Toronto, March 22, 2021 -- Moody's Investors Service, ("Moody's") downgraded
Canadian Pacific Railway Company's ("CP") senior unsecured ratings to
Baa2 from Baa1 following the announcement that its parent, Canadian
Pacific Railway Limited, has agreed to acquire Kansas City Southern
("KCS") for approximately $29 billion, the funding
of which includes raising approximately $8.6 billion in
debt. CP's commercial paper rating has been affirmed at Prime-2
and its outlook remains stable.
Financing for the new debt has been committed. As part of the merger,
CP will also assume KCS' outstanding debt of approximately $3.8
billion.
"The downgrade reflects the increase in adjusted leverage,
which will exceed 3X through 2023" said Jamie Koutsoukis,
Moody's analyst. "It also incorporates the regulatory and
integration risks of the acquisition" she added.
The following rating actions were taken:
Affirmations:
..Issuer: Canadian Pacific Railway Company
....Senior Unsecured Commercial Paper,
Affirmed P-2
Downgrades:
..Issuer: Canadian Pacific Railway Company
....Senior Unsecured Shelf, Downgraded
to (P)Baa2 from (P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
Outlook Actions:
..Issuer: Canadian Pacific Railway Company
....Outlook, Remains Stable
RATINGS RATIONALE
CP's Baa2 credit rating benefits from 1) its well-positioned railway
network, 2) a preponderance of stable commodity hauls, and
3) a track record of a very good operating margin. CP is constrained
by 1) its small size versus its North American Class 1 peers, 2)
uncertainties associated with regulatory approval for CP's recent announcement
to acquire KCS (we expect shareholder approval will occur in mid-2021)
which will result in adjusted leverage exceeding 4x in 2021, 3)
its exposure to economic cyclicality, 4) adverse weather conditions
and 5) increasing regulatory risks. Moody's believes the company
has the ability and is committed to reducing its adjusted financial leverage
towards the mid-point of its 2x to 2.5x public leverage
target, however the time to achieve this will be protracted.
The acquisition of KCS will strengthen CP's rail network,
creating a bigger continental network and expanding the reach of single
hauls and service capabilities that can be provided to customers.
In addition, its credit profile will benefit from a larger,
more diversified business with a greater exposure to higher margin merchandise
business, increased customer diversity and breadth and the potential
for synergies from network and equipment efficiencies as well as greater
revenue expansion. Offsetting these benefits however is the increase
in adjusted leverage which will increase from 2.5x at year-end
2020 to 4.5x pro forma for the acquisition, and remain above
3x through 2023. There is also the economic risk to CP should they
not be granted regulatory approval and be required to unwind its purchase
of KCS at an unknown price.
CP has excellent liquidity. Excluding the announced acquisition,
the company has CAD2.5 billion in expected sources of liquidity
compared to about CAD770 million of uses over the next 12 months.
Sources of liquidity include cash of CAD147 million and an undrawn US$1
billion credit facility (matures in September 2024) as of December 31,
2020. As well, we expect CP will generate about CAD1.1
billion of free cash flow in 2021. The company has C$320
million of debt due August 2021, and C$450 million due in
January 2022. CP's revolving credit facility agreement has a maximum
debt to EBITDA covenant and we expect they will maintain significant headroom
under this covenant.
CP has secured US$8.6 billion of committed bridge financing
for its announced acquisition of KCS.
The stable outlook reflects Moody's expectation CP existing rail
network will continue to operate well, such that operating margins
do not decrease below 37%. It also incorporates the expectation
that the company will receive shareholder approval for the KCS acquisition
in mid-2021 and will make steady progress in reducing its initial
elevated leverage as a result of the acquisition towards 3x by 2023.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade would require clarity regarding regulatory approval
for CP's acquisition of KCS. It would also require the company
maintain adjusted debt/EBITDA below 2.75x and free cash flow/debt
of more than 10%.
A ratings downgrade could occur if Moody's expects the company to sustain
its adjusted debt/ EBITDA above 3.25x and free cash flow/debt of
less than 5%.
The principal methodology used in these ratings was Surface Transportation
and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Canadian Pacific Railway Company, headquartered in Calgary,
Alberta, Canada, provides rail freight transportation services
over a 12,700 mile network. The railroad serves the principal
business centers of Canada from Montreal to Vancouver as well as the U.S.
Midwest and Northeast regions. Revenues in 2020 totaled CAD7.7
billion. KCS operates a Class I railroad in the central U.S.,
The Kansas City Southern Railway Company, and, through its
wholly-owned subsidiary Kansas City Southern de Mexico, S.A.
de C.V., owns a concession to operate Mexico's northeastern
railroad. Revenues in 2020 totaled $2.6 billion.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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.
Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
