Shortline operator Patriot Rail, the business-facing name of NA Rail, is going to the debt markets for refinancing, prompting all three ratings agencies to weigh in on its issue.
Three ratings on the same issue and company at the same issue is unusual. Companies often are satisfied with one or maybe two. But all three were published this week.
The debt issue in question is a $440 million offering to pay down existing debt, pay a dividend to shareholders and cover transaction fees. The ratings agencies also took into account Patriot’s plan to substitute a $40 million senior secured revolving credit facility with a five-year, $50 million senior secured RCF.
Ratings analyses published by Moody’s (NYSE: MCO), Fitch Ratings and S&P Global Ratings (NYSE: SPGI) normally do not include information such as revenue or income for privately owned companies. But the Moody’s report pegged Patriot Rail’s revenue at $198 million in 2024. S&P S&P said it expects Patriot Rail’s revenue to grow 4% to 6% this year.
The agencies’ ratings of NA Rail stretched out over three notches. What S&P calls its Long Term Issuer rating was set at B-, affirming its existing rating. Moody’s was the equivalent of one notch higher at B2 on its Corporate Family Rating – also an affirmation.
Fitch was the highest at B+ for its Issuer Default Rating. That was a first-time rating on Patriot Rail from Fitch.
There was an unusual divergence on the rating of the actual debt issue. Fitch gave a notably higher rating of BB, three notches above the B2 rating from Moody’s and four above the B- from S&P. When a borrower is rated by multiple ratings agencies, the ratings tend to be equivalent or at most one notch apart.
All the ratings are deep in non-investment-grade territory.
Patriot Rail’s website lists 31 individual shortline railroads owned by the company. The bulk of them are in the Midwest. A map of the company’s operations can be found here.
Moody’s described Patriot Rail’s revenue “scale” as “modest,” featuring some level of concentration in moving packaging and paper. It also said Patriot has less competition with intermodal railroads, so it is less exposed to truckload competition.
In a disclosure about its finances, Moody’s said Patriot has a “strong” operating margin that it expects to remain above 25%.
Fitch said it expects that free cash flow will be in the high-single-digit to low-double-digit range, which equates to about $15 million to $30 million.
Fitch described Patriot’s network as “established” and “geographically diverse.” As well as noting its “limited exposure” to intermodal competition, and by extension trucking, Fitch said Patriot’s traffic is “domestic-focused” and has “moderate customer and end market concentration relative to other operators.” Fitch said Patriot had “operational and cash flow risk profiles to be more consistent with the BB category,” a possible reason why its rating was the highest among the three agencies for the actual debt issue.
“Patriot’s stability is underpinned by its established portfolio of diverse, difficult-to-replicate rail assets,” Fitch wrote. “Short line railroads provide more bespoke services to customers to ensure that rail is an efficient and operationally advantaged option for shippers, further supporting its core role in supply chains and ability to maintain steady pricing levels.”
All three agencies put Patriot Rail’s ratio of debt to earnings before interest, taxes, depreciation and amortization near 5.5X. That is the key metric for agencies that seek to determine the likelihood of a borrower successfully servicing its debt.
Moody’s was right at 5.5X; S&P said it was 5.4X in 2024 with an estimate that it would add 0.5X through the new debt issuance; and Fitch estimated at 5.6X. All of the agencies viewed the trend in coverage as strengthening, “as growth capex projects are completed and increased revenue realized,” Fitch said.
Patriot Rail’s largest shareholder is Igneo Infrastructure Partners. Although the new debt will in part fund a $42 million dividend payment to shareholders, Moody’s reported that Igneo has committed to put back $25 million into the company for “growth initiatives.”
Despite providing a rating significantly below investment grade, S&P Global Ratings was positive about Patriot Rail’s strategy.
“We view Patriot’s business as stronger than before due to its increased size, reduced customer concentration, and expansion into new industries,” the agency wrote. “Since being acquired by its current sponsor Igneo, Patriot has exited its relatively low-margin port business, doubled its rail freight operations through acquisitions and some organic expansion, and diversified into adjacent markets like warehousing and transloading and excursion railroad operations.”
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