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Rating Action:

Moody's affirms Caa1 rating of Florida East Coast Holdings Corp.; outlook stable

09 Apr 2014

New York, April 09, 2014 -- Moody's Investors Service ("Moody's") has affirmed the Caa1 Corporate Family Rating ("CFR") of Florida East Coast Holdings Corp. ("FECH") and has assigned a B3 rating to the $850 million senior secured notes due 2019 that the company plans to arrange to refinance its existing notes. In addition, Moody's has assigned a Caa3 rating to the $250 million senior unsecured notes due 2020 that FECH plans to issue as part of this refinancing. FECH intends to issue the $850 million senior secured notes and the $250 million senior unsecured notes with Florida East Coast Industries, LLC ("FECI") as co-issuer, with a portion of the proceeds to be allocated to each of the issuers. The rating action considers FECH's strong growth trajectory and increasing profitability, balanced against the company's elevated debt levels as a result of its obligations under the new notes. The ratings outlook is stable.

RATINGS RATIONALE

The Caa1 CFR of FECH takes into account the strong revenue growth and improvements in profitability that the company has demonstrated in recent years. Revenues increased to $279 million in 2013, up from $200 million in 2010. Over the same period, operating income margins increased to 27.3% in 2013 from 22.4% in 2010. This has resulted in a substantial increase in cash flow from operations which, to a large extent, the company has invested in infrastructure and equipment to accommodate increased freight volumes and maintain service levels.

The Caa1 rating also considers the company's compelling market position in the Florida freight market. FECH is the only railroad with access to key ports in South Florida and offers a competitive alternative to freight haulage by truck. FECH's operations remain regionally concentrated, however, with limited freight diversification.

Moody's considers FECH's elevated debt levels a key constraint on the company's ratings. Pro forma for the proposed refinancing, Moody's estimates leverage to be 6.9 times in 2013, as measured by Debt to EBITDA. However, FECH and FECI are co-issuers of the proposed notes and the notes are joint and several obligations of the issuers (FECI is a real estate and infrastructure development company that, like FECH, is owned by funds that are managed by Fortress Investment Group, LLC). In addition, the notes are guaranteed by certain subsidiaries of FECH, but are not guaranteed by any subsidiaries of FECI, which implies that the obligations of FECI under the new notes are structurally subordinated to any existing debt that resides at FECI's subsidiaries. In view of these structural aspects, Moody's has recalculated FECH's leverage assuming $1.1 billion of aggregate principal amount of the new notes and an increase in EBITDA that reflects FECI's surplus cash generation after servicing its existing debt, resulting in an estimated Debt to EBITDA of approximately 8.5 times in 2013, pro forma for the new notes.

Moody's assesses the liquidity profile of FECH to be adequate. The company maintains a sizeable cash balance ($36 million as of December 31, 2013), generates an increasing amount of cash flow from operations and has no material debt maturities until 2019, following the proposed refinancing. In addition, the company has a $30 million asset-based revolving credit facility that expires in January 2015. With capital expenditures in 2014 significantly higher than in 2013, Moody's expects free cash flow in 2014 to be negative.

The proposed $850 million senior secured notes are rated B3, one notch above the Caa1 CFR of FECH. This reflects the material amount of unsecured liabilities, primarily the new senior unsecured notes, that are ranked below the senior secured notes in Moody's Loss Given Default ("LGD") methodology. Conversely, as the proposed $250 million senior unsecured notes are ranked subordinated to a substantial amount of secured debt in the LGD analysis, the rating for the new senior unsecured notes is Caa3, two notches below the CFR.

The stable rating outlook is predicated on Moody's expectation of continuing strong revenue growth and an improvement in operating income margin in 2014. As the company's growth in EBITDA is likely to offset the impact of an increase in total debt to fund a portion of FECH's elevated capital expenditures, Moody's expects leverage to decrease in 2014 from the estimated levels in 2013 pro forma for the refinancing.

Ratings could be lowered if an unexpected weakening in freight demand results in deteriorating pricing or volumes. Moody's believes that operating income margins that fall materially below 25% during a prolonged period of weak freight demand could result in a significant decrease in free cash flow and hinder the company's ability to maintain its credit metrics and an adequate liquidity profile. Metrics such as Debt to EBITDA in excess of 9.0 times or FFO to Debt below 5.0% could also pressure the rating downward.

The ratings could be revised upward if the company can demonstrate continuing growth in revenues and improvements in profitability, while generating free cash flow that is applied to repay debt. Specifically, Debt to EBITDA sustainably less than 6.5 times and FFO to Debt above 8.0% could warrant upward rating consideration.

Assignments:

..Issuer: Florida East Coast Holdings Corp.

....Senior Secured Regular Bond/Debenture, Assigned B3

....Senior Secured Regular Bond/Debenture, Assigned a range of LGD3, 40 %

....Senior Unsecured Regular Bond/Debenture, Assigned Caa3

....Senior Unsecured Regular Bond/Debenture, Assigned a range of LGD6, 90 %

Outlook Actions:

..Issuer: Florida East Coast Holdings Corp.

....Outlook, Changed To Stable From Positive

..Issuer: Florida East Coast Railway Corp.

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: Florida East Coast Holdings Corp.

.... Probability of Default Rating, Affirmed Caa1-PD

.... Corporate Family Rating, Affirmed Caa1

....Senior Unsecured Regular Bond/Debenture Aug 1, 2017, Affirmed Caa3

..Issuer: Florida East Coast Railway Corp.

....Senior Secured Regular Bond/Debenture Feb 1, 2017, Affirmed B3

The principal methodology used in this rating was the Global Surface Transportation and Logistics Industry methodology published in April 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Florida East Coast Holdings Corp., headquartered in Jacksonville, FL, operates a freight railroad that services the east coast of Florida from Jacksonville to Miami. The company is owned by funds managed by Fortress Investment Group LLC.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Renier Michael Lipsch
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Caa1 rating of Florida East Coast Holdings Corp.; outlook stable
No Related Data.
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