Stocks & Investing
Stocks and Investing
Stocks and Investing
Fri, April 1, 2011
Thu, March 31, 2011 
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has upgraded the ratings of CSX Corp. (NYSE: CSX). A full list of rating actions is shown below. CSX's ratings apply to approximately $7.8 billion in senior unsecured debt and a $1.25 billion unsecured revolving credit facility. The Rating Outlook is Stable.
The upgrade reflects the company's fundamentally improved financial profile as it has leveraged efficiencies gained over the past several years to consistently grow margins and generate strong free cash flow. As a result, CSX reported record operating and financial metrics in 2010 despite volumes remaining slightly below pre-recession levels. The upgrade also considers the likelihood that CSX will continue to divert a material portion of its operating cash flows to shareholders in the form of increased dividends and additional share repurchases, and recognizes the possibility that the company could engage in some modest incremental borrowing to support its shareholder-return initiatives.
More generally, CSX's ratings and Outlook reflect the Class I railroad operator's competitive position as one of the two largest eastern freight operators and the fuel-efficiency advantage compared to freight alternatives such as trucking. The company's credit profile is further supported by financial flexibility created through a conservative cash deployment approach during the downturn that has resulted in a strong liquidity position. Propelled by double-digit volume improvement and a resilient pricing environment, CSX produced record free cash flow and managed to report the lowest full-year operating ratio (OR) in the company's history in 2010. Fitch expects continued improvement throughout 2011 as the U.S. economy expands and demand overseas drives strong export coal volumes. Combined with increased operational efficiency, pricing gains are expected to translate to strong free cash flow over the next several years, providing necessary support to cash deployment programs.
Volumes improved noticeably in 2010 following a sharp decline that began in late 2008 and lasted through 2009. Overall carload and container volumes were up 10.2% year-over-year in 2010, with the strongest growth seen in the automotive (up 45%), metals (up 22%) and intermodal segments (up 17%). However, coal volumes were up just 1%, reflecting continued high utility stockpiles which offset strong export coal demand from Europe and Asia. Demand in CSX's coal segment has begun to strengthen in the early part of 2011 and Fitch expects the positive momentum to continue over the intermediate term as the global economy gradually improves. Furthermore, with the investments that CSX has made in its network infrastructure over the past several years, Fitch does not expect the rise in volumes to result in track congestion or operational fluidity issues, such as those seen in the period following the prior downturn.
The rail-based pricing environment has remained positive, although pricing is still not as strong as in the pre-recession period. CSX reported a 7% increase in total revenue per unit in 2010. Fitch expects core pricing throughout the industry to remain positive and above the rate of railroad inflation through 2011, with the potential for stronger growth in 2012 as the U.S. economic recovery gains further traction. As a result, pricing is expected to contribute to ongoing margin strength and positive free cash flow generation over the next several years.
As a result of record free cash flow, the suspension of the company's share repurchase program in 2009, and the refinancing of significant debt maturities, CSX has built and maintained a strong liquidity position. The company ended 2010 with cash, cash equivalents and marketable securities of $1.35 billion, well above its pre-recession level. In addition, the company has access to a $1.25 billion unsecured revolving credit facility that matures in May 2012 and a $250 million 364-day receivables securitization program that expires in December of this year, both of which were undrawn at the end of 2010. Lease-adjusted leverage (lease-adjusted debt/EBITDAR) stood at 2.65 times (x) at year-end, below the levels seen prior to the recession. The consistency in lease-adjusted leverage has been supported by steadily rising EBITDA margins and declining lease expenses. Balance sheet debt at year-end was $8.7 billion, including $613 million of current maturities, $500 million of which matured on March 15, 2011.
With its strong liquidity position and in light of its positive operating trends, the company restarted its share repurchase program in the first quarter of 2010. Over the course of the year, the company bought back nearly $1.5 billion of common stock. Fitch expects the company's share repurchase program will continue to be the primary channel for returning cash to shareholders. With over $1 billion of free cash flow generated in 2010, CSX is projected to produce similarly strong free cash flow in 2011, holding dividends constant, as operating cash flow growth is offset by increased capital expenditures. As a result, free cash flow generation should be strong enough to fund a significant portion of share repurchase activity this year. As previously mentioned, Fitch recognizes that CSX could engage in some incremental borrowing to augment the number of shares that could be repurchased. An increase in leverage would not necessarily result in a reversion back to 'BBB-', however, as the company's credit profile can support some additional borrowing and remain consistent with a 'BBB' profile.
The most significant risk facing CSX at this time is the potential for an unexpected slowing or reversal of the economic improvement experienced over the past several quarters. Under such a scenario, Fitch would expect volumes to decline and pricing to weaken, pressuring CSX's near-term credit profile. Additional risk factors include an increase in regulatory oversight of the rail industry's pricing practices that could pose some marginal risk over the long term as it would potentially slow the rate of margin and free cash flow growth. In general, Fitch does not expect any increased regulation, at least as currently envisioned, to put material pressure on the company's credit profile in the near term. Fitch would also note that previous corporate governance concerns regarding proxy battles with activist hedge funds continue to moderate as shareholder returns have increased and half of the activist directors will have turned over their seats on the board following the upcoming elections.
Fitch has upgraded the following:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Senior unsecured credit facility to 'BBB' from 'BBB-';
--Senior unsecured debt to 'BBB' from 'BBB-'.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Evaluating Corporate Governance' (Dec. 16, 2010);
--'Analysis of U.S. Corporate Pensions' (Dec. 1, 2010);
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Liquidity Considerations for Corporate Issuers
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]
Analysis of U.S. Corporate Pensions
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365 ]
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