Kansas City Southern de Mexico $200 million notes talked at 13¾% area

By Paul A. Harris

St. Louis, March 23 - Kansas City Southern de Mexico, SA (KCSM) is talking a $200 million offering of unsecured notes at the 13¾% area, according to a high-yield mutual fund manager.

Pricing is expected on Tuesday.

Banc of America Securities LLC will be involved in the sale of the notes, which will be transacted via Rule 144A.

The offering was disclosed in an 8-K document filed with the Securities and Exchange Commission on Monday by the company.

Proceeds will be used repay the credit facility in full.

On Dec. 16, Kansas City Southern Railway Co. (KCSR), the parent, priced a $190 million issue of 13% five-year senior unsecured notes (B2/BB-/) at 88.405 to yield 16½%.

Morgan Stanley & Co. Inc. was left bookrunner for that deal. The joint bookrunner was Banc of America Securities.

Also in Monday's filing the company stated that it was undertaking the debt deal in light of current economic and business conditions, in order to increase the liquidity position of KCSM and KCSR.

"The Weekly Railroad Traffic reports published by the Association of American Railroads have noted that total carload volumes for both KCSR and KCSM have declined to date during the first quarter of 2009 as compared to the same period in 2008," the company stated in Monday's 8-K. "Through the 10-week period ended March 14, 2009, total carload and intermodal unit volumes for the 2009 first quarter have declined 5.9% and 25.9% for KCSR and KCSM, respectively, compared to the same period in 2008.

"Revenues for both KCSR and KCSM are expected to decline in the first quarter of 2009 at a rate greater than these percentage volume decreases due to product mix, shorter length of haul and reduced fuel surcharge revenue. KCSM revenues have also been negatively affected by the continued devaluation of the Mexican peso against the U.S. dollar. Cost containment measures are expected to partially offset the impact of reduced volumes."

The company said consolidated operating ratio for the first quarter of 2009 is expected to be in the mid to upper 80s as compared to 81.5% for the first quarter of 2008. In addition, KCSM's operating ratio for the first quarter is expected to be higher than KCSR's operating ratio.

In addition to the debt offering, Kansas City Southern is implementing a program that gives it the option of issuing up to $75 million of equity.

"These actions are expected to provide sufficient liquidity for both KCSR and KCSM through the end of 2010. KCS does not have any significant debt maturities until 2011," the company stated in the filing.

Kansas City Southern de Mexico operates in northeastern and central Mexico. The parent company is based in Kansas City, Mo.

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