Bondholders have sued Canada-based railroad company Canadian Pacific Kansas City (CPKC), for failing to repay more than $1bn after missing a merger deadline.
The $31bn merger deal of Canadian Pacific Railway (CP) and Kansas City Southern (KCS) was concluded in December of 2021 following a protracted bidding war with Canadian National (CN).
As part of the deal, Canada Pacific took on KCS’ $3.8bn outstanding debt.
In late 2021, Canadian Pacific sold the notes, along with $1.4 billion in 2.45% bonds expiring in 2031, to help fund its $31 billion buyout of Kansas City Southern.
A trustee for Canadian Pacific’s $1 billion of 3% bonds due in 2041 stated in a case filed in a Manhattan federal court that the railroad was “incentivized not to redeem the bonds because it would cost several hundred million dollars in extra interest payments to replace them” Reuters reported.
The news agency further reported that the trustee, Wilmington Savings Fund Society (WSFS), said that Canadian Pacific was required to repay both bond series at 101% of face value plus accrued interest if merger permission from the US Surface Transportation Board did not become “effective” by 25 March 2023.
According to WSFS, the agency authorized the merger on March 15, but with an “effective” date of April 14, necessitating the bond repayment, while Canadian Pacific individually and incorrectly concluded there was no such necessity.
“In the current interest rate market, Canadian Pacific’s clear financial incentive is to repudiate the (redemption) obligation and hope that the legal action required to remedy that breach takes as long as possible,” the trustee said.
In a statement, Canadian Pacific said the March 15 ruling meant it was under no duty to repay the notes.
“Any assertion to the contrary is incorrect and disregards the language of the indenture, which leaves the determination to Canadian Pacific,” the firm said.