CP Rail Sells First Century Bond as Investors Make Longevity Bet

  • Railway company founded in 1881 sells 100-year security
  • CEO Harrison boosts debt load to fund share-repurchase plan

More than 100 years after it was formed to link the country, Canadian Pacific Railway Ltd. just convinced the bond market to wager that it will be around for another century.

The railroad’s $900 million 100-year bond, sold with a coupon of 6.125 percent, shows how the once-troubled company has won over investor hearts and minds under new Chief Executive Officer Hunter Harrison, even as it embarks on a share-repurchase plan that would boost its debt load.

“CP had its fair share of issues up until Hunter Harrison took over,” said Roshan Thiru, director of Canadian credit at Manulife Asset Management. “Then they fixed a lot of the operational problems and the company is in excellent shape now.”

Canadian Pacific’s bonds have benefited from the company’s improved efficiency and profitability since activist investor Bill Ackman became the company’s biggest shareholder in 2011 and installed a management team led by Harrison. Even the plans to let debt levels rise by returning money to shareholders such as Ackman’s Pershing Square Capital Management LP, hasn’t deterred investors from snapping up company debt.

The Calgary-based railway didn’t respond to a message seeking comment.

Investor Demands

Canadian Pacific likely decided to issue its first century bond at the request of an investor looking to match long-term liabilities with assets, such as a pension fund or insurance company, Thiru said. He said he wouldn’t be interested in tying up money in a bond with such a long time line.

There are only a handful of bonds with terms 80 years or longer and they have about the same value to an investor as a 30-year bond, said Joel Levington, a Bloomberg Intelligence U.S. credit analyst.

“The further out you go, the less valuable that cash flow is today,” Levington said. “The present value of it is less and less because it takes longer and longer to get.”

The century bond sale was the biggest by CP Rail since 1986. The company also issued $300 million in 20-year bonds with a 4.8 percent coupon. The average maturity on the Bank of America Merrill Lynch 15+ Year BBB US Corporate Index is 25 years with a yield of 5.5 percent, according to Bank of America Merrill Lynch data. The last century bond was issued by Brazil’s Petrobras Global Finance in June with a 6.85 percent coupon, according to data compiled by Bloomberg. Calgary-based Enbridge Inc., a pipeline operator, issued C$100 million ($76 million) of century bonds in Canada in 2012.

Longevity Bet

Investors tend to purchase ultra-long bonds and hold them to maturity, which is why confidence in the longevity of the business is so important. Canadian Pacific has been rescued by a hotshot U.S. executive once before -- William Cornelius Van Horne was brought in to get the floundering original railroad construction project back on track in 1882.

Canadian Pacific may also have chosen to issue a century bond now because low interest rates are favorable to long debt time-lines, Levington said. The yields on BBB rated bonds are lower today compared with five years ago, and companies see opportunity to finance at relatively lower interest rates, he said.

The financing will allow Canadian Pacific to bolster its share price with buybacks. The company has bought back 3 million shares and may buy more than 6 million additional shares under its repurchase plan. It has funded the buybacks almost entirely with cash from operations, tapping the bond market only once, for $700 million this year, since Ackman’s management team came in.

To be sure, Canadian Pacific is paying up in order to fund its share purchases. The company’s bonds, with $4.4 billion outstanding, have seen the premium investors demand to hold them over government debt rise faster this year than the average among transportation companies with U.S. debt, including competitor Canadian National Railway Co., according to Bank of America Merrill Lynch data.

Bond Covenants

Still, Canadian Pacific -- which paused its buybacks this year to renegotiate the terms on its bond covenants -- is prepared to let its debt-to-earnings ratio rise above 2.5 times from 2.2 times as it continues buying shares, said Chief Financial Officer Mark Erceg in a July 21 earnings call.

“You would expect that,” Thiru said of the company’s continued buy-backs. “They have created a lot of efficiency within the organization.”

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