Essay About Purchase Of Its High Performance Train And Such Federal Funds

Amtrak Darden Case Study Analysis
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[pic 1]National Railroad Passenger Corporation (Amtrak): Acela FinancingCase BackgroundAmtrak was started with the aim of providing efficient rail services to the masses and it is presently a well-integrated service offering as part of the public transport infrastructure of USA. However, even after close to 30 years of its existence, it continues to remain unprofitable and rely on the subsidies being provided by the government and has never tried to wean itself off this dependence. Hence, the government’s out-of-the-blue ruling has given a rude shock to Amtrak as it is now expected to eliminate its reliance on such federal funds completely within the space of the coming few years.With this backdrop, Amtrak now has three financing options in front of it to fund the purchase of its high performance train sets ‘Acela’ –Issue a 20-year term bond underwritten by a major bank with its locomotives and train sets acting as collateralEnter into leveraged-lease structure being offered by BNY Capital Funding with Wilmington Trust acting as custodian and Export Development Corporation as the sole debt provider in this transactionContinue to rely on government’s funding as the purchase of Acela trains would be capital expenditure, which still would remain under the purview of government funding for AmtrakThere are several pros and cons to each alternative that need to be checked for balance and will require taking an overall view of the entire situation. Arlene Friner, the CFO of the company, would do well to do a detailed cost-benefit analysis of each option and select the most lucrative deal for Amtrak as this decision could have multiple repercussions on the very existence of the company.Critical ProblemsSome of the critical financial issues faced by Amtrak as per the case are:Amtrak, which is an organization that has never been profitable in its existence of almost 30 years, is now suddenly being expected to turn profitable within the space of a couple years even as federal grants will be rescinded. This seems to be an uphill task as Amtrak needs to rapidly develop a radical business plan that allows it to overcome its complacency and become a profit-making endeavour.At the centre of this effort would be ‘Acela’, the high-speed and high-performance train sets that Amtrak intends to buy. It is being positioned as a premium offering, but its acceptability among the users of Amtrak is yet to be tested, so the revenues it will bring in are difficult to anticipate.An important point to be noted from the income statement here is that about 50% of Amtrak’s expenses are comprised of benefits, wages and salaries – a cost that is only going to increase with the need of more personnel to man the additional trains. Also given that these are technologically advanced trains, Amtrak would need to incur significant training expenses as well to maintain a uniform level of service and to appropriately utilize the assets it is about to acquire.How the cash inflows due to Acela will weigh against the capital expenditures made on the same is tricky to predict. Thus it is difficult to verify the $180 million revenue target that is being expected to be achieved by the year 2002.Thus it is crucial to question if this is even the correct time to invest in such a capital-intensive initiative and by when will the company be able to break even and eventually become profitable on the back of this projectIn spite of the release of the Amtrak Reform and Accountability Act (ARAA), if Amtrak continues to rely on federal funds for maintaining its everyday operations, this would show Amtrak in extremely poor light and would sway the general public’s opinion against it as being a drain on the taxpayer’s money rather than being the profitable resource that it was intended to be when it had been established. This may draw the ire of the population and may result in calls for shutting down the whole enterprise even before it gets a chance to prove itself.Additionally, the federal funds can be put to better use than just purchasing new train sets by taking on riskier projects that would not be easily funded by other institutions. Since federal funds are a sure shot, it would be better to utilize them for projects that would find lesser takers for financing them rather than spending on the Acela project that has garnered a lot of interest in the financial markets considering it has the option of issuing bonds or taking up financing leases.Another factor that needs to be considered here is that, as soon government support is withdrawn, Amtrak’s credit ratings will plummet a few notches which will severely impact its credit-worthiness and thereby make it furthermore difficult for the company to secure financing from private financing optionsAmtrak had recently issued a debt instrument and thus, it would be rather problematic to find takers for another bond from the same issuer in such quick succession. Thus Amtrak’s treasurer’s fears may be justified that the market may already be saturated with Amtrak paper and thus may create low demand, thereby driving up the interest rates that are to be offered to attract potential bondholders at a time when Amtrak has been consistently making losses and any costlier financing would only make matters worse.Additionally, the increase in the debt on its books would worsen its debt/EBITDA leverage and interest coverage metrics, which are important markers of the financial health of a company. This could lead to potential downgrade of both the issuer and issue ratings of Amtrak, further compounding the problem of having to offer higher interest ratesEven without the impending debt (and with it, the regular interest payments) that it is planning to take up on its books, Amtrak is making losses. So how it is planning to manage its cash flows once it takes up the leveraged lease or bond semi-annual repayment schedule remains to be seen.So far Amtrak does not appear to have a concrete plan in place to maximize the revenue stream from Acela and ensuring that it will be sufficient enough to not only overcome the losses it has been incurring annually, but also the interest payments (in case of debt) or lease payments (in case of financing lease) it will add on to its expenses if its ambitious project goes throughShould Amtrak decide to go with the leveraged lease option, since the liability (and as a corollary, the assets bought) would not be on its balance sheet, it would not be able to depreciate the new train sets in the years following the purchase and thus would consequently need to pay a higher amount of tax as compared to other financing options.Also, since several parties (Amtrak the lessee, BNYCE the equity lessor, EDC the debt lessor and Wilmington Trust the third-party independent owner-trustee) are involved in the execution of the lease, it might lead to complications going forward as the goals of all the involved parties may not align at all times. Thus it would perhaps be wise to spend considerable time drawing up the terms of engagement with great clarity at the start to avoid any clashes later