Cowen: “Hard Assets For Hard Times”
Written by Andrew Corselli
Cowen and Company revealed three factors that could position railcar lessors well in the intermediate to long-term: Financial investors looking for hard, yield-generating assets amid further interest rate declines; partial, lease-term-driven insulation; and “our view that lease rates will be first to rebound in the rail equipment market when a freight recovery occurs.”
Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer went on to note that “GATX and Trinity are the largest operating lessors.”
“Dwindling investment options amid global stock market meltdowns and falling interest rates could channel even more capital to railcars with attached leases than we have seen in the last five years,” the analysts noted. “Many operating lessors do not have lease-cancellation policies; instead, they typically work toward potential win-win resolutions with customers whose needs for assets no longer exist or who are suddenly financially burdened. In the past several years, some banks and other financial investors from around the world have deployed capital into leased freight railcars in North America for tax advantages and due to scarce yield alternatives. With interest rates falling further, the scarcity of alternatives could become more pronounced.”
In case of a relatively short recession, the analysts said, many operating lessors are partially insulated by their average lease terms. “GATX, for instance, had an average lease renewal term of 37 months in 4Q19. The number of railcars scheduled for renewal in 2020 is about 17,800, and we would expect a similar number in 2021. GATX’s total North American fleet consists of more than 118,000 tank and freight cars serving just about every industrial end market. While we remain on the sidelines due macro uncertainty and a less-compelling valuation than some other companies in our coverage, we note that GATX remained profitable during the Great Recession and is one of the best-run lessors.”
The analysts added that if coronavirus containment efforts reach significant milestones in the spring and summer, we could see a marked recovery in freight demand “driven in part by replenishment of depleted inventories. This and a potential decline in railcar manufacturing activity in the near term could cause a material rebound in spot lease rates.”
