Banks are finally expecting a payday Monday for their work on the $13 billion Norfolk Southern loan.
The railroad company asked banks last week for an amendment to the Merrill Lynch and J.P. Morgan-led loan that would allow the company to tap $1.65 billion. The Norfolk, Va.-based railroad earlier this week used $1 billion for the purchase of 9.9% of Conrail's shares, and will use the rest as a backstop for its commercial paper.
In return, banks are receiving the up-front fees that brought many to the mammoth loan. At the $500 million top tier, banks that were allocated $317 million are receiving $1 million.
Norfolk Southern has been embroiled with CSX Corp. in a bidding war over Conrail since late October. The recent activity has brought CSX's holdings in Conrail to approximately 20% and Norfolk Southern's to close to 10%.
Many of the other fees remained contingent on Norfolk Southern winning the war, which bankers said was not currently assured. Nonetheless, bankers were pleased to be in line for an imminent fee.
"They've had people's commitments and have dragged this out a long time," said a banker familiar with the transaction. "We're absolutely happy."
Bankers have jumped on board a loan that has gone through several incarnations, including an increase in size to $13 billion from its original $11.5 billion.
Norfolk Southern will sign the loan agreement Monday, but won't have access to the funds until it decides to purchase at least 51% ownership of Conrail. The loan expires on Aug. 1 if the company hasn't become a majority owner of Conrail.
While executives from Conrail, CSX, and Norfolk Southern have started meeting, few bankers see a short-term resolution to the process.
"Given the importance of this to both companies, I can't see either folding their tent right now," said a banker who committed to the Norfolk Southern loan.
The ongoing railroad battle has adversely affected the debt ratings of the railroads.
Moody's Investors Service recently downgraded the senior debt ratings of CSX and Norfolk Southern, and placed the ratings of Conrail on review for possible downgrade.
"The bidding war underscores the heightened long-term risks related to increased competitive pressures and financial leverage facing both companies," said Moody's in its ratings action.
Bankers, however, appeared comfortable with the risks, particularly because Norfolk Southern remains a highly rated investment-grade company.
The secondary market has already shown a receptiveness to the transaction, which is a positive portent for those who signed onto the original debt.
"If we wanted to sell a portion of our commitment, we could do that at an attractive price," said one banker. "That certainly makes you feel better about the transaction."
This banker said that if Norfolk Southern and CSX split up Conrail, Norfolk's loan might be reduced to $7 billion.
"In that circumstance, the paper would be more dear, and the pricing would be even more attractive," he said.
In the short term, bankers expect Norfolk to refinance the $1 billion in the capital markets.
