Other Reports

Small Railroad Investment Goals and Financial Options

  • 01
  • Jan
  • 1993
AUTHOR: Federal Railroad Administration
KEYWORDS: Economic Analysis, Risk Analysis, Loans
ABSTRACT: Small railroads appear to face some unique problems and difficulties securing financing. According to the banking industry, it takes an inordinate amount of work to prepare a small railroad loan package, compared to a similar sized loan for other businesses (like a warehouse or an office building). Unlike many similar-sized businesses that need short-term loans for inventory or working capital, small railroads need long-term financing for long-lived assets such as track materials and equipment. Even when private financing could be obtained, these railroads felt that the terms offered were unsatisfactory. In particular, loans were usually offered for not more than 8 years, too short a term for railroad investments that have a much longer productive life. The few banks that specialize in railroad financing generally restrict their loans to fairly large amounts—$5 million or more. However, local banks, which might be expected to offer smaller loans, have little or no railroad lending experience, and many of these railroads need small loans. There are also certain legal restrictions that may make it more difficult to recover the proceeds of a railroad loan after a bankruptcy or a default than a debt owed by a non-railroad borrower; these restrictions also tend to heighten a potential banker’s reluctance to deal with the industry. Most small railroads are privately held, and there are very little financial data available pertaining to this segment of the rail industry. Accordingly, to meet the objectives of the study, FRA surveyed Class II and Class III railroads and received 339 responses—about 70 percent of all independent shortline railroads. In addition, FRA interviewed bankers, state officials, and others for their perspective on the financial environment in which these carriers operate.