Kansas City Southern recently reduced its existing credit facility in an effort to decrease the company's exposure to floating interest rates, according to Paul Weyandt, treasurer. "We cannot justify being a railroad company and having over 50% floating-rate debt," Weyandt said, noting that most of the company's assets are long lived. The company replaced the bank debt with seven-year notes, so its interest-rate expense will increase. But the increased cost is worth it for the company, which removed some interest-rate risk from its income statement, he explained.
Kansas City Southern decreased the size of its overall credit by paying off its $92.5 million "A" term loan and reducing its "B" term loan from $247 million to $150 million. The $100 million revolving portion of the facility was unchanged. The move was done through an amendment and restatement because the fees were lower than for a new syndication, Weyandt noted. In exchange, the company completed a $200 million offering of seven-year notes with a coupon of 71/ 2% through Morgan Stanley.
In addition, the company was able to reduce pricing on its term loan by 75 basis points after paying down $85 million in debt last year and improving its credit ratios. The current market also offered Kansas City Southern the opportunity for aggressive pricing. "We knew that we could get a significant decrease in the spread over LIBOR because it was available in the marketplace," Weyandt said.
The "B" piece is now priced at LIBOR plus 2%, while pricing on the revolver remains at LIBOR plus 21/ 2%. There was no reduction to the price on the revolver because that move would have required 100% approval from its J.P. Morgan-led bank group, Weyandt explained. Instead, the company chose to loosen some of the terms and covenants, he noted.