Last October, when Norfolk Southern Corp. launched a hostile bid to buy Conrail Inc. for $9 billion in cash, the Norfolk, Va.-based railroad tapped J.P. Morgan & Co. and Merrill Lynch & Co.-a commercial and an investment bank-to arrange an $11.5 billion loan.
Chase Manhattan Bank, BankAm-erica Corp., Nations-Bank Corp., and Bank of Nova Scotia had already committed themselves to a $4.8 billion loan to back Richmond, Va.-based CSX Corp.'s $8.4 billion friendly cash and stock offer for Conrail. But Norfolk had no trouble lining up banks of its own.
Within a week, 90 banks had committed themselves to Norfolk's credit, attracted by its hefty commitment fees: $1 million for the first 15 banks who committed to the $500 million tier on top of a $200,000 early-bird fee. The banks would also receive a 1.2% fee on final allocation, and a 25- basis-point facility fee.
By the time the loan closed, the railroad had raised $22 billion-nearly twice the needed amount.
Though Norfolk pared its lending group down to 60 banks for an $11.5 billion facility, the rail company soon increased its loan to roughly $13 billion, the second-largest credit facility in history.
Norfolk and CSX agreed to split up Conrail in April, with Norfolk Southern buying 58% of Conrail for $5.9 billion and CSX paying $4.3 billion for 42%.
Norfolk scrapped the original facility and put together a new financing package: a $4.3 billion bond issue (the largest investment-grade public debt offering ever), $1.6 billion of commercial paper, and a $7 billion backup credit facility led by J.P. Morgan and Merrill Lynch.
Once again, banks were eager to jump aboard. Forty-six committed themselves to the $7 billion backup credit.
Henry C. Wolf, Norfolk's executive vice president of finance, spoke with American Banker about the company's banking relationships.
How did your relationships with your lead lenders, J.P. Morgan and Merrill Lynch, evolve?
WOLF: We have a relationship with J.P. Morgan that is over 100 years old. When Norfolk Southern was formed by the merger of the Norfolk and West Railway Co. and the Southern Railway Co. in the 1890s, Morgan did financings for both of those companies. Our relationship with Merrill Lynch began on the commercial paper and equipment trust side of the business. We did not have an extensive investment banking relationship with them until about four or five years ago. As a result of the consolidation of the railroad industry, we have expanded our investment banking relationship to include Merrill.
Did any of your banking relationships change because of this bidding process for Conrail?
WOLF: In a sense, yes. It's our understanding that CSX entered into an exclusive relationship with four banks, which precluded those banks from participating in our credit facility and our financing.
Would you work with those banks in the future?
WOLF: If the appropriate opportunity, driven by the economics of a transaction, causes us to give these banks business, their involvement with CSX doesn't preclude them. Obviously we'd be more apt to work with those banks that were there when we needed them.
How did you react to the banks' enthusiasm to lend to your credit facility?
WOLF: We were a little surprised by banks' enthusiasm, since historically we've not been a big borrower. Having lacked the experience of doing a large financing, we didn't know what to expect.
One very poignant moment was when we were addressing a group of banks for the original $13.5 billion credit facility. When the presentation was complete, a number of people representing banks handed us commitment letters on the spot. One bank handed us a commitment for $1 billion!
It's a very warm feeling when you get that kind of response. Norfolk Southern has traditionally enjoyed the best credit rating-double-A-in the rail industry, so we felt confident that we would be able to secure the financing. But we were a bit surprised when we had commitments totaling more than $22 billion.
Has the convergence of investment and commercial banking changed the way you do business?
WOLF: Norfolk Southern has been represented by Merrill Lynch and J.P. Morgan-which both have both investment and commercial banking capabilities- and we feel like we were very well served by both of these firms. We also work with commercial banks that don't have the investment banking capabilities and investment banks that don't have commercial banking capabilities.
What you typically do is seek to work with the commercial bank or the operation that provides the most effective service, such as the ability to provide credit resources in a timely fashion at competitive rates.
Has the bidding process for Conrail changed the way you think about your banks?
WOLF: We have had excellent banking relationships because we have been traditionally an excellent credit. Banks were very responsive to our needs, even after we borrowed $5.9 billion. We continue to have the best credit rating from S&P and Moody's in the railroad industry-even after taking on this additional debt.
Norfolk Southern is spread out over a widely dispersed geographic area in the U.S. and into Canada. One of the things that we tried to focus on is developing and maintaining banking relationships in the communities in which we are attempting to do business.
Anything else?
WOLF: The level of participation in our credit facility by Japanese, European, and Canadian banks was a very satisfying experience from our standpoint. To see them doing business with Norfolk Southern, whose operations are primarily located in the U.S., was very satisfying.
We like to regard ourselves in the transportation business as a link in the international transportation chain, and when your name is recognized by foreign banks, it's your recognition in an overall global economy.
We were very pleased with the way that the financing went. We went into this transaction as the railroad company with the highest credit rating and came out that way.
