(The following appeared at EarthTimes.org on February 27.)
NEW YORK — Fitch Ratings has upgraded the foreign and local currency Issuer Default Ratings (IDRs) of Kansas City Southern de Mexico, S.A. de C.V. (KCSM) to ‘BB-‘from ‘B+’. The Rating Outlook is Stable.
Fitch has also upgraded to ‘BB-‘ from ‘B+’ the following senior unsecured obligations of KCSM:
–US$165 million 7.375% senior notes due 2014:
–US$460 million 9.375% senior notes due 2012;
–US$175 million 7.625% senior notes due 2013.
These rating actions reflect KCSM’s improving operating profile, increased financial flexibility and stronger liquidity over the past two years. Operating EBITDAR, defined as operating EBITDA plus KCSM’s locomotive and railcar lease payments, increased to approximately US$376 million in 2007 compared with US$331 million in 2006 and just US$227 million in 2005. As of Dec. 31, 2007, KCSM had approximately US$1.4 billion in total debt consisting primarily of US$800 million in unsecured senior notes due in 2012-2014 and an estimated US$507 million of off-balance-sheet debt associated with lease obligations. The ratio of total adjusted debt to EBITDAR was 3.6 times (x), an improvement compared with 4.2x in 2006 and 6.1x in 2005. EBITDAR covered fixed expenses, defined as interest expense plus lease payments, by about 2.4x in 2007, compared with 2.1x in 2006 and 1.4x in 2005.
Fitch expects KCSM’s leverage to remain fairly stable in 2008 despite a modest increase in total debt to fund the purchases of 90 new locomotives and 400 new freight cars for approximately US$180 million. Growth in KCSM’s operating income is expected to be driven by increased cross-border traffic from the intermodal, automotive and agricultural segments and a continued favorable pricing environment. KCSM will begin the construction of an intermodal rail terminal at the Pacific coast port of Lazaro Cardenas, which has the potential to become increasingly important to global shippers as an alternative to the congested ports in California. The terminal project and the on-going development of the port infrastructure should strengthen the position of KCSM’s international corridor for traffic between Asia and the United States via Mexico. In 2008, intra-Mexico traffic and the expected growth in the Mexican economy should offset a slowdown in the U.S. economy.
KCSM’s refinancing risk and interest expense were reduced in May 2007 when the company issued US$165 million of 7.375% senior notes due 2014 to pay down US$180 million of 12.50% senior notes due in 2012. KCSM’s parent company, Kansas City Southern (KCS), will need to refinance US$200 million of 9.5% notes coming due in October 2008 and US$200 million of 7.5% notes due in June 2009 at its U.S. operating subsidiary, The Kansas City Southern Railroad Company (KCSR). While Fitch believes that KCS will be able to refinance these obligations, KCSM’s ‘BB-‘ ratings incorporate the risk that KCS could rely on dividend payments or inter-company loans from KCSM to meet its near-term debt service payments. After paying US$120 million for 55 new locomotives in the second half of 2007, KCSM’s cash balance as of Dec. 31, 2007, was US$17 million. KCSM also benefits from US$61 million available under a US$81 million revolving credit facility due 2011.
The ratings for KCSM are supported by the company’s solid business position as a leading provider of railway transportation in Mexico. KCSM is well-positioned to continue benefiting from the growth in the Mexican economy and cross-border trade with the United States as nearly 80% of the company’s revenues are derived from international freight. KCSM operates a strategically significant route connecting Mexico City with Laredo, Texas, the largest freight exchange point between Mexico and the United States. About two-thirds of Mexico’s imports and exports transported by rail pass through this point in Nuevo Laredo, Mexico and Laredo, Texas. By serving customers in various sectors such as general commodities, automotive and intermodal, KCSM’s revenue based is well diversified. Although KCSM’s operating earnings have improved in 2007, the ratings continue to reflect a challenging environment characterized by fierce competition, high fuel costs, and a general shift in manufacturing to China from several countries, including Mexico.
KCSM operates one of three main railroad networks in Mexico, transporting more than 40% of the country’s railway freight volumes. KCSM’s main tracks cover 2,645 miles throughout commercial and industrial areas in the northeastern and central regions of the country and serve three of Mexico’s main seaports. In 2007, revenue of US$813 million was generated from diverse sectors such as agro-industrial, cement, metals and minerals, chemical and petrochemical, automotive, manufacturing and industrial, and intermodal. Through various subsidiaries, Kansas City Southern (KCS) owns 100% of KCSM. In 2007, KCSM generated 47% of KCS’ consolidated revenue and 60% of its operating income.
Fitch’s Credit Analysis report about KCSM can be found on FitchResearch, Fitch’s subscription-based web site, located at www.fitchratings.com or by contacting Products & Services at +1-212-908-0800.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.