Fitch Rates CSX’s New $1B Sr. Unsecured Notes ‘BBB’
Fitch Ratings has assigned a rating of ‘BBB’ to the $1.0 billion in new senior unsecured notes issued by CSX Corp. (NYSE:CSX). The new notes consist of $300 million of 5.6% senior unsecured notes due 2017 and $700 million of 6.15% senior unsecured notes due 2037. Proceeds from the new notes will be used to repay $600 million in debt that matures in 2007, as well as prepay $150 million in 8.3% notes due 2032. The remainder of the borrowings will be used for general corporate purposes. The new notes contain a change of control put provision that requires CSX to repurchase the notes if a change of control occurs and, as a result, the company’s ratings fall below investment grade. The Rating Outlook for CSX is Stable.
CSX’s ratings are based on the railroad’s improved credit profile, robust free cash flow and continued expectations for favorable industry demand. Although the slowing U.S. economy drove a decline in volumes in the first quarter, especially in the automotive and building products sectors, the industry revenue environment remains positive, with CSX posting an 8.1% increase in unit revenue in the first quarter. In addition, about 11% of CSX’s revenue base is not yet covered by fuel surcharges, providing further opportunity to raise revenues as those contracts are renewed. CSX’s cost structure has improved along with its revenue base, with the company producing a first quarter operating ratio (OR) of about 80.6% (adjusted for Hurricane Katrina insurance recoveries), well below the ORs it recorded several years ago. Although the first quarter adjusted OR was 150 basis points higher year-over-year, much of the increase was attributable to expenses associated with a derailment in January.
The change of control provision included in the new notes provides a layer of protection for the holders should CSX become the subject of a leveraged buy-out (LBO). Although the combination of heavy capital spending needs, large unionized employee populations, regulations limiting further mergers and a lack of non-core assets that could be sold limit attractiveness of the large Class I railroads as LBO candidates, the concept of such a transaction has lately been the subject of much public discussion. Putting aside the LBO discussion, Fitch expects to see continued improvement in CSX’s cost profile, as the railroad’s margins benefit from infrastructure investments that the company has made over the past two years. Combined with the favorable revenue environment, free cash flow is expected to remain strong, although it will be primarily directed toward CSX’s share repurchase program. The company appears to be comfortable with its current leverage level, lessening the likelihood of any material reduction in debt over the near term.
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