A year after the merger of the Burlington Northern and Santa Fe railroads, the new entity is approaching the next stop in its financial and strategic evolution, and has no plans to ask commercial banks to get off the train.
"In the past, we had to deal with commercial banks and investment banks separately," said Pat Ottensmeyer, a senior vice president and chief financial officer at the Burlington Northern Santa Fe Railroad. "Now that commercial banks have securities capabilites, we can use them across the spectrum," he said.
And indeed, banks serving the booming and rapidly changing rail industry have scrambled to seize the opportunity to provide a significantly wider array of financial products to both large and small railroads.
In one of a series of huge transactions that have reshaped U.S. railroading in recent years, Burlington Northern and Santa Fe merged in a $3.85 billion deal, in the face of a hostile bid from Union Pacific Corp.
As they move into new areas of financial services, bankers have attempted to get in on the ground floor as huge changes have swept the once-stagnant rail industry.
"There is more one-stop shopping so that we are now bringing some competition to the bulge bracket Wall Street firms," said Francis M. Cox 3d, vice president at Chase Manhattan Bank, who has been handling rail industry relationships for the past decade.
Railroads like Burlington Northern have turned to the bank loan market as the pace of consolidation has picked up in recent years, creating opportunities for banks to win attractive business.
Chemical Banking Corp. (now part of Chase Manhattan Corp.) and J.P. Morgan & Co. led a $2.5 billion loan last year for the Fort Worth-based Burlington Northern. Part of that facility, a $1 billion, 364-day revolving credit, will be due for refinancing Nov. 22.
Burlington Northern, which has annual revenue of $18.2 billion, generally anticipates returning to the attractive bank loan market.
The bank loan market "continues to be very competitive, and our expectations are that it is slightly better than it was a year ago," said Mr. Ottensmeyer.
Analysts said deregulation and consolidation have been immensely successful for the rail industry, allowing it to eliminate redundant facilities and improve cost savings.
The consolidation process has created stronger bank customers, whose needs extend well beyond the multibillion-dollar loan syndication market.
"Railroads have returned to profitability," Mr. Ottensmeyer said. "The industry has gotten its cost structure significantly improved, and the level of profitability has been strong."
Charles M. Vincent, a railroad and banking industry analyst in Philadelphia at PNC Institutional Investment Services, said that the financial fundamentals at railroads have improved rapidly.
"Rails are getting better usage of their assets, getting by with as little as one third of their personnel and infrastructure and have made major improvements in safety," he said.
Philip Baggelaey, managing director at Standard & Poor's Ratings Group, explained that railroad credit quality has been gradually improving since rails were deregulated in 1981, and railroad equipment operations have some of the best safety records of any type of corporate bonds.
"It's amazing what has gone on," Mr. Vincent said. the nation's railroads, after years of decline and eventual bankruptcy and government- assisted restructuring "have literally gone from the 19th century to the 21st century without stopping in the 20th."
The Darwinian railroad struggle against overcapacity that other industries - most notably banking - are undergoing has also left room for the development of the smaller railroads.
The larger railroads have divested their short rail lines, which midsize railroads have eagerly snapped up. The situation is analogous to community banks buying up some of the isolated branches of growing regional banks.
Bruce Flohr, chief executive officer of Railtex in San Antonio, estimates that approximately 20,000 miles of track will be sold to growing short rail companies like his.
Such companies can reduce the costs of operating branch lines, but win more business by "going out and calling on local shippers and getting business away from trucks and back onto railroads," Mr. Flohr said.
To be sure, while executives at Railtex are comfortable dealing with bigger, stronger banks, they did not express the same level of confidence in commercial banks' abilities to provide nontraditional services.
"The only concern I have is that I see banks getting into the corporate finance end of things," said Laura D. Davies, Railtex's chief financial officer.
"Investment bankers and merchant bankers are generally very savvy in their own business, and we like to see the banks stick to their knitting," said Ms. Davies.