DM&E Financing revisited.

[Anonymous]

beaulieu, If I were taking out the largest government loan in history, and pledging my house as collateral...I would expect the watchdogs protecting taxpayer interests to have a sharp curiousity in my ability to make good on the promises.

[Anonymous]

I had never heard about the extra 4 billion until you brought it up either (thanks for doing so, btw)

The secrecy draped around the loan request, this clandestine extra 4 billion you mention, sure make one want to stand backside facing the wall.

does me anyway.

[beaulieu]

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.

Not strange at all, If you have a home loan are your finances including income made public? The government agency and whatever bank makes the loan will see the information, no one else.

[Murphy Siding]

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.

[Anonymous]

    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.

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?

I notice that the language defining the program permits either, and in googling around, 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 found this critique  by several bankers very informative, especially  where they mention that  even if DM&E is required to buy loan insurance via a credit risk premium to try and mitigate  risk, it ultimately still becomes the taxpayer harnessed with the loss.


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?

This site  is worth a read, clearly their bias is strong, but they offer info not available anywhere else..

I wouldn't.

[beaulieu]

With Uncle Sam onboard its only a question of exactly what interest rate will be offered and will DM&E accept the rate. There is less risk for the bank so a lower rate can be offered but it will still be likely at least one point above prime. remember only principal is guaranteed, not interest.

[Murphy Siding]

     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.

[beaulieu]

Murphy because of the nature of the line, it unlikely the whole amount would be at risk, unless the DM&E were to do something like Haliburton and simply squander or steal the money and come nowhere near completing it. If the line is completed, but DM&E can't get enough contracts, especially early on, and the interest begins to eat at them, the line would have significant value to one of the Class Is. I am sure that the whole of the DM&E/ICE will have to be pledged against the loan. On that basis, the four of the five Class Is without access to the PRB would be interested, I don't think KCS would have the resources. In the case of the C&NW access to the PRB, a company known as Western Rail Properties Inc. (WRPI) was incorporated to own the new line and a portion of the existing C&NW line which was rebuilt. The UP cosigned the loan for C&NW. Banks loaned the money on the basis that if the C&NW defaulted the UP would pay. Separately, if the C&NW defaulted on the bank loan, then title of WRPI would pass to the UP.

[Murphy Siding]

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.

[MStLfan]

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

[PNWRMNM]

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 

[kenneo]

Anti-Gates is correct.  Ownership of whatever is pledged as security for the 2.5 Billion would devolve to the Federal Government.  The Feds, can if they desire, suborn title to whoever actually loans the money and in the case of a business failure would be liable only for any differance between the value of the failed property and the value of the loan.

[Anonymous]

    Does anybody know how the loan guarantee by Uncle Sam works?   Thanks

Well of course DM&E is securing it's arrangements from the FRA, and consequently might be unique, but here is an explanation of the department of energy's strategy on securing the fed guaranteed loans, look at pages 27 & 28 where it says

"Thus, DOE would prefer to limit the financial risk to the Federal government from the first loan guarantees issued under Title XVII as DOE gains valuable experience and expertise with these financial and commercial arrangements. This intention is bolstered by the mandate of Section 1702(g)(2)(B), which requires that ôwith respect to any property acquired pursuant to a guarantee or related agreements, [the Secretary] shall be superior to the rights of any other
person with respect to the property.ö This statutory provision requires DOE to possess a first
lien priority in the assets of the project and other collateral security pledged. Because DOE is
not permitted by Title XVII to adopt a pari passu financing structure, any holders of non-guaranteeddebt have a subordinate claim to DOE in the event of default, and will not be able to recover on their debt until DOEÆs claim is paid in full."


The possibility for similarities might be great.
My most humble appologies if this information is outside of the scope of your interest.


 

[Murphy Siding]

    Not wishing to rehash DM&E vs. Mayo, or land grant history, I am posting this as a real question.  It would seem to me, that anybody looking to invest billions of dollars into a project such as this, will try to work it out so they are senior lienholders if something goes astray.  Does anybody know how the loan guarantee by Uncle Sam works?   Thanks

[Limitedclear]

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

[billbtrain]

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

[Anonymous]

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!

[Anonymous]

<QUOTE>" If this all goes through, and sometime down the road, DM&E goes under, or at least defaults on the loans, what happens? Does Uncle Sam make sure the $2.5B party gets paid back? Is the $2.5B party, or the $4B party the junior lien holder. If the whole thing goes bust, who is stuck? This whole scenario has not been made clear in anything I've ever read about the DM&E loan/expansion."

Excellent question Murph,I hope someone qualified puts in an answer.

It seems like I recall reading here a while back that when railroads go bust, reorganization is the norm as opposed to liquidation.

Can't build too many office buildings on tracts of land 60' wide x 150 miles long, so the bulk of the asset is not fit for very much else.

So the creditors get the assets, the stockholders of record get a good reaming, they change the name from "railroad" to "railway" (or vice versa) and try again, this time with lower economic ambitions, and a new operator.

At least that's the way I think it works.

[solzrules]

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. 

[Murphy Siding]

     This question has nothing to do with Rochester, Minnesota.  If I understand the situation correctly, DM&E is trying to get a federally guaranteed loan for about $2.5 Billion.  They will put that with the approximately $4 Billion they already have lined up for financing.  If this all goes through, and sometime down the road, DM&E goes under, or at least defaults on the loans, what happens?  Does Uncle Sam make sure the $2.5B party gets paid back?  Is the $2.5B party, or the $4B party the junior lien holder.  If the whole thing goes bust, who is stuck?  This whole scenario has not been made clear in anything I've ever read about the DM&E loan/expansion.