Kruglinski: From your perspective, in what shape is our industry, both Class I's and smaller railroads? Also, what is likely to happen in the next 12 to 24 months?
Hart: Other than 2006, the industry is in the best shape it has been since I started at IC in 1978. The recession was a setback, but less so for the railroads than the other modes. There are a lot of positives. We are looking at Class I operating ratios in the 60s; strong cash flows to finance record amounts of capex; growing traffic; new markets in frac sand, ethanol, DDG; fuel efficiency; the shipping community's acceptance of intermodal. Even the President has singled out rail as a key part of his transportation, energy, and environmental policies. The short line and regionals participate in all this, too, but, of course, to a lesser extent in intermodal. They don't have the scale of the Class I's nor their access to capital, so they have some challenges.
Kruglinski: You have been on the job at Fifth Third for nine months or so. What kinds of deals have you been working on?
Hart: It's a commercial banking mix of revolver/term loan. We work closely with our leasing company, Fifth Third Equipment Finance. We've been busy getting the group up and running and we are off to a great start. Our rail deals have been with big and small short line operators, rail equipment lessors, and a couple of suppliers, one on the railcar side and the other in locomotives. Our pipeline is good.
Kruglinski: What other kinds of transactions would you like to see?
Hart: I am a commercial banker, so revolvers and term loans are the basic structures. The Bank has good capital markets capabilities. I would like to use our syndications team. I would like to arrange a private placement. Maybe do a securitization. Overall we would like to lend more money. We hear of companies who are writing a check instead of borrowing or leasing to acquire rolling stock.
Kruglinski: Tell me about Fifth Third's capacity to serve Class II and Class III railroads.
Hart: They are the core of our target market. The Class I's have all sorts of ways to raise money—banks, private placements, securitizations, public debt, equity. The regionals and short lines with a couple of exceptions rely first and foremost on commercial banks and operating lessors. There are no limits on our capacity in the sense of industry concentration limits, etc., set by the Bank. We want to "deliver the Bank" to the Class II's and III's. I've been a student of them for 20 years so I think I have a pretty good understanding of what works and what doesn't. Our job is to tell their story—why a railroad is a good credit risk—to generalist bank credit officers.
Kruglinski: What is the biggest challenge you face in bringing your loan and leasing products to our industry?
Hart: The biggest and most interesting challenge is creating a term sheet for a loan or lease that is acceptable to the customer and makes sense for the Bank, and then getting it approved by the credit officer. I've found it tends to be a creative exercise to meet the challenge. What is the deal? What are the risks? How do you mitigate the risks? Given the risks, why do the deal? That's the big picture. The short term challenge is that a lot of prospects, and not just in the railroad industry, have weaker than average historical financial statements for 2009 and 2010. The trends are positive and the YOY comps are good, so that mitigates those weak historicals.
Kruglinski: Does the Surface Transportation Division have target markets other than rail?
Hart: We've defined our target market to include the trucking industry and domestic marine—like Jones Act carriers and river operators. Our market for all three modes is coast to coast.
Kruglinski: How do readers get in touch with you?
Hart: Call me at (312) 704-7375 or email email@example.com. We will soon have our own Surface Transportation web page at www.53.com.