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Compiled by Pat Foran, editorAs part of the information gathering for our 14th annual Finance & Leasing Guide, I posed two questions last month to about five dozen North American rail finance and leasing execs: "What is the key issue facing the rail finance and leasing sector in 2014?" and "On the regulatory front, what's your biggest near-term concern?"
Clearly, uncertainty surrounding tank car design-related regulation or legislation in the post-Lac-Mégantic world is on their minds — so much so, perhaps, that the perennial key concern that is "economic uncertainty" didn't make the key-issue cut in 2014. Of course, uncertainty surrounding regulation/legislation of any kind is very much a business concern. But this year marked the first time since the deep, dark recessionary days of early 2009 that big-picture economic fretting wasn't a prevailing sentiment in their survey responses. For what it's worth, not a single respondent used the word "economy" in their written responses or follow-up phone conversations. Not that tank-car design is the only thing railroad finance and leasing professionals, and marketplace observers are thinking about. See below for their unedited responses, which were submitted via email and fax.
What is the key issue facing the rail finance/leasing sector in 2014? Why?
"Spiraling cost of newly built rail equipment. In many cases lessees can no longer afford the high lease costs associated with new equipment and are looking only at used equipment or alternate methods of shipment.""The key issue facing the rail finance/leasing sector in 2014 is the reconciliation of U.S. GAAP and International Accounting Standards Board (IASB). This issue will have a tremendous impact on the railroad industry since many leases which are presently classified as operating leases and are off balance sheet may now come on balance sheet. The railroad industry is extremely capital intensive and the prospect of adding additional billions of dollars in lease commitments may decrease financial flexibility.""Railcar tank availability and current lease rates regarding tank cars.""Shifts in types of cars due to changing needs of energy sector/regulation from coal to car.""The rate of change in railcar design (obsolescence) continues to accelerate as does the ongoing cost of maintenance. Both issues are causing a material shift in the lifecycle price modeling that require car owners to re-calibrate (increase) the real cost of ownership. When added to the increasing cost of manufacturing, rising interest rates and freight rates, the real cost of shipping by rail is about to surge.""Coal, centerbeams, CBR explosions — effect on lease rates by the first two, uncertainty of regs on the [third] issue.""Any form of regulation or changing the playing field. Investment is made based on the nature and structure of the industry, and the commercial outlook of the carriers, lessors and lessees. If arbitrary change or unpredictable actions are pursued, it will create a high level of uncertainty and regulatory risk.""Increasing federal regulation and compliance oversight of banks and bank-affiliated leasing companies. With all the auditors and regulators involved in the most minute details of every transaction, it has become very difficult (and more expensive) to conduct business for many institutions.""Perceived over building of certain rail car types, especially related to the oil boom — covered hoppers and tank cars.""Due to [the] Shale Oil revolution, tank car demands remain strong and supply is tight. We are working closely with our customers to provide cost-effective solutions and deliver high-quality equipment to support their growth plans.""The primary issue for 2014 is the uncertainty surrounding tank-car specifications and how resolution will occur concerning safety measures with crude-by-rail transport. Oil transportation is under scrutiny while the demand for more capacity continues to grow.""The biggest issue(s) are how to handle crude by rail safely and how to manage the existing fleet.""Uncertainty of the retrofit of tank cars and demand of tank cars for crude by rail could create very volatile lease rates.""Tank car regulations and specifications continue to be the biggest issue (and the biggest unknown) in the industry. For lessors and car owners, continually rising car costs are also an issue; while lease rates justify the investment in certain car types, in others they do not; and in certain commodities, it could slow loadings growth.""(1.) The key issues would include concerns over the recent crude oil derailments and the modifications that will be required to the tank car fleet. Some of the modifications being discussed could obsolete the fleet. These modifications may also cause the cost of new tank cars to increase dramatically, creating a price point that may become unattractive to continue to lease tank cars and shift the transport of crude from rail to pipe. (2.) Potential over-build of tank cars.""The key issue facing our sector is the proposed rulemaking HM-251 requiring the adoption of P-1577 standards to all DOT-111 tank cars; this would create catastrophic cost burdens on the leasing sector and even put some of the smaller leasing companies out of business."On the regulatory front, what's your biggest near-term concern ... and why?"Passage of [STB] Ex Parte 711 [Petition for Rulemaking to Adopt Revised Competitive Switching Rules]. Expanding switching will have immediate near-term cost and service ramifications.""Regulatory issues that we face include EPA regs on coal and CSAPR [Cross State Air Pollution Rule].""Continued EPA regulations that are killing the coal industry; the current Administration is killing the coal industry." "Continued coal mining and coal burning regulations because it severely reduces a key commodity haulings for the R/Rs.""CBR tank car mandated modifications, if any; timing and grandfathering.""Recent accidents cause regulators to ban or unreasonably restrict CBR shipments. Some updates in tank car requirements appear needed.""What the new tank car designs that are being proposed are going to be as that will impact our internal designs for tank cars." "Tank car design. Regulated design changes to the existing fleet will be cost prohibitive, obsolescing older equipment.""To improve tank car safety, the market is working diligently to finalize the new specifications for tank cars. The new regulations will improve tank-car safety, increase demand in the repair network and create new demand for tank cars."
"The uncertainty of tank car regulations for cars transporting flammable liquids. Both crude and ethanol carrying tank cars are under scrutiny and the range of regulatory scenarios is very large. It is unclear what regulations will be enacted and consequently, investment in new and existing cars, and infrastructure is under review by all interested parties — shippers, receivers, railroads and financial institutions." "The regulatory arena seems to be incorrectly focused on changing the traditional DOT 111 general purpose tank cars as being the problem behind recent accidents and may enact regulatory changes or otherwise unfairly undermine the reliability of this design. Evidence is mounting that indicates the chemistry of some (perhaps all) oil recovered from fracking has significantly different properties than oil recovered from conventional drilling and therefore it (fracked crude) requires different packaging regulations (tank cars). The near-term implications on the abundance of tank cars built and ordered for this new supply are onerous and extremely expensive. Public perception influences politics which make regulations and the public is not fully informed.""History is repeating itself — watch out. Please read quote from Pastor Martin Niemöller, circa 1946: 'First they came for the communists, and I didn't speak out because I wasn't a communist. Then they came for the trade unionists, and I didn't speak out because I wasn't a trade unionist. Then they came for the Jews, and I didn't speak out because I wasn't a Jew. Then they came for me, and there was no one left to speak out for me.'""Regulations related to the retrofitting of tank cars and possible new mandates that may restrict traffic similar to recent crude oil tank-car crashes.""Tank car regulations as to DOT type 111. Industry players are concerned about the lack of real information and way too much speculation has them jittery.""That's an easy one — a final spec for flammable liquids. The sooner the FRA acts on this, the better, as the uncertainty is unsettling for the entire industry. The attempt by the railroads to continually try to absolve themselves of any liability, and to push that liability to car owners and shippers, is also a concern."