OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-(EXP)' rating to Kansas City Southern's (KCS) proposed senior unsecured credit facility and notes issuance. Fitch has also assigned an 'F3' short-term IDR to KCS and an 'F3(EXP)' rating to KCS's proposed commercial paper program. Fitch has existing unsecured and short-term ratings for both of KCS' operating subsidiaries (Kansas City Southern Railway Company and Kansas City Southern de Mexico SA de CV) but previously did not have issue ratings for the parent company, KCS.

Assignment of the unsecured and short-term ratings follows KCS' exchange offer of the existing unsecured notes at both KCSR and KCSM and the concurrent launch of a new $800 million unsecured credit facility and commensurately sized CP program. The exchange offer is an effort to simplify KCS' debt structure, with the intention of moving all existing debt at each of the operating subsidiaries, to the parent company level. In addition, the new facility upsizes the existing $450 million revolver and CP program at Kansas City Southern Railway Corp (KCSR) and the $200 million revolver and CP program at Kansas City Southern de Mexico (KCSM).

Fitch does not believe that the change in capital structure has an impact on the credit quality of the debt, and therefore the 'BBB-' ratings at KCS are in line with the current unsecured ratings at both operating subsidiaries.

Current holders of debt at the KCSR level will be essentially unaffected by the new structure. Debt at the KCSR level which currently benefits from a downstream guarantee from KCS will be exchanged for new debt at the KCS level that will benefit from an upstream guarantee from KCSR.

The lack of a guarantee from KCSM means that the obligations at KCS will be subordinate to any remaining notes at KCSM. However, Fitch does not view this risk as having a material impact on the ratings. While the amount of remaining debt at each operating subsidiary is contingent upon the success of the exchange offer, the remaining amounts are not expected to be material enough to impact the ratings of the debt at the parent company. This risk will also diminish over time as the company pays down any remaining debt left over at the KCSM level.

Fitch's key assumptions within the rating case for Kansas City Southern include:
--Continued moderate economic growth in the U.S. and Mexico;
--Low-to-mid-single digit revenue decline in 2015 followed by modest growth thereafter;
--Operating margins expanding incrementally over the intermediate term;
--Adjusted debt levels remaining roughly flat through the forecast period;
--Modest annual increases in the dividend.

Future actions that may individually or collectively cause Fitch to take a positive rating action include:
--Total adjusted debt/EBITDAR sustained below 2.5x;
--Sustained FCF margin in the low to mid-single digits;
--Execution on KSU's goal of reaching a low 60% range operating ratio.

A negative rating action is not expected at this time. However, a downgrade could be precipitated by more aggressive, debt funded share repurchases causing debt/EBITDAR to be sustained above the 2.75x-3.0x range. Ratings pressure could also be caused by a severe drop off in demand for cargo flowing between the U.S. and Mexico. EBITDAR margins falling towards or below the 40% range, and sustained negative free cash flows could also lead to a negative ratings action.


Fitch has assigned the following ratings:

Kansas City Southern
--Short-term IDR 'F3';
--CP 'F3(EXP)';
--Senior unsecured bank facility 'BBB-(EXP)';
--Senior unsecured notes 'BBB-(EXP)'.

Fitch currently rates Kansas City Southern as follows:

Kansas City Southern
--Issuer Default Rating (IDR) 'BBB-'.

Kansas City Southern Railway Co.
--IDR 'BBB-';
--Short-term IDR 'F3';
--CP 'F3'
--Senior unsecured bank facility 'BBB-';
--Senior unsecured notes 'BBB-'.

Kansas City Southern de Mexico SA de CV
--Foreign currency IDR 'BBB-';
--Local currency IDR 'BBB-';
--Short-term IDR 'F3';
--CP 'F3';
--Senior unsecured notes 'BBB-'.

The Rating Outlook is Positive.