Kansas City Southern continues debt reduction, eyes high-grade status

By Paul Deckelman

New York, Nov. 15 - Kansas City Southern's debt-cutting efforts have been rolling along since the end of 2009, and the railroad operator now believes that it is on track to raise its mid-BB debt ratings to investment grade somewhere down the line.

"It's a great story," the Kansas City, Mo.-based freight transportation company's vice president for finance, Michael Cline, told investors at the Citi 2011 North American Credit Conference on Tuesday in New York, referring to his company's efforts to improve its balance sheet.

Cline, who also is the company's treasurer, said that since year-end 2009, Kansas City Southern has reduced its overall debt levels by $267 million, or about 13%, going from $1.98 billion to $1.71 billion as of the end of this year's third quarter on Sept. 30.

And the company - which runs freight trains over 6,000 miles of track it owns in the southern and midwestern United States, in Mexico and in the Panama Canal Zone - announced just last week that its wholly owned domestic freight rail subsidiary, Kansas City Southern Railway Co., will redeem all $123.5 million of its outstanding 13% senior notes due 2013 on Dec. 15, paying a redemption price of 113. Cline noted that will bring the total amount of debt reduced in the 2009-2011 period up to nearly $400 million.

Leverage down

Cline said that the debt-cutting efforts have been reflected in other numerical measures; leverage, as measured by debt to adjusted EBITDA, has been cut in half to 2.2 times at Sept. 30 from 4.4 times at year-end 2009.

The company's ratio of total debt as a percentage of its total capitalization has fallen to 40% from 49.2% in 2009.

At the same time, Kansas City Southern has "more than doubled" its adjusted EBITDA coverage of its interest obligations, Cline said, to 5.8 times from 2.6 times in 2009.

Maturities smoothed

The railroad executive also told participants at the conference that in the last two years, the company has made "excellent progress" in terms of improving its maturity profile. While at the end of 2009 it had $1.1 billion of maturities coming due in 2012 and 2013 and no maturities beyond 2016, the reverse is true now.

"We've capitalized on what have been very attractive market conditions and very constructive interest rates," he said, and as a result, there are just relatively nominal amounts of debt maturing over the next few years: $6 million this year, $29 million next year, $34 million in 2013 and $46 million in 2014. The first significant debt maturity doesn't come up till 2015, when $275 million of 8% notes come due on June 1, along with small amounts of bank debt.

There are also several outstanding bond issues from the company's Kansas City Southern de Mexico SA de CV subsidiary, although the first of these will not be due until 2016, when $98 million of its 12½% notes mature. In 2018, $300 million of the Mexican subsidiary's 8% notes are slated to mature.

Cline also said that the company has "worked extensively to build liquidity to levels more in line with the rest of the industry," including $400 million of total revolving credit facility availability entered into earlier this year - $200 million at the parent company and $200 million at the Mexican unit - an increase from $225 million of total availability under prior facilities.

The company also had $217 million of cash and equivalents, for total liquidity at the end of the third quarter of $617 million, although that will be reduced by $140 million to cover all of the costs of the 13% bond buyback next month.

No further bond buys on tap

In answer to an investor's query during the question-and-answer session following the formal presentation, Cline said that Kansas City Southern is not planning on any other debt buybacks at this time.

He explained that "I think the lowest-hanging fruit has probably been picked." While the company is "constantly evaluating opportunities," management's thinking is that the 12½% Mexico notes "would be pretty costly for us to buy back."

He said management "occasionally" considers the possibility of taking out its 8% notes - either the parent company bonds due in 2015 or the Mexican bonds due in 2018.

"There are no immediate plans, but I will tell you that it's something that we are constantly looking at."

Aiming for investment grade

Cline said that the company's capital structure improvements and its better operating performance "have not gone unnoticed by the ratings agencies." At the beginning of 2010, the company had a corporate family rating of B2 from Moody's Investors Service and a Standard & Poor's issuer rating level of B. Fast-forward to the present, and its ratings are Ba2 with a stable outlook and BB with a positive outlook, respectively.

He said that while such progress is pleasing, "we've not yet achieved our ultimate goal, which is to be investment grade, and our metrics, especially with the upcoming debt paydown in December, look very much like those of an investment-grade company."

The Kansas City, Mo.-based company maintains "a very active dialogue with the agencies, and we're hopeful that the next move - from mid-BB to high BB - will happen in due course as a result of the results that we've delivered, and we're also hopeful that if we can continue to sustain strong financial and operating performance, that move to investment grade, accomplishing that objective, will happen over a reasonable period of time."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.