DBRS Comments on Canadian Pacific Railway’s Expanded Share Repurchase Program

DBRS Limited (DBRS) today notes Canadian Pacific Railway Company’s (CP or the Company) announcement of an expanded normal course issuer bid program to increase its share repurchases to 8% of existing public float from 6% under the current program, which will terminate on March 17, 2016. The change is expected to result in the repurchase of an additional 2,797,181 shares and cash spending of $540.4 million based on CP’s closing share price of $193.2 as at August 28, 2015. DBRS opines that the expanded share repurchase program by itself will not affect CP’s ratings (BBB (high) and R-2 (high), with Stable trends), but notes that the cushion against further weakening of financial metrics at this rating level is now minimal. DBRS regards the expanded share repurchase program as aggressive, taking into consideration that the Company has spent $3.0 billion in share repurchases in the 18 months ended June 30, 2015, with additional repurchases since then.

Assuming that the share repurchase is to be substantially financed by additional debt issuance, DBRS estimates that the Company will reach the limit of its internal unadjusted debt-to-EBITDA ratio of 2.5 times (x) for 2015, which corresponds to the DBRS-adjusted debt-to-EBITDA ratio of 2.7x and adjusted cash flow-to-debt of 27%. DBRS maintains its opinion (expressed in its press release and rating report published on August 10, 2015) that, in line with the Company’s internal leverage target, CP’s corresponding financial metrics should still support the current ratings, although material and sustained deviation from this threshold could pressure the ratings.

Given its increased debt level, CP’s financial metrics could weaken further in the event of an unexpected deterioration in operating results and cash flows as the Company continues to pursue aggressive share repurchases. DBRS does not expect operating conditions for the railway industry in 2016 to become more favourable, and notes that, in such an event, the Company will have to readjust its future share repurchase levels swiftly and diligently to ensure that its financial risk profile stays consistent with its current ratings. Therefore, DBRS will review developments in CP’s quarterly operating results and last-12-month financial metrics and could consider a negative rating action in the event of any further deterioration from current levels.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Railway Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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