A Problematic Investment

Canadian-based National Steel Car’s abandonment of its rail car facility has left the Retirement Systems of Alabama holding the property, and trying to broker a deal to bring jobs to the Shoals.

In 2009, National Steel Car Inc.'s employees in Hamilton, Ontario were afraid the Alabama plant would lead to the closure of the Canadian production facility (pictured above).

Photos by Paul Robertson and Steve Gates

The mile-long plant in the Shoals was designed to build rail cars. And it would be great if it did, says David Bronner, CEO of the Retirement Systems of Alabama. Any kind of rail cars would be fine—from the freight carriers it was designed for to new-fangled protective auto transports to multi-modal containers to high-speed rail specialty cars.

Or for that matter, anything else that can take advantage of the plant’s capability to manufacture things that are enormously big and heavy–wind towers, jet engines, generators.

Anything, but the next to nothing being built there now.

The plant this year was supposed to be churning out 10,000 rail cars annually and employing 1,800 workers. But National Steel Car, the Canadian company that broke ground on what would have been the largest rail car plant in North America, plugged and abandoned the project in August of 2010.

Finally, at the end of 2010, Bronner says, there are some good alternative prospects in the offing.

Bronner cares because the RSA now owns the plant. The RSA loaned the Canadian company’s U.S. subsidiary, National Alabama, $350 million, followed by a second loan of $275 million. When National Alabama backed out, RSA’s investment—designed only as an incentive—equaled 100 percent equity in the plant.

The deal started just like hundreds of other RSA investments—up-front funding to help the state entice industrial plants.

“We’ve been involved in everything in the state for the last 30 years,” Bronner says.  RSA, he notes, helped bring Mercedes-Benz, Singapore Technology’s Mobile Aerospace Engineering, Airbus and many more to the state.

“We’ve been a vehicle to try to get jobs into the state,” Bronner says. It’s a key element of his overall philosophy for RSA: “The stronger the economy, the stronger the retirement system.” 

“When the state talks a big game and doesn’t have the $100 million to put in, guess who does?” he queries.

Normally the retirement group provides equity up front to cover the incentives the state has offered, allowing the state to repay after it has time to react and budget funds. 

RSA has a history of recouping its investments, Bronner says, even ones that looked especially gloomy. In the mid-1980s, RSA financed Alabama Pine Pulp—then the largest pulp mill in Alabama. The last installment of the loan was paid off this year, nearly a quarter century after the startup financing, after Georgia Pacific bought the mill.

Loans in the service of economic development, including real estate investments such as high-rise buildings, Marriott hotels and the Robert Trent Jones Golf Trail, comprise about 9 percent of the RSA’s total investment portfolio. These are private placements, versus the 86 percent in public equities and government, corporate and municipal bonds, and the 5 percent in cash. Bronner takes the lead on directing the private placements.  

“Basically, you’re trying to recruit an industry here that was leaving the U.S. for Mexico,” he says of the rail plant—a labor-intensive enterprise that might have easily located south of the border instead of Alabama. “We saw the opportunity to get with a Canadian company that wanted to build in the U.S. to serve a U.S. market.”  The company’s decision to build in Alabama was similar to those underlying Mercedes’ decision to move into Alabama or BMW’s to open in South Carolina, he says. The European companies wanted to serve a U.S. domestic market without the hassles of importing and exporting goods.

The difference with the Canadian enterprise was that the economy dropped like a load of steel, and the demand for rail cars was crushed—going from 100,000 a year to about 10,000 a year.  National Alabama scooted and RSA was left holding the plant.

“I would prefer not to be building rail cars,” Bronner says. “But sometimes you are dealt the hand.”  In New York, RSA ended up owning the city’s largest office building—55 Water Street—“and it happens to be our best investment.”

“Whether we use this plant depends on demand,” he says. “If President Obama and Congress did something about the rail industry and we could get people here from Germany and Japan to build high-speed rail, I’d be interested.” Failing that rather unlikely option, he would be happy for the plant to build ordinary rail cars.

At Thanksgiving, RSA obtained intellectual property rights from another Canadian rail car builder, which has sold out to a Japanese company that will use the Canadian plant to build wind generators. The Canadian court has to approve the intellectual property rights sale, but Bronner is confident that it will. Then, if the economy turns enough that buyers started ordering 200 or 300 cars at a time, that plant would be able to function as designed.

In the meantime, however, Bronner wonders what else he could entice into using the building. “Instead of just being whipsawed by the economy, I would like to offset it with another type of product that allows you, regardless of the rail industry, to keep your workforce working.”

He hopes to hear by late winter about several other options under discussion. Four to six major companies in the U.S. have gone through the building, sending engineers to evaluate the cost of adapting it to meet their needs. Now discussions at those firms have moved up to senior management in some cases and boards in others.  He hopes for “a major announcement” by the beginning or March “or else we’ll be going on to Plan B or C, which is what you have to do.”

Unfortunately, the decisions involved in locating a major plant take time, he says. “You’re all ready to go and they’re still studying it. It’s like recruiting a brand new company.” Even when a decision is fast-tracked, it takes months, he says, noting that he was in talks with Airbus for seven years.

In retrospect, was it a good investment?  “Not now, no,” Bronner says. If the economy hadn’t tumbled, Alabama would have a Canadian company providing 2,000 jobs and building 30,000 rail cars a year—the most sophisticated rail car plant in the U.S.

But he notes, “It’s not as if the money was given to Mr. Madoff and your money is gone. The asset is sitting there; now we have to figure out how to get revenue off it, and that happens when we jack up employment.”

“It’s an unusual problem that you pick up in a recession,” he says. “Recessions create opportunities, but they also create problems.”  Now the issue is, “How can we attack the problem—to turn something around that somebody else hadn’t thought of.”

Big and idle as the plant is, Bronner stresses that it’s not a danger to RSA investments and, consequently, to retiree benefits.  The rail car plant investment represents about $500 million out of total investment portfolio worth $25 billion, he says, adding, “In 1973, when I came here, it would have been the total investment.” Now it’s a fraction, similar to the $300 million swing in RSA investments when the stock market jumps or falls 200 points.

Nedra Bloom is a freelance contributor to Business Alabama. She lives in Mobile.