However, G&W trades its debt publicly, meaning rating agencies issue reports on certain aspects of the company’s finances. And last week, S&P Global Ratings released a report that is almost two reports in one. (NYSE:SPGI) Despite offering a strong outlook for the company’s North American shortline business, it downgraded G&W’s debt rating.
Moody’s (NYSE:MCO) G&W’s debt rating was also lowered from Ba2 to Ba3. Due to S&P’s move, the debt rating was downgraded from BB+ to BB. Ratings from both agencies are considered equivalent. Both are below investment grade. The immediate trigger for the downgrade was G&W’s refinancing of its financing package, which included a term loan and a revolving credit facility, resulting in net additional secured debt of $920 million. G&W is taking on additional debt to fund a $761 million dividend payment to Brookfield Infrastructure, which owns G&W.
G&W says it owns or leases more than 100 freight railroads and has 7,300 employees serving a total of 3,000 customers in North America and Europe. According to Moody’s, G&W’s portfolio includes 110 short-line railroads.
In North America, railroads operate in 43 states in the United States and five provinces in Canada. Mileage is over 13,000 miles.Principal Owner Brookfield (NYSE:BIP) is a listed company. Singapore’s sovereign wealth fund GIC also holds a stake in G&W. And while Brookfield reports results for its entire rail business, adjusted earnings before interest, taxes, depreciation, and amortization in 2023 were $411 million, and cash inflows from operations were $317 million. dollar, but it does not exceed G&W. Brookfield also has rail operations in Australia and Brazil. The company’s rating downgrade comes as both government agencies view G&W’s credit metrics as deteriorating as a result of the additional debt burden. The new debt structure will push up the company’s debt burden, the S&P report said. EBITDA will be raised to 5.5x, which exceeds the company’s “downgrade criteria” of 4.5x, and the operating cash ratio will be lowered to 10%. The downgrade threshold for this metric is 13%.
Moody’s said it expects G&W’s debt-to-EBITDA ratio to be 5.5x at the end of 2024, compared with 4.2x at the end of 2023.
Refinancing and dividend payments
The overall transaction includes G&W issuing $3.43 billion in new debt to refinance existing debt and pay dividends, increasing net debt by approximately $920 million. .
S&P also noted that G&W plans to spin off its UK and European rail operations. This reduces EBITDA by $40 million to $45 million, impacting the company’s debt-to-EBITDA ratio.
Reducing intermodal transportation exposure is considered a positive
On the surface, the rating downgrade is negative. However, while S&P Global’s outlook for G&W’s North American operations was otherwise solid and positive, Moody’s was slightly more cautious.
According to S&P, its European operations are primarily in intermodal transportation. With the division no longer part of the company, G&W will “limit its exposure to intermodal freight and become a bulk goods-focused rail freight carrier with operations throughout North America.”
“Intermodal freight is more volatile than bulk or industrial goods and is more susceptible to truck substitution, especially for short-distance shipments,” S&P wrote. “Therefore, we believe the rest of our business is more resilient to underlying economic conditions.”
And the outlook for the rest of the business painted by S&P is certainly positive. After the European spin-off, G&W’s profit margins will improve “as transport of bulk and industrial products will result in higher revenue per vehicle load.” The proof: The European operations being spun off account for about a third of consolidated G&W revenue and only about 7% of his reported EBITDA. (His G&W-specific EBITDA numbers were not disclosed but will be available to S&P Global analysts.)
After the sale, S&P Global expects EBITDA margins to improve by 600-700 basis points to a range of 38-39%.
G&W releases statement
When asked to comment on the rating change, a G&W spokesperson issued a statement primarily reflecting on past events, while also adding some perspective on the new structure of the company’s European operations.
“G&W plans to refinance its debt opportunistically, extending maturities into the 2030s and increasing the flexibility of loan terms,” the spokesperson said. “As part of the refinancing, we plan to separate our North American and UK/European companies into independent sister businesses. Each business will continue to be owned by Brookfield Infrastructure and GIC, and each business will receive separate and independent financing. Our proposed financial structure is reflected in G&W’s latest credit rating from Standard & Poor’s, which remains strong at ‘BB’. ”
S&P Global expects Brookfield to maintain its investment in G&W, which it considers to be “moderately strategic.”
“We believe G&W remains one of the parent company’s largest investments and is consistent with BIP’s strategy of investing in infrastructure assets,” S&P said. “Therefore, we believe the BIP will provide some support to G&W in certain circumstances, such as during times of financial distress, and we view the railway as important to the parent company’s long-term strategy given the size of the investment.”
S&P’s outlook on G&W is stable, meaning an upgrade or downgrade is unlikely. S&P further supported its optimistic outlook for the shortline operator, noting that the rating remained stable. Moody’s also has a stable outlook for G&W.
“The stable outlook means that given the breadth of goods the company transports and the geographic diversity of its operations, demand for G&W’s services will remain stable over the next year, leading to stable (free operating cash flow) generation. “This reflects what we expect,” S&P said. “We expect to maintain our debt levels while disciplined use of excess cash flow for distribution to shareholders.”
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