DBRS Comments on CP Railway’s Pension Pre-Payment
DBRS notes that today Canadian Pacific Railway Company (CP or the Company) announced plans to voluntarily contribute approximately $500 million to its Canadian defined benefit pension plan. The contribution will be made from cash on hand, and follows the recent issuance of $400 million in medium-term notes in November 2009. The pre-payment is relatively neutral to CP’s credit profile and does not warrant a rating action.
The pre-payment will reduce the Company’s near-term cash contributions and improve the under-funded position of its pension obligations, which was large (close to $1 billion at end-December 31, 2008, and likely higher at September 30, 2009). CP now estimates that its 2010 pension contributions will be between $150 million and $200 million, or $100 million below the previous estimated range, which increases the Company’s financial flexibility.
The decline in near-term liquidity is modestly negative, but CP’s cash position was significant at September 30, 2009 (over $600 million) and increased with the aforementioned debt issuance that will largely be used to fund the pre-payment. As such, DBRS expects the Company’s liquidity position to remain solid after the pre-payment. DBRS notes that the increase in debt in Q4 2009 is likely to pressure CP’s coverage and leverage ratios over the next two quarters. However, term debt maturing in May 2010 ($350 million) is expected to be redeemed with cash, which should largely offset the impact of the Q4 2009 debt issuance and return core credit metrics to near 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 is a Corporate rating.
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