Moody’s Investors Service has downgraded Brunswick Rail Limited’s (BRL) corporate family rating to B1 from Ba3 and probability of default rating to B1-PD from Ba3-PD. Moody’s has also downgraded to B1 from Ba3 the senior unsecured rating on the $600 million Eurobond issued by Brunswick Rail Finance Limited and guaranteed by BRL’s key operating subsidiaries. The outlook is negative.
The downgrade reflects Moody’s view that BRL’s financial metrics, which have weakened beyond thresholds for the company’s Ba3 rating, will not substantially recover over the next 12-18 months because of (1) the persistently weak pricing environment in the company’s core Russian market, and (2) BRL’s ambitious growth strategy which effectively prioritises fleet expansion over deleveraging.
In 2013, BRL’s revenues and Moody’s-adjusted EBITDA declined as a result of a downturn in the freight rail transportation market in Russia and a $9 million bad debt provision. BRL’s Moody’s-adjusted EBITDA margin remained fairly high, 67.7% as of year-end 2013, although down from 75.4% as of year-end 2012. However, in absolute terms, the company’s EBITDA declined 25% from 2012, raising leverage to 4.6x adjusted debt/EBITDA as of year-end 2013, from 3.5x a year earlier (all metrics are Moody’s-adjusted). In addition, as of year-end 2013 BRL’s EBIT interest coverage declined to 1.5x from 2.1x as of year-end 2012 and its retained cash flow (RCF)/debt to 13.6% from 21.5% (all metrics are Moody’s-adjusted).
BRL’s ambitious growth strategy, whereby it expects to expand its fleet to 40,000 railcars by 2018 (from 24,619 at end-2013), indicates in Moody’s view a potential priority on growth over deleveraging to the thresholds for a Ba3 rating. In addition, Moody’s expects that the increase in BRL’s dividend payouts following the issuance of preferred shares placed with the European Bank for Reconstruction and Development (EBRD, Aaa stable) in 2014 will restrain the company’s potential for restoring its financial metrics. Even if BRL were not to raise new debt to finance its capital expenditures (capex) in 2014, its earnings and cash flow generation would likely remain constrained by the persistently weak pricing environment in the Russian market of operating leasing of freight railcars. As a result, Moody’s expects the company’s debt/EBITDA to remain above 4.0x and EBIT interest coverage below 2.0x, which were the thresholds for a Ba3 rating (all metrics are Moody’s-adjusted), over the next 12 to 18 months.