Asset-Based Lending: Apache Railway

Description of Railway

The Apache Railway is a short line railroad located in eastern Arizona, approximately 60 miles from the Arizona-New Mexico state line. The rail line was constructed in the early 1900’s to serve several forest products facilities (saw mills, paper, lumber, etc.) within and along the Apache-Sitgreaves National Forest. The line used to go as far south as McNary, AZ on the Fort Apache Indian Reservation. However, as the forest products industry declined over the past 50 years, much of that part of the line has since been abandoned, and the line now only extends as far south as Snowflake, AZ. The Apache Railway operates a 39.5 mile railroad between Holbrook, AZ and the former paper mill near Snowflake, AZ, as well as a 5.4 mile branch to Snowflake, AZ. In addition, there are 10.47 miles of rail in side tracks and yards as well as several miles of inventoried 131 pound rail.

The Borrower

In 2008, Catalyst Paper acquired a paper mill as well as the railroad located about 10 miles west of the town of Snowflake. The paper mill closed its doors in early 2012. In early 2013 Snowflake Community Foundation (“SCF”), an Arizona corporation, purchased the Apache Railway Company from the previous owner Catalyst Paper in a stock transaction.

The Solution

In order to fund the purchase price, SCF received $6.8 million ABL financing, secured by the railway, from Rabin and a group of lending partners pursuant to which SCF issued promissory notes to the partners. Rabin and the other lending partners worked closely with SCF to provide a complete financing solution, which allowed the borrower to execute its turnaround plan.

In order to repay the loan made available to it, SCF applied for a $7MM Railroad Rehabilitation & Improvement Financing (RRIF) loan from the Federal Railroad Administration (“FRA Financing”). Rabin and the other lenders have assisted SCF in obtaining the financing by working creatively with SCF, such as deferring any payable interest payments and providing several extensions to the term of the notes. The flexibility of the facility provided by Rabin and its lending partners, as well as the will to assist SCF and the town of Snowflake maintain and operate the railway, allowed SCF to successfully secure a $7 million note from the FRA to repay the promissory notes to Rabin and its partners.

During this process the SCF reduced its operating loss and showed continued improvement until reaching profitability. With the SCF’s continued success and increased profitability, SCF is now well on its way to operate from internal cash flows and meet its payment obligations to the FRA.

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