Genesee & Wyoming (GWR) Ratings Affirmed at Moody's Amid Planned Glencore Acquisition

October 21, 2016 12:30 PM EDT

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Moody's Investors Service ("Moody's") affirmed the ratings of Genesee & Wyoming Inc. (NYSE: GWR), including the Ba2 Corporate Family Rating ("CFR") and the Ba2 ratings of the company's credit facility, following the announcement that it plans to acquire the internal rail haulage operator of Glencore Plc ("Glencore") in the Hunter Valley coal region in Australia ("GRail") for A$1.14 billion ($866 million). The ratings outlook remains stable.

RATINGS RATIONALE

The affirmation of Genesee & Wyoming's ratings considers the limited incremental effect on financial leverage from the planned acquisition, the unique familiarity that Genesee & Wyoming has with the GRail operations as well as the mitigation of risk from long-term coal exposure through a new take-or-pay rail haulage contract with Glencore.

The GRail acquisition is structured as a joint investment by Genesee & Wyoming and funds managed by Macquarie Infrastructure and Real Assets ("MIRA"). Genesee & Wyoming will contribute its existing Australian rail operations and MIRA will contribute approximately A$644 million ($489 million) in equity and shareholder loans, resulting in a 51% ownership for Genesee & Wyoming of the combined entity ("GWA JV"). Taking into account new acquisition debt issued by GWA JV of A$690 million ($524 million) and a A$250 million ($190 million) repayment of Genesee & Wyoming's outstanding Australian term loan, Moody's estimates debt/EBITDA of 4.1 times in 2016 on a pro forma basis for the transaction, compared to an expected 3.8 times in 2016 for Genesee & Wyoming on a standalone basis. The estimated pro forma debt/EBITDA includes the impact of the $126 million planned acquisition of U.S. regional railroad operator Providence and Worcester Railroad Company. While this level of financial leverage is high for Genesee & Wyoming's Ba2 CFR, the company has a consistent financial policy of deleveraging its balance sheet following debt-funded acquisitions.

Genesee & Wyoming is uniquely familiar with GRail because it currently operates the coal haulage business under a contract with GRail. GWA JV will enter into a new 20-year contract to haul coal on an exclusive basis from Glencore's mines. The contract provides for minimum guaranteed volumes over the first 18 years, mitigating the risk from long-term exposure to coal. Moody's expects that the GRail acquisition will materially enhance the profitability of Genesee & Wyoming's Australian operations.

Genesee & Wyoming maintains good liquidity (SGL-2). Moody's estimates free cash flow to be $230 million in 2016, including grants from outside parties, ample to fund mandatory amortizations under the company's term loans of close to $25 million per quarter that commenced in the third quarter of 2016.

The stable outlook is predicated on Moody's expectation that the challenges posed by weak freight demand across the company's geographies will abate, which, together with the earnings enhancement from the GRail acquisition, will help to improve margins to more than 20% in 2017. Taking into account the company's scheduled debt repayments, Moody's expects debt/EBITDA to decrease to 3.6 times in 2017.

The ratings could be upgraded if Genesee & Wyoming increases its scale, demonstrates an improvement in operating margins towards historical levels of 25% and if debt/EBITDA is sustainably maintained at around 3 times. Meaningfully diminished risks in relation to acquisitions would also be important to consider a rating upgrade.

The ratings could be downgraded if demand for rail freight weakens or if there is a meaningful deterioration in pricing or cost structure that sustainably affects profit negatively, specifically if operating margins fall materially below 20% over an extended period. The ratings could also be downgraded if we expect a deterioration in credit metrics, such as debt/EBITDA moving towards 4 times or EBIT/Interest of less than 3.5 times. Further, share repurchases or an initiation of dividends is also likely to impact ratings negatively.

Affirmations:

..Issuer: Genesee & Wyoming Inc.

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD3)

..Issuer: GWI UK ACQUISITION COMPANY LIMITED

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD3)

..Issuer: Genesee & Wyoming Australia Pty Ltd

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD3)

Outlook Actions:

..Issuer: Genesee & Wyoming Inc.

....Outlook, Remains Stable

..Issuer: GWI UK ACQUISITION COMPANY LIMITED

....Outlook, Remains Stable

..Issuer: Genesee & Wyoming Australia Pty Ltd

....Outlook, Remains Stable

The principal methodology used in these ratings was Global Surface Transportation and Logistics Companies published in April 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.



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