Rail finance and leasing: Limping toward a lingering sense that there's light at the end of the tunnel

by Pat Foran, editor

We may be turning the corner on this recession, but forgive rail asset owners if they aren't doing cartwheels, giving high fives or exhibiting any signs of exaltation. For many of those who sell, lease and service rail cars and locomotives, it'll be hard times for some time. As one leasing exec told us during the information gathering for our 10th annual Finance and Leasing Guide: "We are all limping into 2010 hoping for a brighter outlook, so we'll hang on and see what comes."

Rail-car demand is still down, down, down, as is car-production plant utilization, and that'll continue to put cost, price and profit squeezes on builders and lessors. Surplus rail equipment remains in storage.

And although capital markets have improved, access to capital is still an issue for many.

"The current market has no liquidity, values are stagnant or dropping from a historical perspective, and funding sources are residual value constrained," as one financial services exec put it.

With those kinds of conditions, financial players have no choice but to reassess their respective market positions. Plenty are.

"Several of the traditional lessors are being restructured and others have publicly suggested they will reduce the size of their operating fleets," one consultant said. "While there are several strong lessors, capacity of the industry to provide equipment could be reduced."

And that could be a problem "when the economy rebounds," the consultant added.

We expect to hear characterizations of the market in the conditional tense ("it could ... it would") for the foreseeable future. A little certainty would go a long way toward giving finance execs a better shot at glimpsing a light at the end of this tunnel. About the only thing that seemed sure as this issue went to press in early February was a statement Progressive Railroading columnist Toby Kolstad offered up in this month's column: "One day, rail-car demand will increase, and tens of thousands of new cars will be needed annually to replace old cars and to handle new railroad traffic."

We'll keep leaning and, at times, limping toward that light, then ...