Fitch Rates Kansas City Southern's Unsecured Notes 'BBB'
OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB' to the $250 million notes to be issued by Kansas City Southern (KCS). Corporate ratings for KCS and its two primary subsidiaries, Kansas City Southern Railway Co. (KCSR) and Kansas City Southern de Mexico (KCSM), are unaffected.
The new issuance will represent a senior unsecured obligation of KCS, and will rank pari passu with all of the company's existing unsecured debt. The notes will mature in May of 2026, and proceeds will be used primarily to pre-fund $250 million in floating rate notes that mature in October of this year. As with KCS's existing unsecured debt, the notes will feature a guarantee from KCSR.
KEY RATING DRIVERS
KCS's ratings are supported by a strong balance sheet, its efforts to control costs and improving operating margins. Total adjusted debt/EBITDAR has remained relatively steady at around 2.5x over the past few years, which Fitch views as consistent with the 'BBB' rating. Fitch expects that leverage may decline incrementally over the intermediate term. Other credit metrics have improved materially, including a funds from operations (FFO) fixed-charge coverage ratio that has gone from 4.4x as of year-end 2012 to 7.6x as of year-end 2015.
Fitch calculates KCS's EBITDAR margin at 49.7% for the latest 12 months (LTM) period ended March 31, 2016. Margins have trended steadily upward since 2012, and Fitch expects the company to produce solid margins through the forecast period. Fitch notes that the strong results produced in 2015 came amidst a relatively difficult year for the rail industry, where volumes across many operating segments were pressured by low commodity prices and economic uncertainties. KCS's credit profile also benefits from improved liquidity provided by an $800 million revolver that was obtained in the second half of 2015. The new revolver added $150 million of additional capacity to KCS's previous facilities.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Moderate volume and revenue declines in 2016 followed by low-single-digit growth thereafter;
--Continued slow macroeconomic growth in the U.S.;
--Operating margins trending upward slightly throughout the forecast period;
--Total debt balance remaining around or slightly below current levels.
RATING SENSITIVITIES
An upgrade in the near term is unlikely; however, future actions that may individually or collectively cause Fitch to take a positive rating action include:
--Total adjusted debt/EBITDAR sustained below 2.0x;
--Sustained free cash flow (FCF) margin in the mid- to high-single digits;
--An operating ratio trending toward and maintained in the low-60% range.
Future actions that may individually or collectively cause Fitch to take a negative rating action include:
--More aggressive debt-funded share repurchases causing debt/EBITDAR to be sustained above 2.75x;
--A severe drop-off in demand for cargo flowing between the U.S. and Mexico;
--EBITDAR margins falling toward or below the 40% range, and sustained negative FCF.
LIQUIDITY
The company maintains solid financial flexibility through its cash on hand as well as availability under its commercial paper (CP) program which together total $800 million. Total liquidity was $856.6 million at the end of 2015, which Fitch considers to be strong given the company's ability to generate cash from operations and the relatively low levels of cash needed to operate the business on a day-to-day basis. Cash on hand totaled $136.6 million plus $720 million in total availability under the new KCS $800 million CP program. KCS had $80 million of outstanding CP at the end of 2015. Near-term debt maturities are also manageable. Debt maturities total $356.1 million in 2016 and primarily consist of a $250 million note and the outstanding CP. KCS has no other significant maturities until 2020.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Kansas City Southern
--$250 million senior unsecured notes 'BBB'.
Fitch currently Rates Kanas City Southern as follows;
Kansas City Southern
--Long-Term Issuer Default Rating (IDR) 'BBB';
--Short-Term IDR 'F3';
--Commercial paper 'F3';
--Senior unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB'.
Kansas City Southern Railway Co.
--Long-Term IDR 'BBB';
--Short-Term IDR 'F3';
--Senior unsecured notes 'BBB'.
Kansas City Southern de Mexico SA de CV
--Long-Term Foreign Currency IDR 'BBB';
--Long-Term Local Currency IDR 'BBB';
--Short-Term IDR 'F3';
--Senior unsecured notes 'BBB'.
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