Re: PC: PC Institutional Creditors Group

["Robert Holzweiss" <robert.holzweiss@xxxxxxxx>]

Gary and listers

Although I do not have the actual document in front of me (it is at home), I am almost certain your question concerns the banks that participated in the PC's revolving credit line established by David Bevan as a last ditch financing solution to keep the railroad afloat.  After exhausting his borrowing options ($100,000,000 in commercial paper during 1968/1969, borrowing $59,000,000 from European banks, and using PC's Pennco subsidiary to issue $50,000,000 of 8.25% bonds) Bevan negotiated a $50,000,000 revolving credit line with 71 banks led by First National City Bank (FNCB) of New York.   

After exhausting the initial $50,000,000, Bevan arranged to increase the credit line to $300,000,000 with FNCB of N.Y.'s stake increasing to $35,000,000.  As collateral, Bevan pledged Pennco, the Penn Central's last unencumbered asset, valued at more than $900,000,000.  The revolving credit line acted like a credit card with a $300,000,000 line of credit.  Of course, Bevan planned on repaying the money to reduce interest payments but the PC's financial trouble precluded repayment and Bevan exhausted the $300,000,000.  The PC was then saddled with huge interest payments without the means to repay interest or principle.

In hindsight, it appears that David Bevan managed the Penn Central's finances so poorly that his extravagant borrowing with little hope of repaying caused the railroad to fail.  However, Bevan was no fool.  He, like many Nixon Administration officials including Arthur Burns (Council of Economic Advisors), Bevan believed the Penn Central would eventually turn the corner toward profitability.  Therefore, he rested his financing strategy on four basic assumptions.  

First, he believed that tight money markets and high interest rates during 1969 and 1970 would not last indefinitely, allowing him to refinance loans at lower rates of interest.  

Second, Bevan, like Saunders, Perlman, and most of the Penn Central management team, expected merger savings to increase over time as they fully integrated the PRR, NYC, and NH into one railroad.  

Third, as early as the 1950's, Bevan argued that long-term debt maturities represented the biggest threat to the PRR (and later the PC).  While working for the PRR, he spread out long-term debt maturities to reduce the threat of too many maturities in any given year.  When Bevan assumed his position as chief financial officer with the PC, he again faced uneven debt maturities because of the uneven long-term obligations of the PC's three predecessor lines.  The rapid maturation of significant long-term debt forced Bevan to refinance with short-term loans until he could retire the debt with merger savings or increased revenue from the Penn Central's non-railroad subsidiaries.  In retrospect, refinancing long-term obligations with short-term debt may seem foolish, however, Bevan only followed the prevailing wisdom of the day.  Even Section 77 of the Bankruptcy Act assumed a railroad in bankruptcy protection only required relief from long-term debt obligations to return to solvent operations.  Bevan's strategy hinged on postponing long-term debt repayment without entering bankruptcy protection by refinancing with short-term notes such as commercial paper.  Because his plan depended on rapid increase in revenue, it carried a high degree of risk.  Although his refinancing strategy allowed extra time for the railroad to turn the corner, the revenue never materialized, forcing the PC into bankruptcy.  

Finally, Bevan, like the rest of the PC management team, optimistically hoped that the railroad's financial trouble might lead to higher rates or regulatory reform.  When rate increases proved inadequate, regulatory reform failed to develop, the tight money market failed to loosen, merger savings failed to materialize, and short-term debt obligations began to mature, Bevan found himself accepting the blame for the Penn Central's dismal financial condition.

These are my opinions based on my research.  Other views/critiques are appreciated.

Bob Holzweiss





>>> gary -AT- mssinc.com 06/23/05 10:01AM >>>
OK gang, here's a real tester. Does anyone know anything about the Penn
Central Institiutional Creditors Group? From what I can gather, it has
something to do with the PC Corp. transferring rail assets to Conrail. Any
information would be appreciated...

Gary