DM&E Loan Default Possible - Gutknecht Fails to Lead

Orginally posted on The Mankato Free Press on May8, 2006

The Rochester Post-Bulletin reported in today's edition that a well-respected management consulting firm report states that DM&E may not be able to pay back the government loan that they are seeking.

Why fiscal conservatives should care is that once again, Congress is spending our money by subsidizing a business. So if DM&E doesn't pay the loan back, tomorrow's taxpayers will be stuck.

The question is what how will Coleman and Gutknecht use this report ? Last week, Dayton complained that with the Republicans in control that Coleman and Gutknecht needed to step up. Coleman fell on the "Attack the Messenger" escape mechanism and cited that Dayton's complaints are why he was one of the worst Senators. Norm - whether Dayton is the worst Senator has nothing to do with DM&E. Gil and Norm are quitely trying to let this issue slip under the radar. If they are involved, state what your doing.

The Rochester Post-Bulletin online version has a firewall, so here is the complete article.

Study: DM&E may not be able to pay back loan

The Dakota, Minnesota & Eastern Railroad would face an almost impossible job repaying a $2.5 billion federal loan it's seeking for a massive upgrade and expansion, according to a financial study issued today by the Rochester Coalition. The study, conducted by independent management-consulting firm BearingPoint, formerly KPMG Consulting, was commissioned by Mayo Clinic on behalf of the coalition, a group that includes Mayo, the city of Rochester, Olmsted County and the Rochester Area Chamber of Commerce. Based on figures available from what DM&E has provided to regulators, from rail analysts and from comparable railroads' financial data, BearingPoint concluded DM&E never would make enough money to keep up with debt payments over the 25-year life of the loan. By the end of the loan term, the cumulative deficit would reach nearly $1.4 billion, the study says.

DM&E is putting up only $111 million of its own equity capital to back the $2.5 billion loan, the study says.

"No business person would ask to borrow or be allowed to borrow with that kind of leverage," said Steve Huffines, a BearingPoint senior manager. The apparent lack of interest among private investors "speaks for itself," Huffines said. DM&E President and CEO Kevin Schieffer did not have an opportunity to review the report, but said he was not concerned about it. "They have a long history of paying consultants lots of money to come up with goofy conclusions that are submitted to the government and rejected," he said. "I would not be surprised if this is another one. We're very comfortable with the fundamental economics of the project."

Other details in the study:
• DM&E, which reported $221 million in long-term debt on its 2004 balance sheet, already is in debt beyond industry norms. Company debt then was about 50 percent of assets.
• For a variety of reasons, analysts at Morgan Stanley and JPMorgan say DM&E likely never will haul 100 million tons of coal per year, as outlined in the company's regulatory application. A more likely scenario is 25 million to 40 million tons. The coalition study assumes the railroad's best-case scenario.
• If the project goes forward as DM&E forecasts, the railroad would be reliant on coal-hauling for 80 percent of revenues. Other railroads serving Wyoming coal fields are more diversified, the study says.
Because DM&E is a private company, its financial data is hard to get, officials said. The company's loan application to the Federal Railroad Administration remains nonpublic despite several requests for it.

Coalition members said they hope the study prompts a closer look at DM&E's project from those weighing the loan application.

Rochester Chamber President John Wade said public money should not be put at risk in a "highly speculative project."
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Additional Comments on the subject of the DM&E /BearingPoint report:
I had the same concern about the use of management consultants, and that is why I asked the question, “How will Coleman and Gutknecht use this report?” I’m sure that DM&E would be able to pay a consulting group to shape the answers they way they want. But the question is shouldn’t this report require them to consider it and take action ? Remember the public sector was not interested in backing this project, so maybe their due diligence gave them access to DM&E's books.
Realistically, this government loan would not even be a question, if Congress had followed good practices and voted on it as a stand alone item … or required the TranPORKation Bill to be funded in a PayAsYouGo format as was done in the 90’s. This is the type of spending that drives fiscal conservatives batty … especially when you realize that Mark Kennedy was the deciding vote in the House.
I see this as Gutknecht's moment to stand in the spotlight. He has an angry group of constituents in Rochester who want action. He should use this report to publicly question the wisdom of this loan.

If the company does have the financial wherewithal, why won't a commercial bank be the prime lender? He needs to decide if he believes that the government needs to subsidize this railway company.

Question: Let's substitute "railroad" with "airline", and ask, should taxpayers be involved with granting loans so an airline could expand their service routes?
Gutknecht has been a wallflower on this issue ... standing on the sideline hoping that it gets resolved without impacting him. He has shown no visible support for (or support against) this project ... yet it is has an impact on the First District as well as an impact to the country's fiscal condition.
[Support] ''92 million Americans will receive an average tax cut of $1,083.'' That sounded, and was intended to sound, as if every American family would get $1,083. Needless to say, that wasn't true. The Tax Policy Center estimates that 89 million people will receive tax cuts and that the total tax cut will be $99 billion, or about $1,100 for each of those 89 million people. But this calculation carefully leaves out the 50 million taxpayers who received no tax cut at all. And even among those who did get a tax cut, most got a lot less than $1,000, a number inflated by the very big tax cuts received by a few wealthy people. About half of American families received a tax cut of less than $100; the great majority, a tax cut of less than $500.