In re Chicago, Missouri and Western Ry. Co.
| Decision Date | 24 August 1988 |
| Docket Number | Bankruptcy No. 88 B 5141. |
| Citation | 90 BR 344 |
| Parties | In re CHICAGO, MISSOURI AND WESTERN RAILWAY COMPANY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Daniel Murray, of Jenner & Block, Chicago, Ill., trustee.
Ross & Hardies, Chicago, Ill., for the lenders.
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON THE BORROWING APPLICATION AS MODIFIED OF DANIEL R. MURRAY, TRUSTEE OF THE DEBTOR, CHICAGO, MISSOURI AND WESTERN RAILWAY
The court has held a hearing on the Borrowing Application as modified filed by Daniel R. Murray, the duly appointed and acting Trustee of the Debtor, Chicago, Missouri and Western Railway Company seeking orders permitting him as Trustee to enter into several loan agreements with the State of Illinois or related entities more particularly described in these Findings of Fact and Conclusions of Law. At that hearing, the Debtor's secured Lenders, Citicorp North America, Inc. and Heller Financial Services, Inc. also made objections to any such loans. In accordance with the applicable rules, the court now makes Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
The railroad line owned and operated by the Chicago Missouri & Western Railway Company ("CM & W") was chartered in the late 1840's. (The CM & W is herein referred to as "CM & W", "Debtor" or "Railroad".) Passenger service commenced in the mid-1850's. Four owners have operated the line since its inception.
The CM & W was incorporated under the laws of the State of Illinois. It is a wholly owned subsidiary of the Venango River Corporation ("Venango"). CM & W provides common carriage between the railroad gateways of Kansas City, St. Louis and Chicago. Its line extends for over 631 miles. CM & W provides terminal services for the Illinois Central Railroad, formerly the Illinois Central and Gulf Railroad ("IC") at East St. Louis. This service includes the receipt and dispatch of road freight trains, interchange pickup and delivery, and servicing of IC motive power and rolling stock.
The CM & W route is the shortest route between St. Louis and Chicago. It is well engineered, having minimal curvature and few grades. As a result, the route provides for fuel efficiency and less wear and tear on railroad cars.
The St. Louis to Kansas City line is a sturdy railroad suitable for the type of tonnage it is currently handling, as well as for any future tonnage it is likely to handle.
There are four different classes of traffic served by the CM & W: (1) local traffic (i.e., traffic which is loaded on at CM & W stops and unloaded at CM & W stops); (2) forwarded traffic (i.e., where CM & W originates the traffic, which is then completed by another carrier); (3) receipt traffic (i.e., the reverse of forwarded traffic); and (4) overhead traffic (i.e., traffic that is neither loaded nor unloaded on the CM & W).
The CM & W serves a wide variety of customers, from commercial giants like Continental Grain and Con-Agra, that deal on a world-wide scope, down to smaller local entities.
The commodities the CM & W handles are primarily intermodal traffic (trailers carried on flat cars), grain, food and food products, steel, scrap, petroleum, chemicals, plastic products, and some aggregates.
The rail lines of CM & W were purchased in April of 1987 from the IC, together with trackage rights.
The purchase was funded by a loan to Venango from Citicorp North America and Heller Financial Services, Inc., (collectively, the "Lenders"). The court, for the purposes of these findings has accepted the relationship of the Lenders one to the other to mean that the knowledge of one was the knowledge of the other. Each Lender or its parent was and remains one of the free world's largest banking institutions.
The Lenders' original loan for the purchase of the CM & W line was $86,650,000. Venango made no more than a $55,000 equity contribution to the capitalization of the CM & W. Of the total loan, approximately $79,400,000 was designated for purchase of the IC assets, $6,800,000 for transaction expenses associated with the loan, and $500,000 for working capital. Additional subsequent loans have resulted in an indebtedness to the Lenders of approximately $100,000,000. of principal, which with interest now exceeds $107,000,000.
CM & W's original debt to equity ratio was between 150,000% and 200,000%, exceeding the customary debt-to-equity ratio for reporting railroads in the United States which is in the 40% range.
Prior to making the Loan, Lenders:
(i) recognized that "there is no junk bond or equity cushion for us to rely upon" in the event of default by the CM & W;
(ii) recognized that the intended loan was a high risk, with the possibility of high reward;
(iii) recognized that they were providing in substance the total amount of the Debtor's capitalization;
(iv) expressed concern regarding: (a) the unavailability of historical financial information on the CM & W; (b) the considerable time a workout of the loan might take; and (c) potential competition from trucks and other railroads;
(v) recognized that although they were providing virtually all of CM & W's capitalization, they were compensated for this risk via the rights they obtained through an equity position with the Debtor's parent of over sixty percent (60%).
(vi) employed and consulted one rail consultant, Mr. Harry Meislahn; examined and reviewed a traffic study conducted by DNS Associates, a financial forecast prepared by Arthur Andersen & Company, and traffic studies and forecasts made by Woodside Consulting Group;
(vii) recognized that because CM & W was a newly formed entity, a potential existed for unanticipated problems, including cash shortfalls, traffic diversions and cost overruns;
(viii) recognized that CM & W would be exposed to competition from other railroads and other modes of transportation, that over-the-road trucks represented the greatest competition due to their speed and competitive rates, and that the continuing consolidation of the railroad industry could reduce the number of "friendly" railroad connections and increase traffic diversions away from the CM & W;
(ix) recognized that the CM & W track structure from Joliet to St. Louis was in need of repair and rehabilitation, the cost of which would be at least $7,000,000.00 over five years, and that CM & W expected to invest $30,000,000.00 in track rehabilitation;
(x) recognized that historical financial numbers corresponding to the CM & W line were not available because the IC had kept its operating records on a consolidated basis which could not be broken down by line segment, and that the limited traffic data was provided to the Lenders was for 1984, but not for 1986 or 1987;
(xi) recognized that there was no complete historical financial statement for the specific assets that became CM & W, as the IC did not maintain income statements, balance sheets, and other financial statements relating to specific portions of their property;
(xii) recognized the risk that upon its sale, many of the CM & W's revenue sources handled at one point by the IC might be diverted or might not materialize;
(xiii) recognized that in the event of a default the time required for regulatory approval to sell all or parts of the line could result in a delay as long as two years;
(xiv) recognized that abandonment or liquidation of the CM & W would be a difficult course to pursue because of the jurisdiction of the Interstate Commerce Commission ("ICC");
(xv) recognized that in the event of bankruptcy, the court and an appointed trustee would be charged with considering the public interest in addition to the economic interests of the railroad and its creditors and shareholders;
(xvi) recognized that under the Amtrak contract, CM & W would be prohibited from disposing of or abandoning its service of Amtrak without Amtrak's permission, and that such provision effectively limited the method of liquidating the loan to a sale of the railroad as a going concern, thereby precluding the possibility of either abandoning or liquidating the railroad;
(xvii) recognized that even without the Amtrak contract, it would be very difficult to abandon or liquidate the CM & W line because of extensive ICC review and the fact that the majority of past rulings had steered away from these alternatives;
(xviii) recognized that selling segments of the CM & W as a going concern would be more realistic, quicker and more lucrative than liquidating its fixed assets;
(xix) recognized that regional railroads consistently sold higher than their net liquidation values;
(xx) recognized that Amtrak's agreement might be viewed as a revenue enhancement for the traffic it guaranteed in the event that the railroad had to be sold in the future.
(xxi) recognized that newly formed regional railroads generally enjoy lower labor costs than the Class 1 lines, and specifically, that Venango had successfully negotiated labor agreements which would reduce labor costs and provide the benefits of flexible work rules and the ability to subcontract work;
(xxii) estimated the liquidation value of the CM & W assets to be $81,442,000.
The original experts who predicted the revenues and profits for the CM & W at its inception failed to take into account the fact that the IC agreements virtually precluded CM & W from realizing the revenue that was being projected.
At the time CM & W was formed, organized labor argued that the transaction was so economically fragile it could likely lead directly to abandonment. Organized labor therefore interpreted the transaction as a thinly veiled artifice to avoid the labor protection obligations normally imposed upon a Class 1 carrier such as IC.
On April 1, 1988, the CM...
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