Well, the white-horses-on-black-locomotives gang from Atlanta has made the headlines again, with what seems to be a savvy and timely move, and one that few other businesses have the credibility to pull off - although you’ll also see BNSF mentioned in the linked articles from recent Wall Street Journals below:
“Rethinking the ‘Long’ Bond -Bankers Pitch 100-Year Debt, but Given the Risks, Would Investors Bite?”, by Katy Burne, August 23, 2010, Page C-1, cols. 1 - 4, at - http://online.wsj.com/article/SB20001424052748704488404575442021845873594.html This one has a telephoto of a NS loco on a siding as 1 of 3 photos heading the article, in col. 2.
When I have a little more time, maybe I’ll crunch some numbers to illustrate just how much of an annual savings this means for NS’ financing activities - preliminarily and roughly, I estimate it to be about $14,300 per year for each $1 million borrowed [3.33% - 1.00% of principal, - 0.90% for higher interest = 1.43% net decrease each year]. Anyone else who is conversant with those calculations, feel free to jump in with your more refined figures . . .
I wonder if I can get a loan like that for my mortgage . . .
Long term bonds like this are nothing new. I’ve read about West Shore 4’s issued in the 1880’s that had a 500-year (!) maturity. They were listed in Moody’s Transportation Manual as part of Penn Central’s long-term debt.
OK, I ran the numbers, and here are the results, per $1 Million borrowed. Per the WSJ article, these NS bonds have a coupon or nominal interest rate of 6 %, and sold at a price that yields an effective 5.95 %, about 0.90 % higher than where NS’ 30-year debt was trading at on the same day:
5.95 % for 100 years = $59,684 per year to pay back;
Do bondholders (as opposed to stockholders) have much say in how railroads are managed? Can they vote on mergers, or elect members to the BOD? I believe it was the bondholders of the Milwaukee Road which forced the railroad into its last bankruptcy in 1977, could they still do that now?
No, generally not. As long as the interest and principal is being repaid as required, they usually have no say at all.
Same answer. Nothing much to prohibit it - and it might be a good idea, esp. for extraordinary corporate actions that could affect/ impair the credit-worthiness of the firm, such as a merger - but it customarily just isn’t done. Instead, if the bond holders want those kinds of powers - they should buy shares of stock instead.
Yes. But that had nothing to do with them having the rights of stockholders or management supervision - instead, it was because the bonds weren’t being paid, and were in default. As such, the bondholders then had the right to force the MILW into a bankruptcy proceeding, the same as any other large group of unpaid creditors such as fuel oil vendors, utility bills, real estate taxes, unpaid employees, etc. would have.
There’s often also a hybrid commonly called “preferred stock”, which can have attributes of both bonds and stock. Typically, it is entitled to ‘dividends’ at a stated rate or percent - l
Question: What is NS really going to use this additional $250 Million of money for ?
As of June 30, 2010, it already had $855 Million in cash - see page 4 of the Quarterly Financial Review for the 2nd Quarter 2010 at - http://www.nscorp.com/nscorphtml/pdf/financial_q2_10.pdf [20 pages, approx. 842 KB in size]. By the way, the whole outfit was worth about $27.6 billion, of which $10.7 B was Total Stockholder’s Equity and about $16.9 B was Total Liabilities, and of the latter about $6.3 B was Long-term debt (same citation), so this additional debt isn’t going to handicap that railroad too much.
I don’t see it being used to buy new equipment, such as locomotives - even though they are reportedly badly needed. That would be like you taking out a 10 to 30-year Home Equity Loan to but a new car - the asset you buy will be scrap long before the loan is paid off.
That leaves 2 possibilities to my mind. The first is the on-going stock repurchase - about a month ago the NS board authorized another 50 million shares for that, which at the current price of $53.03 would be about $2.65 Billion - over 10 times bigger than this 100-year bond issue.
The other possibility is to finance some of the route and infrastructure improvements, which can reasonably be expected to be around and still producing income to repay those bonds 100 years from now. Plus, some of the estimates of the costs for improving clearances and adding capacity for some of the “Corrridors” are in the multi-hundred million dollar range as I recall, so that would be a good match between need and source, and so too seems plausible to me.
I have no other insights or information on this at the moment - just thought I’d put that question out th
Ahh - good catch, Dale - and fortunately, I can do better than just my mere rough guess at that:
“NS expects implementation of positive train control to result in additional capital expenditures of at least $700 million in the years 2011 through 2015.” [emphasis added - PDN] from NS’ Form 10-K Annual Report pursuant to the Securities Excahnge Act of 1934 for the fiscal year ended December 31, 2009, as included with the NS Annual Report, page K30, last sentence of 2nd para. from the bottom, in the “FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES” Section.
Hey, you’re quite welcome, Dale - ‘fair dinkum’ for all the research you’ve done and posted here - such as that crossing signal in Grenada, Mississippi last week. [tup]
Depends on the professor/ author, and how they choose or are able to present it. I can still picture the now deceased Prof. Robert Barry - a large bear of a man and an amatuer thespian, too - thundering “Quo Warranto !” at us to get into our “thick skulls of mush” the name of the legal action that can be used to
I would have guessed that a good chunk of it was to restructure some existing debt left over from the Conrail deal. As I remember, it was done in varying lengths at not so great rates. I’ll have to look it up.
That makes a lot of sense, Don - if the terms of those notes allowed them to be ‘called’ = retired this early.
Quickly looking at page K56 of the same Form 10-K, under 8. Debt, there’s a list of notes and debentures by maturation date. The 1997 and 2005 bond issuances are easy to identify at 100 years after - and those are shown as being at 7.02% in the amount of $650 Million. Otherwise, there are 5 others at rates from 6.40% to 7.27%, and ranging in amount from $855 million to $1.65 Billion, and maturing on so many different dates that’s it’s hard for me to match them up with the ConRail acqusition. So there would still be lots of places to apply that 100-year money . . .
I think the thing you have to keep in mind is that cash is fungible. While the NS finance people probably have forecasts for cash requirements for years out, I don’t think you will find that they have something like “The money we borrow is going for this and the money we earn from operations is going for that”.
I don’t have the skills to do the various methods cash flow analysis to figure if 100 year bonds necessarily make sense, but I have this thought. If the principal isn’t paid until 2110 and assuming 3% average annual inflation over the next century, the payoff will be equal to about 6.25 cents of today’s dollars. If it came to it, I suspect the CEO could pay the notes from the personal money market fund he uses for his spare discretionary cash.
Sure - even just for the Capital Budget - as distinguished from Operating Funds - i undertand that it’s like a pool, with flows in from several sources at varying rates, and flows out to many places, at different rates. It must be quite a challenge to look at those projections and figure out the best way to meet those needs - to keep the level in the pool sufficiently above zero at all times so that no one gets nervous - even in a stable market, let alone with the craziness and unpredictability we’ve had over the past 2 years. And once the money is in the pool - yes, it all looks the same.
However, there has to be some method to this. The NS finance people are not like opportunistic college kids with a bunch of new and unused credit cards - “Hey, they gave us these - we may as well use them - let’s go buy some stuff !” - without some purpose to doing that, and at this time, in those amounts, and for that term. I’m just curious as to what the rationale or decisional analysis might have been.
I got the Present Value of $1.00 discounted for 100 years at 3.00
Where I was looking, I didn’t see anything that said one way or the other for any of them. That aspect may be addressed elsewhere in the 10-K or Annual Report - or not at all in either, in which case reference to the prospectus for those bonds would have to be made to obtain an answer.
If those previous bonds are not callable, though, I don’t see the sense in borrowing even more money now and incurring more interest payments, just to pay off an already-existing debt which also continues to accumulate interest in the meantime, while likely not earning very much on the recently borrowed money in the interim - makes my head spin, it does.