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Case:NationalRailroad
PassengerCorporation(Amtrak):
AcelaFinancing
1
BNCYFs
LeveragedLease
proposal
Borrow
Government
Funding
2
BenefitstoLessee
Leasing100%
financing
Offerscashflow
benefits
Offbalancesheet
financing
Avoidanceofloan
covenants
Taxplanning
Creationof
workingcapital
Hedgeagainstrisk
ofinflationand
obsolescence
Fastandflexible
financing
Toovercome
monopolyact
Usedinnon
prioritysectorand
servicesector
Possibilityof
evadingcapital
expenditures
Toavoidcapital
approval
procedures
CreatingMoreValueforLease
Taxratedifferences
betweenlessorand
lessee
Realizingdepreciation
deductionbylessorand
lessee
Assetacquisitionand
maintenancecost
specializationorscaleof
economies
Realizingsalvagevalues
superiorityof
propertyknowledge
Leverageabilities
betweenlessorand
lessee differencein
interestdeductibility
Littleoptionsholding
significantvalue
Lessorcanpurchase
equipmentmorecost
effectively;tax
deductionsforInterest
andDepreciation
Tailoredtomeet
lessorsneeds heavier
paymentsinDecthanin
June
BenefitstoLessor
Additional
financial
product
Reducesrisk
Increases
profitability
Accelerates
sales
Higher
leverage[Max.
of10:1]
Nogestation
period
Lowcostof
operations
5
82
13
5
79
14
7
78
15
7
80
14
5
100
100
100
100
61
11
4
24
100
94
25
11
3
6
13
17
6
-17
159
-59
83
21
11
5
6
10
15
2
79
21
12
4
7
10
15
2
78
22
11
3
6
10
14
2
63
16
8
2
4
8
13
1
154
-54
149
-49
146
-46
-59
-54
-49
-46
115
-15
25
-41
25
11
26
10
18
8
36
-18
2
28
-21
13
8
3
2
27
-19
36
-23
9
6
4
19
-22
11
EquipmentFunding
No. Cost Aggregate Cost
High-speed locomotives 15 7,161,300 107,419,500
Train sets
20 32,129,050 642,581,000
Total 750,000,500
19
TermsofBorrowing
Majorbank
offeredto
underwriteabond
Term:20year
Coupon:6.75
percentper
annum
Semiannual
payments:
$12.303million
22
TermsofBorrowing
Paymentbeginning:
Dec1999
Collateralfortheloan:
locomotivesand
trainssets
Drawback
Hadrecentlyissueddebt
Publicmarketmight
alreadybesaturatedwith
Amtrakpaper
23
LeveragedLease
Lessee
Equipment
Equity Investor
BNY Capital Funding, LLC
Lease Payments
Proposedby:BNCYF
(Whollyownedsubsidiary
oftheBankofNewYork)
Lenders advance $214.3
million (80% of equipment
value) in exchange for
first claim on lease
payments on locomotives
and trains ets
Owner Trustee
Wilmington Trust
Lender
Export Development
Corporation (EDC) of
Canada
Lessor:BNCYF(BNCYF:
20%ofrequiredfunds;
wouldreceivelease
paymentsonlyafter
debtorhadbeenpaid)
Solelenderanddebt
provider:Export
DevelopmentCorporation
(EDC)ofCanada(EDC:
80%ofrequiredfunds)
24
LeveragedLease
Equityanddebt
fundsonclosing
wouldflowthrough
WilmingtonTrust..,
Anindependentthirdpartytothetransaction
Actedasownertrustee
Rentalpaymentswouldflowsthrough
WoulddistributethepaymentstoeitherEDCor
BNCYF
Amtrak..,
Attheendofleaseterm,couldbuyequipment
fromBNCYFathigherterminalfairmarketvalue
Hadanearlybuyoutoption,couldacquirethe
equipmentfromBNCYFin2017for$126.6
million
25
FederalSources
Couldusefederal
moniestofund
equipment
purchases
Congressmandated
nottousefederal
subsidiesfor
operatingexpenses
Congressagreedto
fundforcapital
appropriations
Federalgrants
consideredas
premiumand
preciouscommodity
26
RelyonFederalSources
Preferredtousegrantmoneytofund
capitalprojectsthatcouldnotbe
easilyandcosteffectivelyfinanced
suchas..,
Safety
Rightofway
Infrastructurerelatedprojects
Majoroverhauls
Trainsetsandotherrollingstock,
couldbeveryefficientlyfinanced
throughcapitalmarkets
27
28
FinancialLease
Totallease
rental>asset
price
Leaseperiod=
lifeofasset
Purpose:
financingan
asset
Alsocalled
capitallease
Irrevocableby
bothparties
Lesseebears:
maintenance,
insurance,taxes
31
FinancialLease
Minleaserental=rate~
equaltolesseemarginal
costofdebt
Payoutwillinclude;
assetcost,costof
financing,lessor
overhead,rateofreturn
Similartomortgage
loans
32
TestforCapitalizingLease
Ownershiptest:
ownershiptransferred
tolesseeattheendof
lease
Alternativeownership
test:lesseehasrightto
buyassetataprice
substantiallybelowfair
marketprice
Economiclifetest:lease
term>=75%of
estimatedeconomiclife
oftheasset
Valuetest:PVof
minimumlease
payment>=90%offair
marketvalueofassetat
thetimeoflease
33
OperatingLease
Nofixedfuture
commitment
Cancelableby
lesseeonnotice
Purpose:using
anasset
Lessorbears:
maintenance,
insurance,taxes
34
TypesofFinancialLeases
Directleases Lessor
purchasedequipment
orassetandrentedit
outtolessee
Saleandleaseback
Crossborder
(international)lease
Leveragedleases
Foreigntoforeign
lease
35
AssetsSuitableforLeveragedLease
Airplane
Satellites
Ships
Rails
Offshore
drinking
Nuclear
machines
Power
generation
plants
Large
chemical
plants
Gaspipelines
Basicdocumentsusedin
LeveragedLease
Participationagreement
signedbyallparties
Trustagreement
Indenturetrust
Leaseagreement for
taxshieldassociated
withassetownership
andresidualvalueof
asset
37
DirectLease
Hybridof
operatingand
financiallease
Payoutwillnot
include;Repairs,
Maintenance,and
Taxes
Duration:3or
moreyears
Lessorholdsthe
title
Atexpiration:
lesseemayrenew
orpurchase
Fullpayout
38
TypesofLeases
Masterlease:blanket
leasing
Percentagelease:flat
rental+additional
rentaloverand
abovearevenue
Wetanddrylease
usedinairline
industry
Triplenetlease net
ofinsurance,
maintenance,taxes.
39
TypesofLeases
Closedendandopen
endlease ownership
possibilitiesopenedto
lessee
Swaplease
exchangeassetsin
needofmajorrepairs
Fullpayoutlease
Truelease fullygoes
withthelocalrules
andregulationsofa
country
40
TypesofLeases
Washlease tax
benefittransferred
toinvestor
Upgradelease
usedin
obsolescence
Capitallease to
transferownership
tolesseeattheend
ofleaseterm
Employeelease
transferring
employeestoLessor
andleasingitback
41
Leasevs.Buying
Increasescompanysdebt
capacity
Publicmarketissaturated
withAmtrakdebt
Alsoincludesinterest
component
Investorswillnotrecognizea
financialleaseliabilityasa
formofdebt?Liabilities:PV
offinancialleasepayments
andAssets:PVoffinancial
leasepayments
Possibilityofincreasingbook
incomebuyavoiding
depreciationandinterest?
Leasepaymentsincludes
depreciationandinterest
Inworldofnotaxes;leasing=
borrowandbuy
Leaseamounthigheror
lowerindifferencepoint
wouldresultinvalue
destructionforbothparties
42
NPVAnalysisofLease
Cashflows
Discountrate
Outflow:leasepayments
Notaxshieldsonleasepayments
Amtrakhasnotaxbenefits
Notentitledforresidualvalueof
$40.2million
WACC:11.8%
Interestrate:6.75% appropriate
ratetobeused
43
6.75%
0.00%
6.75%
0
1
(0.20)
0.00
(0.20)
2
(3.76)
0.00
(3.76)
3
(7.97)
0.00
(7.97)
4
(10.02)
0.00
(10.02)
5
(10.32)
0.00
(10.32)
6
(8.62)
0.00
(8.62)
7
(10.36)
0.00
(10.36)
8
(9.83)
0.00
(9.83)
9
(10.37)
0.00
(10.37)
10
(8.61)
0.00
(8.61)
(0.20)
(0.19)
11
(10.42)
0.00
(10.42)
(3.76)
(3.52)
12
(9.68)
0.00
(9.68)
(7.97)
(7.21)
13
(10.44)
0.00
(10.44)
(10.02)
(8.78)
14
(8.58)
0.00
(8.58)
(10.32)
(8.74)
15
(11.60)
0.00
(11.60)
(8.62)
(7.06)
16
(7.34)
0.00
(7.34)
(10.36)
(8.21)
17
(11.47)
0.00
(11.47)
(9.83)
(7.54)
18
(9.48)
0.00
(9.48)
(10.37)
(7.69)
19
(15.79)
0.00
(15.79)
(8.61)
(6.18)
20
(7.77)
0.00
(7.77)
(10.42)
(7.23)
21
(20.22)
0.00
(20.22)
(9.68)
(6.50)
22
(5.07)
0.00
(5.07)
(10.44)
(6.78)
23
(15.87)
0.00
(15.87)
(8.58)
(5.39)
24
(4.12)
0.00
(4.12)
(11.60)
(7.05)
25
(22.81)
0.00
(22.81)
(7.34)
(4.31)
26
(3.34)
0.00
(3.34)
(11.47)
(6.52)
27
(23.65)
0.00
(23.65)
(9.48)
(5.21)
28
(2.66)
0.00
(2.66)
(15.79)
(8.41)
29
(24.06)
0.00
(24.06)
(7.77)
(4.00)
30
(1.96)
0.00
(1.96)
(20.22)
(10.07)
31
(20.02)
0.00
(20.02)
(5.07)
(2.44)
32
(6.07)
0.00
(6.07)
(15.87)
(7.40)
33
(6.29)
0.00
(6.29)
(4.12)
(1.86)
34
(12.29)
0.00
(12.29)
(22.81)
(9.95)
35
(21.39)
0.00
(21.39)
(3.34)
(1.41)
36
(6.55)
0.00
(6.55)
(23.65)
(9.65)
37
(18.11)
0.00
(18.11)
(2.66)
(1.05)
38
(8.61)
0.00
(8.61)
(24.06)
(9.19)
39
(13.47)
0.00
(13.47)
(1.96)
(0.72)
40
(8.86)
0.00
(8.86)
(20.02)
(7.15)
41
(6.65)
0.00
(6.65)
(6.07)
(2.10)
42
(2.04)
0.00
(2.04)
(6.29)
(2.10)
43
(0.00)
0.00
(0.00)
(12.29)
(3.98)
44
(21.39)
(6.70)
45
(6.55)
(1.98)
46
(18.11)
(5.30)
47
(8.61)
(2.44)
48
(13.47)
(3.69)
49
(8.86)
(2.35)
50
(6.65)
(1.71)
(2.04)
(0.50)
(0.00)
(0.00)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
(220.26)
44
Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy
10
(4.25)
(8.05)
0.00
0.00
(4.40)
(7.91)
0.00
0.00
(12.30)
(11.90)
11
(4.55)
(7.76)
0.00
0.00
(12.30)
(11.51)
12
(4.70)
(7.60)
0.00
0.00
(12.30)
(11.14)
13
(4.86)
(7.45)
0.00
0.00
(12.30)
(10.77)
14
(5.02)
(7.28)
0.00
0.00
(12.30)
(10.42)
15
(5.19)
(7.11)
0.00
(12.30)
(10.08)
16
(5.37)
(6.94)
0.00
(12.30)
(9.75)
17
(5.55)
(6.76)
0.00
(12.30)
(9.43)
18
(5.73)
(6.57)
0.00
(12.30)
(9.13)
19
(5.93)
(6.38)
0.00
(12.30)
(8.83)
20
(6.13)
(6.18)
0.00
(12.30)
(8.54)
21
(6.33)
(5.97)
0.00
(12.30)
(8.26)
22
(6.55)
(5.75)
0.00
(12.30)
(7.99)
23
(6.77)
(5.53)
0.00
(12.30)
(7.73)
24
(7.00)
(5.31)
0.00
(12.30)
(7.48)
25
(7.23)
(5.07)
0.00
(12.30)
(7.23)
26
(7.48)
(4.83)
0.00
(12.30)
(7.00)
27
(7.73)
(4.57)
0.00
(12.30)
(6.77)
28
(7.99)
(4.31)
0.00
(12.30)
(6.55)
29
(8.26)
(4.04)
0.00
(12.30)
(6.33)
30
(8.54)
(3.76)
0.00
(12.30)
(6.13)
31
(8.83)
(3.48)
0.00
(12.30)
(5.93)
32
(9.13)
(3.18)
0.00
(12.30)
(5.73)
33
(9.43)
(2.87)
0.00
(12.30)
(5.55)
34
(9.75)
(2.55)
0.00
(12.30)
(5.37)
35
(10.08)
(2.22)
0.00
(12.30)
(5.19)
36
(10.42)
(1.88)
0.00
(12.30)
(5.02)
37
(10.77)
(1.53)
0.00
(12.30)
(4.86)
38
(11.14)
(1.17)
0.00
(12.30)
(4.70)
39
(11.51)
(0.79)
0.00
(12.30)
(4.55)
40
(11.90)
(0.40)
0.00
(12.30)
(4.40)
41
(12.30)
(4.25)
42
(12.30)
(4.11)
43
(12.30)
(3.98)
44
(12.30)
(3.85)
45
(12.30)
(3.72)
46
(12.30)
(3.60)
47
(12.30)
(3.49)
48
(12.30)
(3.37)
49
(12.30)
(3.26)
50
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
40.19
40.19
7.64
Sums
(102.97)
(73.88)
(53.01)
(38.04)
7.64
(260.26)
46
NPVAnalysisofLeasevs.Borrowand
Buy
NPVofinterestand
principalrepayment
cashflowsdiscounted
bycostofdebtwill
resultincostofdebt
DifferenceinNPV
Residualvalueclaimof
Amtrakattheendof25
years
Leasingissuperior
cheaperby$40million
47
NPVAnalysisofLeasevs.
BorrowandBuy
No Tax
Lease
49
6.75%
38.00%
4.19%
0
1
(0.20)
0.08
(0.12)
2
(3.76)
1.43
(2.33)
3
(7.97)
3.03
(4.94)
4
(10.02)
3.81
(6.21)
5
(10.32)
3.92
(6.40)
6
(8.62)
3.27
(5.34)
7
(10.36)
3.94
(6.42)
8
(9.83)
3.73
(6.09)
9
(10.37)
3.94
(6.43)
10
(8.61)
3.27
(5.34)
(0.12)
(0.12)
11
(10.42)
3.96
(6.46)
(2.33)
(2.24)
12
(9.68)
3.68
(6.00)
(4.94)
(4.64)
13
(10.44)
3.97
(6.47)
(6.21)
(5.72)
14
(8.58)
3.26
(5.32)
(6.40)
(5.77)
15
(11.60)
4.41
(7.19)
(5.34)
(4.72)
16
(7.34)
2.79
(4.55)
(6.42)
(5.56)
17
(11.47)
4.36
(7.11)
(6.09)
(5.16)
18
(9.48)
3.60
(5.87)
(6.43)
(5.34)
19
(15.79)
6.00
(9.79)
(5.34)
(4.34)
20
(7.77)
2.95
(4.81)
(6.46)
(5.14)
21
(20.22)
7.69
(12.54)
(6.00)
(4.68)
22
(5.07)
1.93
(3.14)
(6.47)
(4.94)
23
(15.87)
6.03
(9.84)
(5.32)
(3.98)
24
(4.12)
1.57
(2.56)
(7.19)
(5.27)
25
(22.81)
8.67
(14.14)
(4.55)
(3.27)
26
(3.34)
1.27
(2.07)
(7.11)
(5.00)
27
(23.65)
8.99
(14.66)
(5.87)
(4.05)
28
(2.66)
1.01
(1.65)
(9.79)
(6.61)
29
(24.06)
9.14
(14.91)
(4.81)
(3.18)
30
(1.96)
0.74
(1.21)
(12.54)
(8.12)
31
(20.02)
7.61
(12.41)
(3.14)
(1.99)
32
(6.07)
2.31
(3.76)
(9.84)
(6.11)
33
(6.29)
2.39
(3.90)
(2.56)
(1.55)
34
(12.29)
4.67
(7.62)
(14.14)
(8.43)
35
(21.39)
8.13
(13.26)
(2.07)
(1.21)
36
(6.55)
2.49
(4.06)
(14.66)
(8.38)
37
(18.11)
6.88
(11.23)
(1.65)
(0.92)
38
(8.61)
3.27
(5.34)
(14.91)
(8.18)
39
(13.47)
5.12
(8.35)
(1.21)
(0.65)
40
(8.86)
3.37
(5.50)
(12.41)
(6.53)
41
(6.65)
2.53
(4.13)
(3.76)
(1.94)
42
(2.04)
0.77
(1.26)
(3.90)
(1.97)
43
(0.00)
0.00
(0.00)
(7.62)
(3.77)
44
(13.26)
(6.43)
45
(4.06)
(1.93)
46
(11.23)
(5.22)
47
(5.34)
(2.43)
48
(8.35)
(3.72)
49
(5.50)
(2.40)
50
(4.13)
(1.76)
(1.26)
(0.53)
(0.00)
(0.00)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
(173.90)
50
Discount rate
Tax rate
After-tax interest rate
Useful life of equipment
Debt
Purchase of equipment
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
Principal repayment
Interest expense
Interest tax shields
Depreciation tax shield
Residual value
Total cash flows
Discounted flows @ KD
NPV of Borrow-and-Buy
10
(4.25)
(8.05)
3.06
4.55
(4.40)
(7.91)
3.00
4.55
(1.59)
(1.56)
11
(4.55)
(7.76)
2.95
4.55
(1.64)
(1.57)
12
(4.70)
(7.60)
2.89
4.55
3.51
3.30
13
(4.86)
(7.45)
2.83
2.27
3.47
3.19
14
(5.02)
(7.28)
2.77
2.27
(0.14)
(0.13)
15
(5.19)
(7.11)
2.70
(0.19)
(0.17)
16
(5.37)
(6.94)
2.64
(2.78)
(2.41)
17
(5.55)
(6.76)
2.57
(2.83)
(2.40)
18
(5.73)
(6.57)
2.50
(4.70)
(3.90)
19
(5.93)
(6.38)
2.42
(4.75)
(3.86)
20
(6.13)
(6.18)
2.35
(4.81)
(3.83)
21
(6.33)
(5.97)
2.27
(4.87)
(3.80)
22
(6.55)
(5.75)
2.19
(7.21)
(5.51)
23
(6.77)
(5.53)
2.10
(7.27)
(5.44)
24
(7.00)
(5.31)
2.02
(9.60)
(7.04)
25
(7.23)
(5.07)
1.93
(9.67)
(6.94)
26
(7.48)
(4.83)
1.83
(9.74)
(6.85)
27
(7.73)
(4.57)
1.74
(9.81)
(6.76)
28
(7.99)
(4.31)
1.64
(9.88)
(6.67)
29
(8.26)
(4.04)
1.54
(9.96)
(6.58)
30
(8.54)
(3.76)
1.43
(10.03)
(6.50)
31
(8.83)
(3.48)
1.32
(10.98)
(5.78)
41
(11.10)
(5.72)
42
(11.21)
(5.66)
43
(11.33)
(5.61)
44
(11.46)
(5.55)
45
(11.59)
(5.50)
46
(11.72)
(5.45)
47
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
(10.77) (10.87)
(5.91)
(5.84)
39
40
(11.51) (11.90)
(0.79) (0.40)
0.30
0.15
(11.86) (12.00)
(5.40)
(5.35)
48
49
0.00
0.00
0.00
0.00
(12.15)
(5.31)
50
40.19
40.19
14.27
Sums
(9.50)
(59.40)
(61.56)
(55.32)
14.27
(171.51)
51
ValueofEarlyBuyoutOption
Amtrakwouldacquireequipmentfrom
BNYCFin2017for$126.6million
Avgyieldon30
yearbond:5.5%
Assumedmarket
equityweight:
100%
Assumedbeta:1
Marketrisk
premium:6%
Type:simpleEuropeancalloption
Valuationmodel:BSM
Optionvalueishighlysensitiveto
WACC
Costofequity:
11.5%[referred
incaseis11.8%]
52
Underlying as et value $17 Mil ion (Present value of strike price of 126.6 mil ion 18 years from now discounted at WACC 11.8%)
Strike price $126.6 Mil ion Purchase price os asset
Maturity 18.5 years (June 1999 to Dec 2017)
Risk-fre rate
6% 5%to 6%
Volatil ty
25% Footnote 10; volatility estimate of locomotive and train cars
Option Vlaue (BSM)$2.97 Mil ion
53
AdjustedNPV
No Tax
Tax Rate of
38%
Lease
-$217.29
million
-$170.93
million
Borrowand-buy
-$260.26
million
-$171.51
million
54
BenefitsofDebt
BeneficialbasedonEPS,
DPS,ROE,Earnings
availabletosecurity
holders
Reducedtaxes
Financialadvertising
signalingmore
aggressivefinancial
policies
Capitalstructurechange
iseasilyreversible[can
paydown(ifrequired)
thedebtquicklywith
internalfunds]
BenefitsofDebt
Noneedfor
accesstodebt
markets
Noconcernabout
creditrationingat
highdebtratios
Possessesplenty
ofcollateral
DisadvantagesofDebt
IncreaseinD/Aratioraisesthe
costofbothdebtandequity
Moredebt=increasesriskof
financialdistress+higherinterest
rates
Betaincreasesandfinancial
leverageincreases
Equilibriumrecapitalizationprice
isthepricethatisexpectedto
prevailaftertherepurchase,and
itisthepricethatcompany
shouldpayforthesharesifitisto
befairtoallshareholders
DebtFinancingDisciplinesManagers
Controloninvestinginriskprojects
Higherdebtrequirementsforcesmanagertoearnmoreto
servicedebt
HighdebtpaymentsinLBOforcemanagerstoconservecash
byeliminatingunnecessaryexpenditures
Morecarefulwithshareholdersmoney
MarketEffectofNewDebt
Signaling
effect
Stockholdersopiniononexpectationof
insiders
Incentive
effects
Bindmanagementtodeliverpredictable
operatingresultsinordertoservicethe
debt
Clientele
effects
Investorsmaybailoutofstock;allowing
otherstobuyin
Leasingvs.Buying
60
IncrementalCashFlows
61
LeveragedLease
62
DecisionTreeforanExploration
Projects
63