There are around 1.6 million railcars chugging across North America’s intricate rail system. While they have operated in much the same way for countless years, the railcar leasing market has been characterised by change, partnerships and consolidation, writes Rebecca Szkutak.
Putting money into a seemingly old-fashioned industry with little technological innovation may not seem like the hottest area of investment. However, Richard Kloster, a senior vice-president and chief commercial officer of railcar consulting firm AllTranstek, says that although the market may not be sexy, it is ripe with potential.
“It’s a business not for the faint of heart,” he says. “It’s also a business that, if done right, can make a lot of money.”
The industry offers an opportunity to continuously collect capital on long-term assets with a 50-year lifespan. Railcars require less cosmetic maintenance than aviation assets and can generate average returns of 8-10 percent, with the potential to go into the high teens.
Some players in this market form partnerships with railcar manufacturers to manage and lease out fleets. One such is Napier Park Global Capital: the New York-based firm has a joint venture with Dallas-based Trinity Industries Leasing Company, a wholly owned subsidiary of railcar manufacturing and leasing business Trinity Industries.
Napier Park helps lease out the Dallas-based firm’s 125,000 car fleet for average terms of five to six years. Napier Park vice-chairman Joe Lane says many borrowers renew these terms: “These assets are attractive because they are long-lived and critical to all parts of the supply chain. They are performing a function that is difficult to think of being disintermediated in terms of a technology change. You can’t fax grain.”
Jason Cipriani, a co-managing partner at Corrum Capital Management, echoes that sentiment. “One of the attractive aspects of railcar leasing is high utilisation levels,” he says. “Most railcar lessees, be they industrial, agricultural or manufacturers, receive raw material or ship product in large quantities in bulk form. The railcar fleet is key to their supply chain.”
The asset manager, based in Charlotte, North Carolina, went down the portfolio company route by acquiring RGCX and its fleet of around 4,200 railcars in 2018. Corrum currently leases out the fleet for terms of four to six years on average.
Corrum and Napier Park are also involved in aviation leasing. Although this strategy may seem similar to railcar leasing, the longevity and low-key nature of railcars keep prices relatively muted and give the market added stability.
“The rent for a brand-new railcar doesn’t differ dramatically from a 15-year-old or 25-year-old car,” says Lane. “The pricing dynamic is different in rail, so differentiation is on the expense side to keep older cars on the tracks. The rent for a 15-year-old airplane would be very different from that for a brand-new aircraft, however. Railcars are essentially big metal boxes that are subject to less technological obsolescence.”
Although the railcar market offers only limited liquidity, Cipriani says it also offers relative safety in the event of a downturn – as long as investors do not rely too heavily on one type of railcar, the returns on which can fluctuate owing to changes in demand within sectors such as oil and gas. “Looking across long periods of time, it is a very resilient industry,” he says. “If you have a diversified fleet serving multiple commodity types and a broad customer base, you can generally expect average to high utilisation rates across most market cycles.”
Lane says that as railcars remain one of the cleanest ways of transporting goods – and significantly greener than by road – the industry could slowly expand.
“Predictions indicate that there will continue to be growth in the movement of product by rail,” says Lane. “It’s green and friendly, it’s efficient, and it has a lot of attributes that are attractive.”