Railway Age at REF 2016: The freight car finance and leasing market is challenging, given current economic conditions, but is relatively robust, based on information shared at the 30th annual Rail Equipment Finance conference at the La Quinta Resort in Palm Springs, Calif.
Carbuilders, lessors, lessees and financial institutions are dealing with common issues related to equipment supply and utilization: coal traffic that continues to plummet; crude-by-rail that, though still significantly higher than before the “Bakken Boom” and hydraulic fracturing created a huge spike in CBR, has fallen off from its late-2014 record high; and healthy intermodal and automotive traffic, among others. Carbuilders are chipping away at a substantial backlog, but orders have fallen off by as much as 15%, depending upon car type. Cowen and Company analyst Matt Ellcott, a colleague of Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, is attending the conference and offers these observations:
“Industrial headwinds are likely to continue, but they appear fully reflected in industry experts’ and investors’ expectations. We would not be surprised if 10-15% of the industry’s freight car order decline is attributable to a wait-and-see approach.
“Based on conference presentations and our one-on-one conversations with a number of industry experts and investors, we came away feeling a bit more confident in our view that further downside to the current subdued expectations for the railcar industry may be limited. The sentiment at the conference was not uniform and ranged from cautiously optimistic, or even upbeat in one extreme, to downright grim in the other, with one industry veteran opining to us that the current environment is worse than the 2006 and 2009 downturns. The most prevalent views, however, appeared to be that the industrial headwinds are likely to continue for the foreseeable future, but, in the words of one manufacturing executive who has not been particularly optimistic in recent months, ‘the sky is not falling.’
“We identified a fairly high level of interest by railcar investors and lessors. However, this could be somewhat of a double-edged sword. While it appears there is no shortage of capital looking for a home, including new investors, some industry insiders are concerned that could lead to another wave of overbuilding in higher-demand railcars such as plastic-pellets covered hopper. One indicator of the still high level of interest in the space is conference attendance, down only modestly from last year, despite the ongoing contraction and near-consensus expectations for a challenging 2016.”