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Rail's Cash-Flow King Stakes $62 Billion on Tokyo Maglev Train

Central Japan Railway Co., whose high-speed trains carried more passengers than the world’s largest airline last year, is staking 5.1 trillion yen ($62 billion) on building the world’s fastest train.

The company plans to fund the project, at a cost almost eight times the $8 billion President Barack Obama is giving to U.S. high-speed and conventional rail projects, with cash, loans and bonds, said Kinya Tani, a spokesman for the Nagoya, Japan- based company. JR Central will issue 5-year, 10-year and 20-year bonds in equal amounts, according to the company.

JR Central is using the greatest free cash flow of any listed rail operator to finance a magnetic-levitation train that will travel between Tokyo and Nagoya, Japan’s fourth-largest city, at a speed of 500 kilometers per hour (311 miles per hour) when the line is completed in 2027. The 290-kilometer link, about the distance from New York to Baltimore, will later be extended to Osaka, the nation’s third-largest city.

“It’s like launching a rocket into space,” said Masayuki Kubota, who oversees the equivalent of $2.1 billion in Tokyo at Daiwa SB Investments Ltd. “The first time is very expensive and risky, but once it’s successful, it can become a big business.”

JR Central’s free cash flow, or money from operations minus capital spending, was $2.86 billion for the 12 months ended December. That compares with $1.6 billion at Union Pacific Corp., the largest U.S. railroad by sales, and $1.4 billion at CSX Corp., the second-largest publicly traded U.S. railroad, according to data compiled by Bloomberg.

Floating Trains

Japan’s busiest high-speed train operator carried 138 million passengers on its bullet trains last fiscal year, compared with 100 million passengers at United Continental Holdings Inc., the world’s biggest airline, formed by the merger of United and Continental airlines.

Maglev lines use magnetic power to propel trains that float above the track. JR Central is running maglev trains on an 18- kilometer test track west of Tokyo and is extending that line to 42 kilometers, later to be part of the full Tokyo-Nagoya line.

Once opened, the line will provide an alternative to the high-speed train link between Tokyo and Osaka that opened in 1964, when the country hosted the Summer Olympics. Japan’s high- speed rail network now extends over 2,000 kilometers, stretching from Aomori in the north to Kagoshima in the south.

‘Big Economic Impact’

The maglev will make the trip to Nagoya from Tokyo in as little as 40 minutes, compared with as little as 95 minutes now. JR Central’s fastest current train travels at a maximum speed of 270 kilometers per hour between Tokyo and Osaka.

“By providing a rapid transportation service between key cities, it will have a big economic impact,” said Yasuhiro Matsumoto, an analyst in Tokyo at Shinsei Securities Co. “What matters is whether they will be able to afford it.”

The train operator’s free cash flow has exceeded 160 billion yen, or $2 billion, for each of the past 10 years.

The company fell 0.1 percent to 717,000 yen at the 3 p.m. close on the Tokyo Stock Exchange. It has advanced 8 percent in the past year, compared with a 6.9 percent gain in the Nikkei 225 Stock Average.

JR Central, rated Aa2 by Moody’s Investors Service, the same as the Japanese government, predicts it may pay 3 percent interest on bonds as Japanese interest rates increase over the life of the project. The company sold 20-year bonds with a 1.797 percent coupon in October.

The train operator had 3.1 trillion yen in interest-bearing debt at the end of March and has said it plans to ensure total debt doesn’t exceed 5 trillion yen. The company’s debt peaked at 5.5 trillion yen in fiscal 1991.

Shrinking Population

Japan’s aging population is shrinking from a peak of 127.8 million in 2004, raising concerns about the need for a second high-speed line linking Tokyo and Nagoya.

“The question is, do you really need that train?” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $3 billion in assets. “If your population is going to shrink and you’re going to have fewer users, why would you build a new line?”

JR Central predicts a maglev service will help persuade people to fly less. Japan’s bullet trains already carry more domestic passengers each year than All Nippon Airways Co., Japan Airlines Corp. and all other Japanese carriers combined.

High-speed train passengers totaled 289 million last fiscal year, compared with 84 million flyers in 2009, according to the most recent figures from Japan’s transport ministry.

High-speed trains remain a tough sell in the U.S. even with federal money, said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut. New governors in Wisconsin and Ohio canceled high-speed rail projects and returned $1.2 billion to the U.S. Department of Transportation amid worries the lines may lose money.

Washington-Baltimore Line

JR Central is also targeting a maglev link between Washington and Baltimore. A line may cost $5.8 billion and cut the 40-mile journey to 18 minutes, and could be extended to New York and Boston, according to a Maryland Department of Transportation-backed group promoting the project.

“There are not that many places where high-speed rail makes sense,” Straebler said. “The most obvious is the Washington, D.C.-to-Boston corridor.”

Amtrak, which is supported by U.S. taxpayers, runs the Acela Express, the only high-speed train in the U.S., between Washington and Boston. The route had 3.2 million passengers in the year ended September 2010, according to the rail operator.

The Washington-based company lost $1.3 billion in that period and has lost at least $1 billion a year for 10 years. In comparison, JR Central has made at least $500 million annually for the past 10 years and had net income of 92 billion yen in the year ended March 31.

“They have a cash-cow business,” said Mana Nakazora, chief credit analyst at BNP Paribas Securities Japan Ltd. in Tokyo. “Their cash flow should be sufficient to pay for the project.”

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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