DBRS Limited (DBRS Morningstar) removed Canadian National Railway Company’s (CN Rail or the Company) Issuer Rating of “A”, Unsecured Bonds, Debentures & Notes rating of “A”, and the Commercial Paper rating of R-1 (low) from Under Review with Negative Implications, where they were placed on April 21, 2021. At the same time, DBRS Morningstar confirmed all ratings with Stable trends. DBRS Morningstar removed the ratings from Under Review with Negative Implications following the Company’s announcement that it is no longer pursuing a merger with Kansas City Southern (KCS). This announcement came on September 15, 2021, after KCS provided a notice of termination of the definitive merger agreement, executed on May 21, 2021, with CN Rail. This was preceded by (1) the US Surface Transportation Board rejecting the use of voting trust in the proposed merger between CN Rail and KCS on August 31, 2021, and (2) the Board of Directors of KCS determining that Canadian Pacific Railway Company (rated BBB (high), Under Review with Negative Implications by DBRS Morningstar) had offered a “Company Superior Proposal” on September 12, 2021.
In April 2021, DBRS Morningstar placed all of CN Rail’s ratings Under Review with Negative Implications following the announcement that CN Rail had made an offer to combine with KCS in a stock and cash transaction valued at approximately $42.4 billion (USD 33.7 billion). The cash portion was to be funded through USD 19.3 billion in new debt issuance. In addition, CN Rail would have assumed approximately USD 3.8 billion of KCS debt outstanding. While the merger would have led to a meaningful improvement in CN Rail’s business risk assessment, these improvements would not have been sufficient to compensate for the much higher leverage. Thus, all ratings of CN Rail were placed Under Review with Negative Implications.
As CN Rail has ended its pursuit to acquire KCS, DBRS Morningstar expects the Company’s financial metrics to remain commensurate with the current ratings. Nonetheless, DBRS Morningstar does not see any near-term factors that could lead to a positive rating action. However, an erosion in leverage caused by weaker earnings and/or higher debt to fund shareholder distributions or a change in CN Rail’s capital structure and financial leverage policies, such that cash flow-to-debt declines below 35% and debt-to-EBITDA increases above 2.0 times on a sustained basis, could lead to a negative rating action.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Railway Industry (January 26, 2021; https://www.dbrsmorningstar.com/research/372750), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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