Thanks to Chris / CopCarSS for my avatar.
I assume the whole affair would enter into bankruptcy court and they would have to slug it out. If past rail bankruptcies are any indication, no one will walk away from the table completely re-imbursed for every dollar invested.
There is an element of risk to this whole proposal, no doubt about it. Uncle Sam would have 2.5 billion into it, but supposedly DME is putting collateral up for the gov't protion of the loan. (Here is a good question - what coallteral is DME throwing up -if required- for the 4 billion dollar financing?) I suppose the people over at the STB would best be able to determine wether this is fiscally feasible. I am sure that they are looking at the risk factors involved with DME's plan. They also have all the DME's financial info that the Mayo clinic does not - hence the STB is able to make a far better determination as to wether or not this is a good idea. I don't think anyone can really say for sure wether it is a good idea or not - only the STB and DME have access to the necessary financial info that is needed to determine the value of the DME/ICE property and the financial risk involved. Anything else is just speculation. At this point, trying to establish who would be fully re-imbursed in a bankruptcy scenario is also speculation. If the rail line is built and along with the new locos and cars required to operate it, then Cedar American Rail Holdings (DME's parent company) would be worth a whole lot more than it is now. Currently I have heard estimates that CARH is worth around a billion.
It would probably fall back to the same party that pays for foreign aid to countries that bad mouth and threaten us,pays for illegal immigrants that don't pay taxes,foreign wars that have no resolution in sight,and have no ability to pay their own bills for day-to-day living.The American Taxpayer.
However,IF DM&E can succeed with it's plan to offer competitive and timely service to reduce the stress of current overburdened physical plant of it's competitors(real or imagined) and offer service to an otherwise "captive" (note the quotation marks) shipper or receiver of goods or services,THEN won't it be worth the risk in the long run?Who payed for BN's initial expansion into the Powder River Basin and upgrade the former CB&Q lines to handle the increase of traffic and tonnage on those lines?How much of a risk did they incur?Especially at a time when the railroads were going thru a decline of traffic and routes and every stockholder had the Penn Central debacle on their minds.
Think about it.
Bill B
futuremodal wrote:Frankly, I think DM&E is getting screwed by having to take out a loan from Uncle Sam. They should be getting some form of grant free of payback obligations. You know, just like all the other railroads in the area!
Why not? Then they can put the screws to some farmers or something...
LOL...
LC
Murphy Siding wrote: Does anybody know how the loan guarantee by Uncle Sam works? Thanks
Murphy,
I agree that the press repoerts of DME financing are clear as mud. This probably reflects reporter's ignorance and DME vagueness. I will offer my understanding of what I have read. I have no particular faith in the sources.
Total project is $6.5 Billion. Evidently $2.5 Billion is fixed plant and that is what they want FRA loan for. I expect the other $4.5 billion is equipment. Equipment can be owned by either the railroad or the utility. If owned by utility, the freight rate will be reduced to reflect the fact that the railroad is not incurring those costs. If the railroad is to own the equipment they may actually lease it, in which case the ownership stays with the leasing company. If the railroad buys the equipment they will be able to finance about 90% of the cost. RR needs to come up with 10% down. I suspect DME has not got cash for 10% down so most equipment not supplied by customers will be leased.
In a lease the risk of default and remarketing are borne by the lessor of the equipment. If DME defaults the lessor has to remarket it and take what he can get. That is part of the risk they run as part of the business. Historically lessors have been able to remarket equipment so the risk premium they would impute is quite small. In the DME case, because the amounts of equipment are so large they might impute a larger premium. On the other hand they may not as if DME goes away the coal will have to move BNSF and UP so there will still be a demand for the equipment. I lean toward a modest risk premium.
If the $2.5 billion is for fixed plant, (track, bridges, etc.) DME will give the FRA what will be in essence a mortgage on the fixed assets. If DME defaults, the property will pass to FRA. FRA will remarket to whomever they can. FRA is US taxpayers, you, me, Ed, and Futuremodal, to name four.
Taxpayer's problem is that the day the project is done the value of the fixed plant is unknown. If the project has any economic profit, which I personally doubt, the asset is worth $2.5 billion plus the present value of the future stream of economic profits. If the project is at economic break even then the asset is worth $2.5 billion. In either of the first two cases DME will service the loan and all is well from the taxpayer's point of view. If the project earns less than the cost of capital, it is worth less than $2.5 billion. If DME defaults and the line goes to scrap it will be worth much less than $1 billion.
The earnings risk is why DME can not finance this on the open market. The other reason they are going for govt money is that they would have to show Wall Street a return of at least 11-12% (according to STB calculations of cost of capital), while with the FRA they will pay the govt's cost of borrowing money for the term of the loan. You can find this in Wall Street Journal. For talking purposes is around 5% for 30 year money. A 7% spread on $2.5 billion is $175 million a year in interest. This is a nice subisdy to DME in comparison with BNSF and UP who financed their investments in the real market as opposed to the subsidized market which the FRA loan program is.
Mac
The C&NW could not / would not finance the complete rebuilding of the Cowboy line across Nebraska for coal traffic. They upgraded a small portion of the Cowboy line and build a new line to the UP, if I remember correctly. How did C&NW finance that? Any similarities?
greetings,
Marc Immeker
marcimmeker wrote: The C&NW could not / would not finance the complete rebuilding of the Cowboy line across Nebraska for coal traffic. They upgraded a small portion of the Cowboy line and build a new line to the UP, if I remember correctly. How did C&NW finance that? Any similarities? greetings, Marc Immeker
Union Pacific financed that for them. It's one of the reasons that UP is big into coal, and CNW is now part of UP.
What I'm getting out of this so far, is that the $2.5B loan would be mostly for route construction and upgrade. Somebody would loan the money, using the finished rail line as collateral. Uncle Sam would guarantee the party from losing any of the $2.5B loaned. If there was a future problem, Uncle Sam has first lien rights, and would use that leverage to advantage, if needed to satisfy the $2.5B loan people. So far, so good.
The $4B (or $4.5B- I don't know(?)) money DM&E already says they have lined up, would be for equipment. This money loaned would not be as risky, because the equipment could be resold (re-poed) if neccessary.
At this point, from a financial standpoint, what's stopping investors from jumping at the $2.5B loan idea. Doesn't it seem to be a slam dunk? Uncle Sam is taking the risk, not the investor.
Murphy Siding wrote: If I understand the situation correctly, DM&E is trying to get a federally guaranteed loan for about $2.5 Billion. This whole scenario has not been made clear in anything I've ever read about the DM&E loan/expansion.
TheAntiGates wrote:Murph, are you really sure that the transaction in question will end up being a federal GUARANTEE on a loan, or instead an actual loan of taxpayer money through the Railroad Rehabilitation & Improvement Financing program?
No, I'm not sure. That's why I'm asking. Thanks for the links. They were interesting, and some were quite biased, as might be expected. What confuses me, is that every time I read something in the media about DM&E's plans, it seems there is more to the story than people are saying. Up until a month ago, I didn't realize that they were going for $2.5Bplus $4.0B they already had lined up. This never comes up in any media reporting that I see. It's frustrating, that I live in the hometown of the DM&E corporate offices, and we don't see much other than superficial news coverage. If my office had a window, I could look accross the parking lot, and wave at Kevin Schaeffer in his office. And yet, there's more questions than answers involved in this deal, even for those not taking sides.
TheAntiGates wrote: Which is very perplexing given that DM&E says its loan application contains business secrets and therefore cannot be made public, (explaining why we have all been left so much in the dark over all of this) who in their right mind would want to loan money to any entity that balks at fully disclosing itself? Pig in a poke, anyone? I wouldn't.
The 2 billion/ 4 billion dollar loan amounts is no secret. That has been described in press releases by the DME (refer to the DME's website and check the past history of press releases, or check out GOTRAC's website. If you are real glutton for punishment you can read the press releases from the Mayo clinic - they talk about it, too). The total project will cost 6-7 billion dollars. That has been public information ever since I started following this affair. The total cost of the project doesn't apply to this thread because the DME is only seeking to obtain 2.5 billion from the feds. The rest of the project will be funded from private investors - certainly no one would expect them to be 'outed' for discussion by the talking heads.
As I understand it the application to the FRA is for RRIF money. That is a direct loan from the US Government.
solzrules wrote: The 2 billion/ 4 billion dollar loan amounts is no secret. That has been described in press releases by the DME (refer to the DME's website and check the past history of press releases, or check out GOTRAC's website. If you are real glutton for punishment you can read the press releases from the Mayo clinic - they talk about it, too). The total project will cost 6-7 billion dollars. That has been public information ever since I started following this affair. The total cost of the project doesn't apply to this thread because the DME is only seeking to obtain 2.5 billion from the feds. The rest of the project will be funded from private investors - certainly no one would expect them to be 'outed' for discussion by the talking heads.
Ok. I'll buy that the information is out there, if you look for it. Too bad they can't promote mopre of a positive image in the home town of their corporate headquarters.
As you understand the situation, is the $2.5B a loan directly from the Government,as several anti-DM&E groups are portraying it, or just a Government guarantee, of loans from an outside party?
TheAntiGates wrote: I notice that some critics are faulting DM&E for trying to become an island of socialism in a sea of railroad capitalism, ( scan down to comment by Frank Wilner, former chief of staff to the vice chairman of the U.S. Surface Transportation Board) suggesting that taxpayer monies will actually be loaned creating an unfair subsidy not enjoyed by DM&E's competitors.
I notice that some critics are faulting DM&E for trying to become an island of socialism in a sea of railroad capitalism, ( scan down to comment by Frank Wilner, former chief of staff to the vice chairman of the U.S. Surface Transportation Board) suggesting that taxpayer monies will actually be loaned creating an unfair subsidy not enjoyed by DM&E's competitors.
Anyone who works for or used to work for the STB is probably heavily vested in the interests of the Big Six railroads. UP and BNSF opposed competition. UP feigns disinterest, but at least BNSF is honest enough to publicly oppose the project (which only puts them further into the pit of anti-American/anti-Capitalist excess.)
As for "an unfair subsidy not enjoyed by DM&E's competitors".....
"DM&E receives no special treatment or consideration. Dozens of railroads have pending loan applications and dozens more have received FRA loans over the past 30 years. In fact, parts of the Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) coal hauling lines were built with FRA loans like the one that DM&E has applied for. In today’s dollars, the FRA loan for the UP line alone was $1.5 billion. "
http://www.gotrac.org/index.cfm?page=267
You and Frankyboy need to do your research first before making such false claims.
Let's set the record straight once and for all - The US rail industry has been and continues to be heavily subsidized.
futuremodal wrote: TheAntiGates wrote: I notice that some critics are faulting DM&E for trying to become an island of socialism in a sea of railroad capitalism, ( scan down to comment by Frank Wilner, former chief of staff to the vice chairman of the U.S. Surface Transportation Board) suggesting that taxpayer monies will actually be loaned creating an unfair subsidy not enjoyed by DM&E's competitors. Anyone who works for or used to work for the STB is probably heavily vested in the interests of the Big Six railroads. UP and BNSF opposed competition. UP feigns disinterest, but at least BNSF is honest enough to publicly oppose the project (which only puts them further into the pit of anti-American/anti-Capitalist excess.) As for "an unfair subsidy not enjoyed by DM&E's competitors"..... "DM&E receives no special treatment or consideration. Dozens of railroads have pending loan applications and dozens more have received FRA loans over the past 30 years. In fact, parts of the Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) coal hauling lines were built with FRA loans like the one that DM&E has applied for. In today’s dollars, the FRA loan for the UP line alone was $1.5 billion. " http://www.gotrac.org/index.cfm?page=267 You and Frankyboy need to do your research first before making such false claims. Let's set the record straight once and for all - The US rail industry has been and continues to be heavily subsidized.
(Dave- I can't honestly tell from your post, if you're being serious or humorous with your **Oh yeah?? So's your mother !!** type post, or, are you trying to have an honest discussion?)
I noticed that AG isn't saying he agrees with Frank Wilner, only offering some links to others opinions.
Can you tell me if the DM&E loan is to be a loan directly from the Federal Government, or a guarantee of loans from third parties?
futuremodal wrote:You and Frankyboy need to do your research first before making such false claims. Let's set the record straight once and for all - The US rail industry has been and continues to be heavily subsidized.
Oh golly gee willickers, does that mean you don't approve? I must be doing something right.
As for your setting the record on subsidy straight once and for all... Gee thanks, however since this is the largest such instance of ALL TIME, a thorough and sifting scrutiny seems more than merited..
Murphy Siding wrote: I noticed that AG isn't saying he agrees with Frank Wilner, only offering some links to others opinions.
Murphy Siding wrote: solzrules wrote: The 2 billion/ 4 billion dollar loan amounts is no secret. That has been described in press releases by the DME (refer to the DME's website and check the past history of press releases, or check out GOTRAC's website. If you are real glutton for punishment you can read the press releases from the Mayo clinic - they talk about it, too). The total project will cost 6-7 billion dollars. That has been public information ever since I started following this affair. The total cost of the project doesn't apply to this thread because the DME is only seeking to obtain 2.5 billion from the feds. The rest of the project will be funded from private investors - certainly no one would expect them to be 'outed' for discussion by the talking heads. Ok. I'll buy that the information is out there, if you look for it. Too bad they can't promote mopre of a positive image in the home town of their corporate headquarters. As you understand the situation, is the $2.5B a loan directly from the Government,as several anti-DM&E groups are portraying it, or just a Government guarantee, of loans from an outside party?
Murph - The way I understand it the loan is from the government (so in other words the taxpayer). Because of this, I think the concern about the ability of the DME to pay it back is well founded. I also read somewhere that (and not being a finacial genius I have no idea why) the government loan will prevent the DME from being subject to excessive speculative interest rates from the private sector. I suppose if private investors see that project is going to move forward then there will be more of a financially rational interest in the project.
futuremodal wrote: ...but at least BNSF is honest enough to publicly oppose the project (which only puts them further into the pit of anti-American/anti-Capitalist excess.)
...but at least BNSF is honest enough to publicly oppose the project (which only puts them further into the pit of anti-American/anti-Capitalist excess.)
BNSF hauls Chinese imports to put money in the pockets of their shareholders. That makes them pro-capitalist. Anti-capitalist would be wanting to nationalize the US rail system, even if it is to lease it out to open access operators.
Solzrules-
Have you seen any breakdown for the $6+ billion, how much for the new line, rebuiding the old line, locomotives, cars, shops, the Winona barge terminal, ect ?
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