2 agencies cut short-line operator G&W’s rating, cite debt-funded dividend

The detailed finances of short-line rail operator Genesee & Wyoming (G&W) haven’t been available since it was bought by an infrastructure-focused investment firm in 2019. 

But G&W has publicly traded debt, and that means rating agencies issue reports on certain aspects of its finances. And last week, in a report that is almost two reports in one, S&P Global Ratings (NYSE: SPGI) reduced its rating on G&W debt even as it gave a strong outlook on the company’s North American short-line business.

Moody’s (NYSE: MCO) also reduced its debt rating on G&W to Ba3 from Ba2. The move by S&P took the debt rating down to BB from BB+. The ratings by the two agencies are considered equivalent. Both are below investment grade.The immediate trigger for the downgrades is G&W’s refinancing of a financing package that involves a term loan and a revolving line of credit, actions that will result in $920 million in net additional secured debt. G&W is taking on the additional debt to fund a $761 million dividend payment to Brookfield Infrastructure, which owns G&W.

According to G&W, it owns or leases more than 100 freight railroads, with 7,300 employees serving a total of 3,000 customers in North America and Europe. Moody’s said the number of short-line railroads in the G&W portfolio is 110.

In North America, its railroads operate in 43 U.S. states and five Canadian provinces. It operates on more than 13,000 track miles.Primary owner Brookfield (NYSE: BIP) is a publicly traded company. Singapore’s sovereign wealth fund, GIC, also has an ownership stake in G&W. And while Brookfield does report the performance of its total rail operations — adjusted earnings before interest, taxes, depreciation and amortization of $411 million and funds from operations of $317 million in 2023 — it does not break out G&W. Brookfield also has rail operations in Australia and Brazil.The cuts in the company’s ratings stem from both agencies seeing the credit metrics at G&W deteriorating as a result of the additional debt load.The S&P report said the new debt structure will push the company’s debt load to 5.5 times EBITDA, which is above the company’s “downgrade threshold” of 4.5X and will cut the ratio of funds from operations to 10%. The downgrade threshold for that metric is 13%.

Moody’s said it expects the G&W debt-to-EBITDA ratio at the close of 2024 to be 5.5X compared to 4.2X when 2023 finished.

Refinancing and a dividend payment

The full transaction involves G&W issuing $3.43 billion in new debt to refinance existing debt and pay the dividend, resulting in the net debt increase of about $920 million.

S&P also noted that G&W plans on spinning off its U.K. and European rail operations. That will reduce EBITDA by $40 million to $45 million, which impacts the debt-to-EBITDA ratio at the company.

Reducing intermodal exposure seen as a plus

On the surface, the ratings cuts are negative. But the S&P Global outlook for G&W’s North American business was otherwise solidly positive, while Moody’s was somewhat more cautious. 

The European operations are mostly intermodal, according to S&P.  With that division no longer part of the company, G&W will “become a bulk commodity-focused rail freight transporter with a presence across North America that has limited exposure to intermodal loads.”

“Intermodal loads are subject to more volatility than bulk and industrial goods and are also more susceptible to substitution by trucks, especially for shorter hauls,” S&P wrote. “Therefore, we believe that the company’s remaining operations will be more resilient to underlying economic conditions.”

And the outlook for those remaining operations sketched out by S&P is solidly positive. Margins at G&W post-European spinoff will be improved “because carrying bulk and industrial goods generates higher revenue per carload.” Evidence of that: The European operations to be spun off accounted for about a third of consolidated G&W revenue and only about 7% of its reported EBITDA. (The EBITDA figure specific to G&W was not disclosed but would be available to S&P Global analysts.)

After the divestiture, S&P Global said, EBITDA margins will improve by 600 to 700 basis points, to the 38% to 39% range. 

G&W issues statement

A spokesman for G&W, asked to comment about the ratings changes, issued a statement that was largely a review of what had occurred, with some perspective on the new structure of the European operations.

“G&W is planning to opportunistically refinance its debt, extending maturities into the 2030s and also enhancing the flexibility of credit terms,” the spokesman said. “As part of the refinancing, we are also separating our North American and UK/Europe companies into stand-alone, sister businesses. Each business will continue to be owned by Brookfield Infrastructure and GIC, and each business will have discrete, stand-alone financing. Our proposed financial structure is reflected in G&W’s latest credit rating from Standard & Poor’s, which remains solid at ‘BB.’”

S&P Global expects Brookfield to maintain its investment in G&W, seeing it as “modestly strategic.”

“G&W is still one of its parent’s largest investments and we believe it aligns with BIP’s strategy of investing in infrastructure assets,” S&P wrote. “Therefore, we believe BIP would provide some support to G&W under certain circumstances — such as during periods of financial distress — and view the railroad as important to its parent’s long-term strategy, given the scale of the investment.”

S&P’s outlook on G&W is stable, meaning an upgrade or downgrade is not likely. In noting that stable rating, S&P gave more support to its optimistic outlook for the short-line operator. Moody’s also has a stable outlook on G&W.

“The stable outlook reflects that, given the wide range of commodities it hauls and the geographic diversity of its operations, we expect the demand for G&W’s services will remain steady over the next year, leading to stable (free operating cash flow) generation,” S&P said. “We expect the company will remain disciplined in using excess cash flow for shareholder distributions while maintaining its debt levels.”

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