Leasing Companies--FURX, HLCX, CEFX

[BNSF4ever]

One thing I've noticed since I got back into railfanning this year is the prominence of leasing company locomotives. From a railroad perspective, faced with shifting traffic patterns, I can see the attraction of leasing motive power. But for the financial companies in this business, what is the attraction for them? What happens when they are faced with a downturn in traffic? Finally, I know that railroads have historically leased out power or have teamed with manufacturers to lease power. So why aren't railroads in this business more rather than financial institutions?

[arbfbe]

When the locomotives come off lease from railroads there is still economic life in them. Some financial institution still hold the title to them and would like to get the remaining value of their investment out of them. Perhaps they can sell them to another railroad or another company. If there is a market for leased locomotives one of the companies that specialize in such transactions can either buy, lease or administer a short term lease of these units to others. The same thing happens when a customer returns their leased automobile back to the manufacturer.

Railroads used to lease locomotives amongst themselves from units the had stored. Some arrangements went on a regular basis with roads like the DM&IR who had lots of units to spare in the winter when the Great Lakes were frozen. Other roads might have units stored during a business slump while another railroad in another part of the country was seeing record traffic levels. Now railroads have better uses for their capital and are not likely to keep spare units around when not needed. So they sell these units or do not renew the leases when the expire. There is still a need for a fluid pool of units to move around the country according to market conditions and leasing companies have taken up that opportunity. It makes sense for them to used older locomotives for that purpose but CEFX has brand new units for this purpose since they are leased long term 100% of the year to CP and UP. It is sort of like CP and UP trading their suplus units but with a third party acting as an intermediary. UP and CP can use their capital elsewhere.

Some of the early leasing companies like Precision National were just taking units they had bought for parts and scrap into running condition to earn leasing revenues. The railroads didn't want to dilute their management focus by doing the same themselves.

The leasing situation as it has evolved, the leasing companies take on the risk and the railroads pay a higher cost over doing it themselves but end up with more capital available for other needs. It seems to work pretty well for now.

[MP173]

Leasing is a fascinating business. I do not know too much about the railroad's side of leasing, although I should as my largest account has over 60,000 cars in a leasing fleet.

Leasing seems to be made up of three parts:
1. Original purchase price.
2. Finance rate
3. Residual value at the end of the lease.

You obviously know the first factor and the second is pretty standard for the time (interest rates plus) but the third factor is an unknown. I would guess most long term rail leases factor a value of $0 at the end of the lease.

Obviously it gets much more complex with other factors such as excess mileage, maintennace, etc. Perhaps someone with a little more knowledge can pickup from here and run.

ed

[Anonymous]

I heard once that FURX was actually owned by the BN. True????? I also heard that for tax depreciation reasons the RR would sell the older units to its own leasing company and lease them back to itself. Seen quite a few repaints bearing the FURX name. Anybody know for sure?

[joegreen]

QUOTE: I heard once that FURX was actually owned by the BN. True????? I also heard that for tax depreciation reasons the RR would sell the older units to its own leasing company and lease them back to itself. Seen quite a few repaints bearing the FURX name. Anybody know for sure?

BNSF sold quite a few of its SD40-2s to FURX in the 2001 time frame.They were all leased to IC&E to help their start up and after IC&E recieved its awaited 55 ex-UP SD40-2s the FURX units were were then leased to BNSF and have been since.

[Murphy Siding]

How is maintenance and damage taken care of on a lease locomotive?

[arbfbe]

FURX is First Union Raillease which is owned by Wacovia. BNSF did not sell their units to First Union or Wacovia, BNSF did not renew the lease for the units when it expired with the original owners. The either sold them Wacovia or perhaps First Union Bank was the owner who first leased them to BN/BNSF.

Maintenance and damage repair between railroads is covered by AAR rules. For leasing companies it is all covered in the specific contract for the locomotives.

The bottom line is railroads own too much fixed plant as in rail, buildings, rights of way, signals and such. They cannot write all of the depreciation for those items, the cars and locomotives given the rate of return they earn from operations. So by leasing all their freight cars and locomotives they can expense all costs associated with those items which is fully deductable every year. The leasing companies have historically been large financial institutions that own very few assets that have depreciation allowances. If they buy locomotives they can fully depreciate these capital items against their incime.