Kansas City Southern, operator of the smallest of North America’s Class I railroads, is redesigning a federal loan request with an eye to the Obama administration’s focus on making rail loans that deliver broad public benefits.
The company told a House subcommittee it would revamp what had been a debt-refinancing application for $125 million from the Railroad Rehabilitation and Improvement Financing. Instead, it will seek a long-term, low-interest federal credit for various capital projects that include government priorities such as collision avoidance or “positive train control” technology, and “green” locomotives that emit less exhaust.
The timing and amount KCS will request in its amended plan still must be determined, but the changes mean the application it first tendered to the Federal Railroad Administration last July may not be finalized for federal consideration for weeks or months to come.
That could put it on a schedule for potential approval late this year. The Department of Transportation says a mandated 90-day clock, for it to finalize loan decisions, only kicks in once an application has cleared early procedures. But first, the DOT must receive the revised submission, and put it through a financial analysis.
If the revised loan request moves ahead soon, federal approval could give KCS a new source of funds for capital investments into 2012, if not earlier.
KCS’s application would be the second to undergo big changes in recent months.
In January, the Alameda Corridor Transportation Authority, which operates the express train route from Los Angeles and Long Beach dock areas to cross-country train connections near downtown Los Angeles, winnowed a RRIF loan request from $553 million to $83.7 million before it moved along. ACTA first applied for the larger credit last spring; DOT officials say the revised loan request is nearing final approval.
The ACTA loan and a KCS application that ends up near its earlier $125 million request, if approved, would be two of the largest credits the RRIF program has issued.
Although the account is authorized by Congress to lend up to $35 billion, it has approved only about $1 billion since it began making loans in 2002, and some of the largest have been repaid in full. The FRA does not regularly report repayments, and congressional staff said only about $430 million in RRIF credit is outstanding.
When KCS sought the RRIF refinancing credit last summer, it was actually the second time it sought RRIF money for the same underlying infrastructure needs. In June 2007, KCS asked the FRA to let it borrow about $100 million as it prepared an ambitious and costly upgrade of an unused rail corridor it owned south of Houston, between Victoria and Rosenberg, Texas.
The work would let KCS stop using an expensive, time-consuming longer route over Union Pacific Railroad’s network, and allow it to build up new intermodal service to and from Mexico. At the time, Chairman and CEO Michael R. Haverty called the project “one of the most strategically important actions our company could undertake.”
With its timetable fast approaching to start work in 2008, but with the RRIF process moving slowly, KCS eventually withdrew that application and financed the work instead from higher-cost private capital. RRIF loans charge interest at the federal government’s own low cost of capital, and the borrower pays a risk premium into a default-risk account at the U.S. Treasury.
So KCS financed the project at a higher cost, but opened the new line in 2009 and immediately began to recoup operating cost savings and build more business. KCS drafted the RRIF loan application to refinance a big part of the more than $170 million in private debt for the Texas work.
The DOT last September issued a Federal Register notice to would-be borrowers, detailing how it would use the RRIF program. Although that guidance was meant to spur RRIF loan interest, some rail industry officials said its emphasis on tying rail loans to broader public benefits — from “livability” of nearby communities to emissions reductions and safety improvements — added a new set of application factors. And the DOT generally discouraged loans for debt refinancing unless it also spurred new construction and job creation.
Seeing this, KCS regrouped. With a balance sheet strengthened by economic recovery, gains from the Texas line work and a recent stock offering, it paid off outstanding debt that cost as much as 12.5 percent.
Now KCS plans to tie its revised RRIF loan submission to new construction plans, livability effects, low-emissions power units, grade-crossing upgrades and government-mandated PTC capital investments. That would make any potential refinancing piece a small part of the total request.
Company officials think the new plan is on track with the FRA, and with the administration’s list of policy goals to help target RRIF lending. KCS told the House panel, “FRA staff has accommodated this shift in focus and is currently working with KCS on obtaining the necessary supplemental information. In light of the public safety and other public benefits that would flow from approval of such a refocused KCS grant application, KCS believes that a loan award would be in the public interest.”
Contact John D. Boyd at email@example.com.