coal demand. Delivered volumes in the first quarter for many of our customers were high while demand for coal was notably lower. The net result has been a significant number of lease turnbacks across the industry this year and an unhealthy number of trainsets in storage. When the market was in an extended trough, many companies shortened terms in the hopes of meeting a better environment at expiration. What this did was condense the overall market expiration profile, which has created an extremely competitive landscape.

Kruglinski: What about all the carbuilding to support the oil and gas fracking market? Is Macquarie participating in this market?

Zander: While we don’t currently participate in the tank car market, we have watched the phenomenal growth of manufacturing activity in this segment. On the drilling side, we have participated in the small-cube covered hopper market for hydraulic fracking sand. The new car market for this segment took off in the first quarter of 2011 and has now tapered off, with some settling expected over the coming quarters as volumes of sand have dropped with reduced drilling for dry gas. This market, which was previously a smaller subset of the covered hopper market, has grown by almost 50% since the end of 2010, but the future demand for sand and cement should keep these cars busy for many years to come. These complementary markets can provide additional comfort to an operating lessor in this car type.

Kruglinski: What markets and car types are you avoiding, or are optimistic about, and why?

Zander: We don’t currently participate in tank cars. The main reason is that it requires a different set of skills from an operations, sales, and risk management standpoint. To date, we have been comfortable in the general freight markets. One interesting and easily overlooked market at the moment is the centerbeam flat car market. We acquired several as part of the portfolio acquisition last year and think there could be a very interesting story in the coming years as housing starts and lumber shipments return to some semblance of long run production and consumption. Another facet of centerbeams is the per-diem lease structure, with which we are very familiar and comfortable. We have used per-diem leases with a wide range of car types and have found this has the ability to strike a nice balance to allow for a structured pay-per-use type of arrangement that can be a great solution for our end customers.

Kruglinski: Macquarie Rail is a part of Australia-based Macquarie Group. Is there an international aspect to your work? Do your international rail investments impact your activities in North America?

Zander: Being part of a global organization introduces us to opportunities in some interesting geographies. To date, all of our rail-related investment has been in North America, the largest and most diverse market. We expect our focus to remain here, but are always interested in evaluating other segments.

At 10,000 cars, Macquarie is now large enough to make an industry statement with its fleet and leasing strategies. Dave Edwards, who led Macquarie from its origination to today, has announced his retirement effective Dec. 31. We’re sure there will be more to come from this well-positioned operating lessor in 2013.