CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned short-term Issuer Default Ratings of 'F3' to both Kansas City Southern Railway Co. (KCSR) and Kansas City Southern de Mexico (KCSM), the two primary operating subsidiaries of Kansas City Southern (KSU). Assignment of short-term ratings follows the initiation of commercial paper (CP) programs at both KCSR and KCSM, which have also been assigned ratings of 'F3'.
KCSR has initiated a $450 million CP program and has simultaneously upsized its existing $200 million revolving credit facility to $450 million. The amended credit agreement also requires KCSR to repay the remaining $245 million under its term loan A-2 in February 2014, which is likely to be funded with CP. KCSM has initiated a $200 million CP program, equal in size to its existing $200 million revolver. The 'F3' ratings are linked to the long-term IDRs of KCSR and KCSM, which stand at 'BBB-'. The Rating Outlook is Stable.
The ratings for Kansas City Southern are supported by the company's solid operating margins, moderate leverage, and ability to generate positive free cash flow. While Kansas City Southern's recent 2014 earnings forecast came out below market expectations, the company's projections remain consistent with Fitch's forecast, which is supportive of the current rating level. Fitch's expectations for moderate GDP growth in the U.S., improving automotive sales, continued expansion of cross-border intermodal business, and a near-term rebound in agricultural and grain volumes support a positive operating environment for KSU in 2014. Operating ratio also continues to trend lower, decreasing by 1.1% in 2013, with management projecting a similar improvement in 2014.
KCS' investment grade credit profile is also supported by balance sheet improvements made in recent years. The company largely completed its goal of taking out its legacy high yield debt through a successful refinancing completed in the first half of 2013. The refinancing further reduced the company's interest expense, which dropped notably over the past several years. The company also issued unsecured notes in October of 2013, with a portion of the proceeds used to repay KCSM's high yield notes. This includes Wednesday's announced early redemption of KCSM's 8% 2018 notes.
KCS does not intend to significantly delever going forward but instead will focus its cash flows on growing the business and maintaining and growing its dividend. KSU recently announced a 30% increase in its dividend from $0.215/share to $0.28/share. Fitch views KCS' current leverage as appropriate for the 'BBB-' rating.
Concerns include continued weakness in coal shipments and the potential for further delays in new automotive volumes coming out of Mexico. Coal volumes, which make up roughly 11% of the company's carloads, are expected to be down in the mid-single digits in 2014. The market has been difficult in recent years, as cheaper natural gas has suppressed coal volumes. New automotive plants coming on line in Mexico are expected to provide significant growth in coming years, but the ramp in production in those plants will be slower than expected. The possibility for further delays in production could push expected growth in autos and related products further into the horizon.
Rating Sensitivities:
Fitch generally views KSU's credit profile as improving. A positive rating action could be triggered by continued operating ratio improvements into the mid to low 60% range and the maintenance of leverage at or below current levels. Fitch would also look for continued solid free cash flow generation.
A negative rating action is not expected at this time. However KSU's credit profile could be pressured by a severe drop off in demand for cargo flowing between the U.S. and Mexico or by a severe economic downturn in the U.S.
Fitch has assigned the following ratings:
Kansas City Southern Railway Co.
--Short-term IDR 'F3';
--CP 'F3'.
Kansas City Southern de Mexico
--Short-term IDR 'F3';
--CP 'F3'.
Fitch currently rates Kansas City Southern as follows:
Kansas City Southern
--IDR 'BBB-'.
Kansas City Southern Railway Co.
--IDR 'BBB-';
--Senior unsecured bank facility 'BBB-';
--Senior unsecured notes 'BBB-'.
Kansas City Southern de Mexico
--Foreign currency IDR 'BBB-';
--Local currency IDR 'BBB-';
--Senior unsecured notes 'BBB-'.
Additional information is available 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818919
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