A Plan For All Seasons

While most of the leasing industry was flattened by recession, sound thinking and deft maneuvers catapulted BRAE Corp. to the top of the INC. 100

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Just days before the initial public offering of BRAE Corp. (#1) in May 1979, an article in Barron's hoisted a bright red flag for the thousands of people who had invested in boxcars or in companies that leased them to the nation's railroads. While nobody quarreled with the fact that BRAE and a handful of other companies were thriving in their leasing activities because of an acute rail-car shortage in the midst of an expanding economy, the article suggested that, for rather basic reasons, prospects might not be so attractive during an economic slowdown. As demand for lumber, metals, and consumer products tumbled, the article cautioned, many of the new rail cars would sit idle, earning little rental income to service their debt.

As it turned out, the recession did wreak financial havoc on several major players in the boxcar-leasing market; some of the more highly leveraged companies were forced to seek refuge under federal bankruptcy laws. But despite the travails of its industry brethren, San Francisco-based BRAE weathered the storm without any life-threatening consequences. By aggressively combining internal growth and new ventures with a series of major acquisitions in the piggy-back trailer, trucking, and offshore marine services areas, BRAE's revenues grew from $282,000 in the fiscal year ended March 31, 1978, to $251.2 million on March 31, 1982, a gain of 88,970%. Such a growth rate would be remarkable even for a red-hot technology company: The five-year sales growth rate of Apple Computer Inc.(#5) when it topped last year's INC. 100 was 43,154%. For a transportation services company operating in a period of economic decline, calling the accomplishment phenomenal might be an understatement.

BRAE's success is a direct result of the creative approaches taken by president and chief executive officer William J. Texido, formerly an executive with Itel Corp. and IBM. While it was no secret in the 1970s that the U.S. rail system had too few good boxcars to meet the needs of shippers, BRAE's approach to the opportunity differed from that of its competitors. Instead of purchasing its own short lines (generally, railroads with less than 100 miles of track) to serve as home bases for hundreds of roving boxcars, and instead of leasing cars to short lines that lacked significant outbound traffic, BRAE minimized its risks by offering to lease cars only to a select group of about 40 short lines owned by major industrial shippers, such as Weyerhaeuser, Georgia Pacific, and Champion International.

The leases themselves were designed for maximum protection. Thousands of new boxcars joined the national fleet each year, a result of attractive daily rates set by the Interstate Commerce Commission ($25 per car, per day of use) and other government incentives designed to encourage rail-car investment. Texido says, "You had to conclude there'd be a surplus at some point in the business cycle." In exchange for a 15-year commitment to load BRAE's cars first, the targeted customers were offered brand new boxcars to ship in, but only enough cars to meet about half of their needs, giving BRAE a generous cushion against major declines in shipments.

A key advantage for the shippers is that they aren't required to take on any new debt in obtaining the new cars. BRAE owns a custom-built fleet of about 5,000 rail cars, costing about $40,000 each, financed through 15-year, fixed-rate borrowings from insurance companies and banks collateralized by the leases and the cars. Moreover, BRAE has been an innovator in equipment management. It insures and maintains the cars, tracks their daily use on a computer, and collects revenues due its customers from all the other railroads using the equipment. Such services are also performed for another 6,000 rail cars that BRAE either partly owns, or manages for a fee for PACCAR Inc. and Ford Motor Credit Co. They are leased to such large companies as Cargill Inc. and Consolidated Foods Corp.

The essential structure of BRAE's rail-car business was developed by Texido, now 47, during the mid-1970s when he assembled a nearly identical operation for his former employer, Itel, the go-go San Francisco leasing company whose headquarters are in the same Embarcadero Center complex as BRAE's. To shape Itel's business plan, which would later be the pattern for BRAE's, Texido recalls, "I spent two weeks traveling around the U.S. talking to everybody who knew anything about short-line railroads. Then I came home and shut the door and asked, 'What does this mean?" Texido left Itel in 1977, lured by the challenge of putting together his own company and backed by a $10 million war chest put up by a group that included financial heavyweight Dan W. Lufkin and ex-president of Transamerica Corp. Edward L. Scarff.

In the late 1970s BRAE fought head-to-head with Itel for equipment leases with many of the same customers and over the purchase of a short line in Wisconsin, a skirmish that Itel won. But whereas Itel (which has recently completed its reorganization under Chapter 11) invested some of its capital in owning a few railroads, Texido's initial interest in that approach quickly faded. Not only were short lines with substantial out-going cargo expensive, he says, but "you could get as much control over the loadings, which is what I really wanted, through leases that stipulated they had to load our cars first."

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