B-175155(1), APR 22, 1975

B-175155(1), APR 22, 1975

LOAN GUARANTEE PROGRAM ESTABLISHED BY 45 U.S.C. SEC. 602 MAY BE APPLIED TO LEVERAGED LEASE AND SIMILAR TYPE TRANSACTIONS ENTERED INTO BY AMTRAK FOR THE ACQUISITION OF CAPITAL ASSETS SINCE AMTRAK INITIALLY PURCHASES AND TAKES TITLE TO THE ASSETS, THE ASSETS ARE OF TYPE DESCRIBED IN SECTION 602 AND AMTRAK INTENDS, AT TERMINATION OF LEASE PERIOD OF SALE AND LEASEBACK TRANSACTION, TO REPURCHASE AND REGAIN TITLE TO SUCH CAPITAL EQUIPMENT.

APPLICATION OF FEDERAL LOAN GUARANTEE PROGRAM TO AMTRAK'S LEVERAGE LEASE TRANSACTIONS:

OUR OPINION HAS BEEN REQUESTED CONCERNING THE APPLICATION OF SECTION 602(A) OF THE RAIL PASSENGER SERVICE ACT OF 1970, PUB. L. NO. 91-518, OCTOBER 30, 1970, 84 STAT. 1338, AS AMENDED, 45 U.S.C. SEC. 602, TO CERTAIN LEASING TRANSACTIONS.

SECTION 602(A), AS AMENDED, READS:

"THE SECRETARY IS AUTHORIZED, ON SUCH TERMS AND CONDITIONS AS HE MAY PRESCRIBE, AND WITH THE APPROVAL OF THE SECRETARY OF THE TREASURY, TO GUARANTEE ANY LENDER AGAINST LOSS OF PRINCIPAL AND INTEREST ON SECURITIES, OBLIGATIONS, OR LOANS (INCLUDING REFINANCINGS THEREOF) ISSUED TO FINANCE THE UPGRADING OF ROADBEDS AND THE PURCHASE BY THE CORPORATION OR AN AGENCY OF NEW ROLLING STOCK, REHABILITATION OF EXISTING ROLLING STOCK, RESERVATION SYSTEMS, SWITCH AND SIGNAL SYSTEMS, AND OTHER CAPITAL EQUIPMENT AND FACILITIES NECESSARY FOR THE IMPROVEMENT OF RAIL PASSENGER SERVICE. THE MATURITY DATE OF SUCH SECURITIES, OBLIGATIONS, OR LOANS, INCLUDING ALL EXTENSIONS AND RENEWALS THEREOF, SHALL NOT BE LATER THAN TWENTY YEARS FROM THEIR DATE OF ISSUANCE."

THE NATIONAL RAILROAD PASSENGER CORPORATION (AMTRAK) HAS REQUESTED THE SECRETARY OF TRANSPORTATION TO GUARANTEE LOANS PURSUANT TO SECTION 602 FOR THE DIRECT PURCHASE OF ROLLING STOCK.

IT HAS ALSO ASKED THAT SUCH GUARANTEES BE EXTENDED TO OTHER TYPES OF CONTRACTUAL OBLIGATIONS SUCH AS FINANCIAL LEASES, CONDITIONAL SALES, EQUIPMENT TRUST CERTIFICATES, AND LONG-TERM REAL ESTATE DEVELOPMENT LEASES FOR THE ACQUISITION OF CAPITAL EQUIPMENT AND FACILITIES.

ACCORDING TO AMTRAK, THE "LEVERAGED" LEASE IS THE PRIMARY METHOD BY WHICH IT HAS FINANCED THE ACQUISITION OF NEW ROLLING STOCK WITH THE USE OF FEDERAL GUARANTEES. AMTRAK'S GUARANTEED OBLIGATIONS UNDER LEVERAGED LEASES WILL AMOUNT TO ABOUT $121 MILLION AT JUNE 30, 1975. UNDER THIS METHOD, AMTRAK PURCHASES EQUIPMENT FROM A BUILDER UNDER A CONDITIONAL SALE AGREEMENT. UPON DELIVERY OF THE EQUIPMENT, AMTRAK MAKES A DOWNPAYMENT OF ABOUT 27 PERCENT OF THE PURCHASE PRICE AND AGREES TO PAY THE BALANCE (CONDITIONAL SALE INDEBTEDNESS) IN INSTALLMENTS. CONCURRENT WITH EACH CLOSING, THE BUILDER ASSIGNS THE CONDITIONAL SALE INDEBTEDNESS (APPROXIMATELY 73 PERCENT) TO AN INTERIM LENDER. AT THIS POINT, AMTRAK HOLDS TITLE TO THE EQUIPMENT.

PRIOR TO PLACING THE EQUIPMENT IN SERVICE, AMTRAK SELLS THE EQUIPMENT TO A TRUSTEE (LESSOR) UNDER THE TERMS OF A SALE AND LEASEBACK AGREEMENT AND IMMEDIATELY LEASES IT BACK UNDER THE TERMS OF AN EQUIPMENT LEASE.

THE TRUSTEE GAINS TITLE TO THE EQUIPMENT, REIMBURSES AMTRAK FOR THE DOWNPAYMENT, AND AGREES TO PAY THE CONDITIONAL SALE INDEBTEDNESS ALTHOUGH AMTRAK REMAINS LIABLE TO THE INTERIM LENDER FOR THE DISCHARGE OF ALL ITS OBLIGATIONS UNDER THE CONDITIONAL SALE AGREEMENT TO THE EXTENT SUCH OBLIGATIONS ARE NOT DISCHARGED BY THE TRUSTEE UNDER THE PROVISIONS OF THE SALE AND LEASEBACK AGREEMENT.

THE EQUIPMENT LEASE BETWEEN AMTRAK AND THE TRUSTEE IS FOR 15 YEARS AND PROVIDES AMTRAK AN OPTION TO PURCHASE THE EQUIPMENT AT THE FAIR MARKET VALUE AT THE END OF THE LEASE TERM. ADDITIONALLY, AMTRAK HAS OPTIONS TO RENEW THE EQUIPMENT LEASE AT FAIR RENTAL VALUE FOR FOUR ADDITIONAL TERMS OF 1 YEAR EACH.

THE INTERIM LENDER, THE TRUSTEE, AND THE DEPARTMENT (WITH THE APPROVAL OF THE SECRETARY OF THE TREASURY) ENTER INTO A GUARANTY AGREEMENT UNDER WHICH THE DEPARTMENT AGREES TO UNCONDITIONALLY GUARANTEE PROMPT PAYMENT BY AMTRAK OF (1) THE CONDITIONAL SALE INDEBTEDNESS, PLUS ACCRUED INTEREST, AND (2) THE LEASE OBLIGATIONS, LESS ANY PAYMENTS MADE TOWARD THE CONDITIONAL SALE INDEBTEDNESS. SHOULD AMTRAK DEFAULT AND THE DEPARTMENT MAKE PAYMENT OF THE CONDITIONAL SALE INDEBTEDNESS AND LEASE OBLIGATIONS, THE DEPARTMENT IS ASSIGNED THE INTERIM LENDER'S AND TRUSTEE'S RIGHTS, TITLES, AND INTERESTS IN THE EQUIPMENT.

THE FINAL STEP IS THE ASSIGNMENT OF THE INTERIM DEBT TO INSTITUTIONAL OR OTHER LONG-TERM LENDERS. THE INTERIM LENDER ASSIGNS THE CONDITIONAL SALE INDEBTEDNESS, ALONG WITH THE GOVERNMENT GUARANTEE, TO AN AGENT FOR THE LONG-TERM LENDERS. THE LONG-TERM INTEREST RATE OBTAINED IS THE FINAL FACTOR IN DETERMINING THE LEASE RATE. THE FEDERAL FINANCING BANK IS THE LONG-TERM LENDER UNDER TWO OF AMTRAK'S LEVERAGED LEASE TRANSACTIONS.

AMTRAK ADVISES THAT LEVERAGE LEASES AND SIMILAR TRANSACTIONS HELP TO KEEP ITS FINANCING COSTS DOWN BECAUSE THE IMPLICIT FINANCING COSTS FOR LEVERAGED LEASES IS LESS THAN THE COST OF DIRECT BORROWINGS NEEDED TO PURCHASE THE EQUIPMENT OUTRIGHT. THE ISSUE PRESENTED TO US IS WHETHER AMTRAK OBLIGATIONS INCURRED IN THIS TYPE FINANCING ARE WITHIN THE LOAN GUARANTEE AUTHORITY OF SECTION 602. RESOLUTION OF THIS ISSUE TURNS ON WHETHER THE ROLLING STOCK (OR OTHER EQUIPMENT) IS ACQUIRED BY "PURCHASE" WITHIN THE MEANING OF THAT SECTION.

THE LEGISLATIVE HISTORY OF SECTION 602, AS AMENDED, INDICATES THAT FUNDS GUARANTEED THEREUNDER SHOULD, INSOFAR AS PERTINENT HERE, BE USED FOR ACQUISITION OF CAPITAL ASSETS AND NOT FOR OPERATING EXPENSES OR OTHER CORPORATE OR RELATED PURPOSES. SEE, FOR EXAMPLE, THE CONFERENCE REPORT, H. REP. NO. 92-1111, 92D CONG., 2D SESS. 16-17 (1972) AND THE REPORT OF THE SENATE COMMITTEE ON COMMERCE, S. REP. NO. 92-756, 92D CONG., 2D SESS. 13 (1972) WHICH FORM PART OF THE LEGISLATIVE HISTORY OF SECTION 10 OF PUB. L. NO. 92-316, JUNE 22, 1972, 86 STAT. 227. SEE ALSO OUR DECISION OF SEPTEMBER 29, 1972, B-175155.

IN LEVERAGED LEASE TRANSACTIONS AMTRAK DOES, IN FACT, PURCHASE AND TAKE TITLE TO THE ROLLING STOCK ALTHOUGH IT MAY IMMEDIATELY THEREAFTER SELL THE EQUIPMENT TO THE TRUSTEE. IN ITS LEASE AGREEMENT WITH THE TRUSTEE, AMTRAK OBTAINS AN OPTION TO REPURCHASE THE EQUIPMENT AT ITS FAIR MARKET VALUE AT THE END OF THE LEASE TERM. MOREOVER, IN ITS LONG TERM PLANS AMTRAK COMMITS ITSELF, ALBEIT NOT IN A LEGAL SENSE, TO PURCHASE THE EQUIPMENT AT THAT TIME. THE ADVANTAGE OF THE LEVERAGED LEASE TRANSACTION IS THAT IT ENABLES AMTRAK TO KEEP DOWN ITS FINANCING COSTS. THIS IS DONE BY SHIFTING TO THE TRUSTEE THE TAX BENEFITS WHICH WOULD BE AVAILABLE TO AMTRAK THROUGH EQUIPMENT DEPRECIATION WRITEOFFS AND INVESTMENT TAX CREDITS WERE IT NOT IN AN OPERATING DEFICIT POSITION.

THERE IS NO DOUBT THAT AMTRAK, LIKE ANY OTHER FOR-PROFIT CORPORATION, MAY LAWFULLY ENTER INTO LEVERAGED LEASE TRANSACTIONS. THE ONLY ISSUE FOR RESOLUTION HERE IS WHETHER THE LOAN GUARANTEE PROVISIONS OF SECTION 602 MAY BE APPLIED TO SUCH TRANSACTIONS.

INASMUCH AS THE CAPITAL ASSETS (ROLLING STOCK, ETC.) DESCRIBED IN SECTION 602 ARE ACTUALLY PURCHASED BY AMTRAK AND INASMUCH AS AMTRAK HAS A DEMONSTRABLE PRESENT INTENT TO REGAIN TITLE TO THE PROPERTY AT THE END OF THE LEASE PERIOD, WE BELIEVE THAT THE LOAN GUARANTEE PROVISIONS OF SECTION 602 MAY BE USED IN LEVERAGED LEASE AND SIMILAR TYPE TRANSACTIONS TO ASSIST AMTRAK IN ACQUIRING CAPITAL EQUIPMENT NECESSARY FOR THE IMPROVEMENT OF RAIL PASSENGER SERVICE.