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Fitch Affirms CSX's Ratings at 'BBB-'; Outlook Revised to Positive

^{Published on 2010-05-21 08:35:17 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed its ratings of CSX Corporation (NYSE: CSX) as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured rating at 'BBB-';

--Unsecured bank facility rating at 'BBB-'.

Fitch's ratings apply to approximately $7.1 billion in senior unsecured debt and a $1.25 billion unsecured revolving credit facility. The Rating Outlook for CSX has been revised to Positive from Stable.

CSX's ratings and Outlook reflect the Class I railroad operator's strengthened operational performance and expectations of an improving financial profile as the company leverages efficiencies gained during the recession to grow its margins and free cash flow. Despite the significant decline in railroad volumes experienced in 2009, CSX remained free cash flow positive and managed to report the lowest full-year operating ratio (OR) in the company's history. Although the industry pricing environment has weakened somewhat from the strong levels seen prior to the recession, pricing growth remains positive, and Fitch expects further pricing improvement as the U.S. economy recovers. Combined with volume growth and increased operational efficiency, this pricing resilience is expected to drive continued strength in both margins and free cash flow over the next several years. The most significant risks to CSX's credit profile are the potential for a stalling of the still-fragile economic recovery, the potential for the company to increase leverage to buy back shares and/or the possibility of increased government regulation of industry pricing.

As a result of the U.S. recession, CSX's volumes declined 15% in 2009, which was in-line with the level of decline seen in the industry overall. However, a combination of continued industry pricing power and the company's rapid moves to reduce operating expenses resulted in a full-year OR of 74.7%, a record for the company and one of the strongest showings among the U.S. Class I railroads. Although free cash flow of $108 million was down significantly from the $812 million recorded in 2008, the ability to remain free cash flow positive in the face of a double-digit volume decline demonstrated the flexibility built into the company's cost structure in the years since the last downturn.

As expected, volume growth turned positive in the first quarter of 2010, continuing the trend of sequential volume improvement experienced since the second quarter of last year. Overall carload and container volumes were up 4.7% year-over-year in the first quarter, with strong growth seen in the automotive (up 64%) and intermodal segments (up 14%). Coal volumes were down 13%, however, reflecting continued high utility stockpiles, although there are signs that utilities' coal inventories are inching back toward more normal levels. In general, Fitch expects the positive momentum in demand growth will continue as the U.S. economy slowly recovers, and through May 15, CSX's volumes so far in the second quarter of this year were up 15%. Although demand is increasing, infrastructure investments that the company has undertaken over the past five years should lessen the likelihood that higher volumes will lead to the sort of track congestion issues and loss of operational fluidity that was seen in the period following the last downturn.

Despite the significant decline in industry demand last year, the pricing environment generally has held up, and Fitch expects core pricing to remain positive and above the rate of railroad inflation through the remainder of this year. In the first quarter of 2010, CSX's 'same store' pricing, which excludes the impacts of fuel surcharges and volume mix, grew 5% year-over-year, which, although down from the growth rates seen prior to the recession, was still relatively solid. Looking beyond 2010, Fitch expects continued pricing growth as the U.S. economic recovery continues to gain traction. As such, positive pricing is expected to contribute to ongoing margin strength and positive free cash flow generation over at least the next several years.

Positive free cash flow, the suspension of the company's share repurchase program from late 2008 through the fourth quarter of 2009, and the refinancing of significant debt maturities has resulted in a very strong liquidity position. CSX ended the first quarter of 2010 with cash, cash equivalents and marketable securities of $1.05 billion, well above its traditional level of cash and marketable securities holdings. In addition, the company has access to a $1.25 billion unsecured revolving credit facility that matures in 2012 and a $250 million receivables securitization program that expires in September of this year, both of which were undrawn at the end of the first quarter. Lease-adjusted leverage (lease-adjusted debt/EBITDAR) stood at 3.0 times (x) at quarter end, in-line with the level seen prior to the recession. Balance sheet debt at quarter-end was $8 billion. This included $617 million of current maturities, $500 million of which does not come due until March 2011. Based on CSX's past practices, Fitch expects the company will refinance most of its significant future maturities when they come due.

With a strong liquidity position and in light of its positive operating trends, CSX restarted its share repurchase program in the first quarter of this year, buying back $229 million in shares in the period. As the pace and durability of the economic recovery become more clear, Fitch expects the company's share repurchase program will ramp up over the remainder of this year. Free cash flow is expected to be strong enough to fund significant share repurchase activity in 2010, but Fitch notes that CSX also could engage in some incremental borrowing to increase the number of shares that could be repurchased, particularly given the extended period in which the company did not repurchase any shares. An increase in leverage would not necessarily result in Fitch revising CSX's Rating Outlook back to Stable, however, as the company's credit profile could accommodate some additional borrowing while remaining on-track for an upgrade in the next 12 to 18 months. If CSX does increase leverage to fund share repurchases, Fitch will evaluate the effect on the company's credit profile at the time of the increase and make any adjustments to the company's ratings or outlook as warranted.

The most significant risk to CSX's credit profile is the potential for an unexpected slowing or reversal of the economic growth trends currently forecasted, leading to a corresponding weakening of freight demand. As noted earlier, CSX weathered the most-recent recession relatively well, however, and it is likely that the company's credit profile would remain consistent with its investment grade ratings if the economy were to weaken again. An increase in government regulation of industry pricing, such as the Surface Transportation Board reauthorization legislation currently under consideration in the U.S. Senate, also could pose a risk to CSX's credit profile as it potentially could pressure margins and free cash flow. In general, though, Fitch does not expect the effect of any increased regulation, at least as currently envisioned, to have material implications for CSX's ratings. A significant pick-up in leveraged share repurchase activity, as mentioned earlier, also could pose a risk for the company's credit profile, although, as noted, such a move would not necessarily keep Fitch from considering an upgrade of CSX's ratings in the next 12 to 18 months.

CSX's ratings reflect the application of Fitch's current criteria, which are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--Corporate Rating Methodology (Nov. 24, 2009);

--Liquidity Considerations for Corporate Issuers (June 27, 2007);

--Cash Flow Measures in Corporate Analysis (Oct. 12, 2005).

Additional information is available at [ www.fitchratings.com ].

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