an interesting item while perusing the quarterly report of my ‘junk bond/high yield’ mutual fund are two listings for Florida East Coast Railway that show them paying a little over 11 percent when almost all the other companies are paying in the 5-7 percent range. anyone have any ideas on why they are paying such a high rate of interest? Ed Ball must be rolling in his grave!
The short answer is that the company is burdened by high interest payments on its long term debt.
In FY12, FY11, and FY10 the company (Florida East Cost Holding Company) had net income of $53,020 million, $34,997 million, and $43,012 million before interest, other income and taxes. Its interest expenses were $58,815 million, $57,420 million, and $66,250 million. Thus, after accounting for the interest expenses and other income, the company had a loss before income taxes of $5,710 million in FY12, $22,467 million in FY11, and $23,606 million in FY10.
The company’s interest coverage in 2012 was below 1. Typically financial analysts look for an interest coverage ratio of 2.5 or better to conclude that the company is not over burdened with interest payments. In FY12 FEC’s interest coverage ratio was .9014.
At the end of FY12 the company had a long term debt to equity ratio of 3.8 to 1. In a word it is over leveraged. That is to say, it is carrying a lot of long term debt and has a high debt service obligation. A significant negative event, i.e. loss of a major customer, recession, etc. could throw it into bankruptcy.
Sam1:
Could this rise in debt load be due to the preparations for work around the needs of the “All Aboard Florida” passenger o
No, it is all due to Private Equity.
Whereas the Class 1s are publically traded (except for BNSF) and have a ready supply of capital (either thru the equity markets or traditional debt markets), FEC is owned by a PE firm. They ramped up the debt (and probably paid themselves a high dividend) and the only avenue for that debt was thru “junk bonds”. These securities pay a much higher interest rate due to the risk involved, as outlined by Sam.
Junk bonds are usually ok, BUT…can experience default if the debt cannot be serviced. My guess is these bonds are mortgaged to the ROW, which would be pretty valuable, but going thru a bankruptcy to recover is a long process.
Just for comparison sake, CN issued 10 year notes in November, 2012 with a yield of 2.25%. Five years notes were issued December 2011 with a 1.45% rate.
Recently Apple issued 2% bonds, yet they are sitting on a HUGE pile of cash. Why? They pay 2% interest rate, but since these are foreign earnings, to repatriate the cash (bring it back to US) they would have to pay a corporate income tax rate of nearly 35%, plus state California tax.
Sorry for the ramble.
Ed
Florida East Cost Railway is a wholly owned subsidiary of Florida East Coast Holding Corp. It is a wholly owned subsidiary of FECR Rail LLC, which was a wholly owned subsidiary of Florida East Coast Industries, Inc. It was a public company that was acquired by Fortress Investment Group LLC on July 26, 2007 and subsequently taken private. The investors bought out the stockholders.
When a public company is taken private, the firm that acquired the company usually issues significant debt to cover the cost of the buyout. It does so because it believes that it can generate sufficient profits from a revised ownership structure to service the debt and provide a return to the purchasers. Frequently, however, these deals go bad because the optimistic projections of the acquirers never materialize. And the company is left with debt that it cannot service. This is exactly what happened to my former employer.
I don’t have the particulars regarding the Florida East Coast buyout arrangements. They are available if one has the time to dig them out, but I don’t.