Lead Manager

SECTION 3
BUSINESS OVERVIEW
BABCOCK & BROWN PROSPECTUS
Case study Portfolio acquisition financed by Japanese operating lease
BBRM identified an opportunity to acquire a portfolio of assets from a railcar leasing company and to
add value through more efficient financing sourced from the Japanese operating lease market. Using
relationships developed in Babcock & Brown’s aircraft leasing activities, BBRM was able to structure a
pioneering Japanese operating lease for railcar assets.
BBRM assumed the role of remarketing agent for the portfolio, which was important for underpinning
the railcar rental forecasts given the short-term nature of the leases. BBRM also negotiated a fixed price
maintenance contract with the seller that eliminated the cash flow risk associated with maintenance.
BBRM then developed an extensive presentation on the equipment and the North American railcar
market and with this identified a bank that was prepared both to lend on a non-recourse basis and share
remarketing and future asset risk associated with the portfolio. In this way, BBRM developed a
non-recourse market for railcar operating lease finance.
This acquisition structure was used to sell 82% of the portfolio acquired. The balance of the portfolio was
sold at a profit in the US market in approximately 90 days.
The transaction provides an example of BBRM using its structuring capability and relationship network to
identify a “best-holder” balance sheet that enables BBRM to secure and manage assets with only limited
use of its own capital.
A longstanding client of Babcock & Brown is the equity investor in more than 90% of BBRM’s railcar portfolio
by asset value, and continues to be the long-term investor in all of BBRM’s underwritten acquisitions in the
North American railcar market.This relationship has been developed and maintained as a result of significant
mutual benefit for both Babcock & Brown and its client. Railcars owned by this investor that are already in the
managed portfolio are subject to long-term management contracts with BBRM, each with an average remaining
length of approximately 7.8 years as of 30 June 2004. In conjunction with its plans to continue building this
investor client’s portfolio of railcars, Babcock & Brown is actively seeking to establish or deepen other strategic
relationships with equipment manufacturers, funding sources and other partners in order to enhance its ability to
source, trade and manage equipment, and diversify the range of partners with which it works.
Railcar leasing industry
The North American freight rail industry is a mature business with many attributes that appeal to investors and
financial institutions:
• Historic stability of rail transport industry and infrastructure for long-distance haul of bulk commodities
• Broad mix of commodities transported by rail reduces volatility
• Freight railcars are generally leased rather than acquired by end users to transport goods
• Long economic life of railcars (up to 50 years) with low to moderate risk of obsolescence
• Liquid market for asset trading
• Strong on-time receivable history for railcar leasing
Market conditions in the North American railcar sector are currently very positive, with railcar loadings up
considerably from last year. According to published statistics by the Association of American Railroads, US and
Canadian combined cumulative carloads for the period ending May 2004 were up 4.5% when compared to the
same period in 2003.This has led to increased utilisation and upward pressure on rental rates, coupled with
increased investor demand. In the current market, ability to access new railcars has become an important source
of competitive advantage.
BBRM’s managed fleet only accounts for approximately 1% of the US railcar fleet.Thus, while general market
conditions are positive, business-specific factors, such as the investment appetite of BBRM’s investors, should have a
greater impact on the growth of its business.The trends in these business-specific drivers currently remain positive.
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