Fitch rates CSX’s proposed senior unsecured notes ‘A-’

Fitch Ratings has assigned an 'A-' rating to CSX Corporation's (CSX) proposed issuance of new senior unsecured notes. Fitch currently rates CSX's Long-Term Issuer Default Rating (IDR) and senior unsecured debt 'A-'. CSX's Short-Term IDR and commercial paper (CP) ratings are rated 'F1'. The Rating Outlook is Stable.

CSX's ratings reflect its strong business profile, supported by its established position in the eastern U.S. rail market, large network and customer-focused services. Growth opportunities arise from regional industrial trends and truck-to-rail shipment conversions, supported by precision-scheduled railroading principles that enhance operating and service metrics.

Financial flexibility is strong due to highly profitable operations, resilient cash flows, a flexible share repurchase policy and relatively moderate dividend distributions. Despite cyclical end markets, Fitch expects volumes to remain resilient and reflect U.S. economic conditions. Management has kept leverage in the mid-to-high 2.0x range, consistent with 'A-' rating tolerances for class 1 rail operators.

Key Rating Drivers

New Notes Rated 'A-': CSX plans to issue a new senior unsecured note with a tenor of 10 years. Fitch believes the transaction will have a minimal effect on leverage, which is expected to remain around the mid-to-high 2x range. Fitch expects the proceeds to be used for general corporate purposes.

Mid-to-High 2x Leverage Profile: Fitch expects EBITDA leverage to slightly increase in 2025 from 2.6x in 2024 and remain in the mid-to-high 2.0x range going forward, which is consistent with the 'A-' rating level for class 1 rail operators. Fitch believes CSX will maintain a measured approach to capital deployment, largely managing leverage with share repurchase activity.

Leverage may reach the high end of Fitch's estimated range during cyclical downturns. M&A activity is likely to be bolt-on size, which would be manageable in the context of CSX's cash flow profile. Large transformational transactions are highly unlikely.

Capital Allocation Retains Financial Flexibility: CSX's consistent and sizable FCF generation represents a key credit strength supporting the 'A-' rating. Fitch forecasts FCF (calculated after dividends) to be around $900 million in 2025, highlighting one-time network rebuild and deferred tax payments being made in the year, before strengthening to over $1.5 billion. CSX's annual dividend payments as a proportion of earnings are moderately lower than rail peers, further supporting its ability to manage capital and operational priorities through business cycles.

High Market Share and Barriers: CSX's regional market strength and high barriers to entry are due to the difficult to replicate rail infrastructure and are supportive of profitability and cash flow metrics that lead the broader transportation market. This also supports fundamental pricing strength even though reported yields can fluctuate based on shifts in freight mix and fuel surcharges. The primary competing mode is trucking, which can at times restrict pricing growth in certain lanes. However, rail service is particularly attractive for heavy loads and long, fixed routes.

Rail Freight Inherently Resilient: Rail freight transportation has proven core to the economy's supply chains and, as a result, is likely to be resilient to economic cycles which are influenced by industrial, commodity and consumer markets. Rail is the most cost-effective transport mode with continuous national reach, making it economically attractive to shippers. CSX has managed through long-term declines in coal volumes, which have been offset with growth in intermodal and industrial shipments.

Trends in Operating Conditions: Fitch expects the EBITDA margin (48% in 2024) to slightly decrease in 2025; it remains in the high-40% range over the medium term. Contributors to long-term fundamental growth include U.S. industrial development and truck-to-intermodal conversion opportunities. Weighing on the outlook is the continued long-term decline in coal shipments and potential trade policy changes. Despite these risks, CSX's integration with regional trade, strong profitability and financial flexibility are expected to mitigate negative impacts.

Peer Analysis

Fitch views CSX's operating profile considerations as fairly consistent with the other class 1 rail operators, benefiting from significant strength in competitive market positions, high barriers to entry and resilience through economic cycles afforded by the attractive cost-competitive nature of rail transport. CSX, like its rail peers, generates EBITDA margins in the high-40% to low-50% range, a uniquely high level for the broader transportation sector. Capital intensity across the rail operators is generally around the mid-teens.

Fitch estimates CSX's EBITDA leverage in the mid-to-high 2.0x range is generally in line with class 1 rail peers that target leverage around the mid-2.0x range. Canadian Pacific and Norfolk Southern are on deleveraging trends moving toward this level, while Union Pacific (UNP; A-/Stable) maintains leverage in the high-2.0x range. Canadian National recently raised its target leverage to 2.5x. Burlington Northern Santa Fe has historically maintained leverage in the low-2.0x range.

Fitch also considers CSX's capital allocation policy more credit-friendly given the relatively low proportion of dividends to operating earnings compared to most other class 1 rail operators.

Key Assumptions

--Flat to low single-digit revenue growth in near term;

--EBITDA margins remain in the high-40% range;

--Non-recurring cash costs for deferred tax and network recovery are elevated in 2025;

--Subsequent to 2025 capex as a percentage of revenue trends toward 17%;

--CSX remains consistent with capital allocation and financial policies, supporting EBITDA leverage around the mid-2.0x range.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--A less conservative financial policy leading to EBITDA leverage sustained above 3.0x;

--A shift in capital allocation strategy leading to materially reduced financial flexibility;

--Regulations or policy changes that negatively affect the industry.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--A shift to a more conservative financial policy leading to EBITDA leverage sustained below 2.5x;

--Continued commitment to a more conservative capital allocation strategy, including retention of a share repurchase-oriented returns policy;

--Demonstrated margin strength through business cycles via pricing, volume mix, and/or flexing cost structure that supports a steadier FCF profile.

Liquidity and Debt Structure

Fitch believes liquidity will remain comfortable given CSX's ability to generate cash from operations, the high availability under its credit lines, and its laddered maturity profile. As of Dec. 31, 2024, CSX had $933 million of cash and cash equivalents and an undrawn $1.2 billion revolver. The revolver serves as a backstop for the company's $1.0 billion CP program, which was undrawn. The unsecured note maturities are approximately $0.5 billion to $1.0 billion per year through the next five years.

Issuer Profile

CSX is a leading class 1 railroad company operating in North America across 26 states east of the Mississippi River. It transports a mix of bulk, industrial and premium shipments.