DBRS Morningstar Confirms Ratings on Canadian Pacific Railway Company at BBB (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating, Medium-Term Notes rating and Unsecured Debentures rating of Canadian Pacific Railway Company (CP or the Company) at BBB (high) as well as its Commercial Paper rating at R-2 (high). All trends remain Stable. The ratings confirmation reflects the Company’s strong operating performance and efficiency across its network. The confirmations also reflect the Company’s commitment to a balanced financial policy that favours funding share repurchases with internally generated cash flows, resulting in solid leverage and operating metrics which DBRS Morningstar anticipates are sustainable going forward. While CP has accommodated strong demand over the past couple of years, it is well positioned to adequately address a potential slowdown in shipments and revenue growth owing to its efficient network and measures aimed at making optimal use of spare capacity.

In the last 12 months ending September 30, 2019 (LTM 2019), CP’s revenue ton miles (RTM) grew by just around 1% compared with 2018, following strong growth in both 2017 and 2018. Shipments and volume growth have most recently started to slow down because parts of the North American economies have softened, negative repercussions of trade tensions have begun to show and other exogenous and industry-specific factors have appeared. While some commodities and goods such as Metals, Minerals and Consumer Products, Automotive and Forest Products have been soft, others such as Energy, Chemicals and Plastics and Intermodal have been growing which is expected to continue in the near future. Last winter, harsh weather temporarily affected the Company’s performance and operating ratio, but CP’s network and fleet were adequately prepared such that operating efficiency has since more than recovered throughout 2019. In particular, the Company’s Intermodal segment’s RTMs grew by 4%, supported by a number of new contracts and opportunities while CP’s Energy, Chemicals and Plastics segment’s RTMs also grew by 3%, driven by strong demand for rail capacity from Canadian oil producers seeking alternatives to pipelines to transport their products to U.S. refineries. The Company has committed to annual capital investments of about $1.6 billion in 2019 and 2020. These investments include high-capacity grain hoppers as well as other network improvements and fleet modernizations which, in DBRS Morningstar’s understanding, will continue to increase CP’s capacity and network efficiency. As a consequence and combined with the continuation of a balanced financial policy, credit metrics are expected to stay within a range that is commensurate with the current ratings with debt-to-EBITDA below 2.5 times (x) and cash flow-to-debt at around 35% in 2020. The Company’s commitment to a strong balance sheet gives DBRS Morningstar comfort that CP will not take actions that will disproportionally favour equityholders over debtholders (i.e., funding share repurchases solely through debt-issuance proceeds).

The Stable trends indicate that the ratings are currently well positioned. Negative rating pressure could arise if CP took credit-negative actions or experienced significant slowdown in its markets such that cash flow-to-debt deteriorated and remained below 30% and debt-to-EBITDA increased and remained well above 2.5x for a sustained period of time. Conversely, positive rating pressure could arise if cash flow-to-debt increased above 35% and debt-to-EBITDA trended below 2.0x, on a sustained basis.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Railway Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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