National Railroad Passenger Corporation ("Amtrak"): Acela Financing

Abstract

In the late 1990s, the National Railroad Passenger Corporation (Amtrak) faced a rude awakening as Congress stipulated that it eliminate its reliance on federal subsidies by 2002. In response, Amtrak drew up a plan for self-sufficiency, the centerpiece of which was a new high-speed passenger service that, it was hoped, would boost revenue enough to make Amtrak self-sufficient by 2002. To run this new service, Amtrak needed to purchase $750 million worth of new locomotives and train sets in 1999. Three alternatives were available for funding the purchase: debt financing, lease financing, or reliance on federal sources. The case opens with Amtrak's CFO instructing her staff in April 1999 to review a leveraged-lease proposal that has just been submitted by BNY Capital Funding LLC. The objectives of the case are to introduce students to financial leases as a financing alternative, explore the lease-versus-buy decision and the conditions under which financial lease arrangements make sense, and exercise skills in the valuation of financial leases.

Excerpt

UVA-F-1363

Version 1.6

National Railroad Passenger Corporation (“AMTRAK”):

Acela Financing

On April 30, 1999, Arlene Friner, CFO of Amtrak, instructed her Treasury staff to review a leveraged-lease proposal from the BNY Capital Funding LLC (BNYCF). Several weeks earlier, Amtrak and its adviser, Babcock & Brown Financial Corporation, had invited financial institutions to submit lease-financing proposals for Amtrak's planned purchase of locomotives and high-speed train sets. The equipment would be utilized on the “Acela” line, Amtrak's new brand that was designed to differentiate Amtrak passenger trains and service in the Northeast Corridor from the existing service. Acela, scheduled to begin service in late 1999, promised to offer faster trip times and premium service (Exhibit 1).

Friner and her staff had gone over the proposals and agreed that BNYCF was among those that offered the best terms. Now, she had to decide whether Amtrak should finance the equipment purchases using BNYCF's leveraged-lease proposal or borrow money and purchase the equipment on its own.

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Keywords: leasing, debt policy, financing, valuation