RailWorks' credit rating downgraded to B by S&P

Move was expected

company hopes for profitability this year

January 10, 2001|By Paul Adams | Paul Adams,SUN STAFF

Standard & Poor's downgraded its corporate credit rating for Baltimore-based RailWorks Corp. yesterday from BB-minus to B, reflecting Wall Street's ongoing concern about the company's ability to overcome its cash-flow problems.

The rating change comes after the rail services company violated its credit terms twice last fall and took a $48 million charge against third-quarter earnings as part of a sweeping restructuring plan.

S&P put the company on its CreditWatch list Sept. 28 with negative implications, an indication that a downgrade was likely. Yesterday's action removes the company from CreditWatch, but S&P analysts still give the company a negative outlook and say further rating downgrades are possible over the next year if conditions don't improve.

"There's no surprise there whatsoever," said John G. Larkin, RailWorks' chairman and chief executive. He said the company and its lenders anticipated the ratings change.

In addition to its corporate credit rating, S&P lowered RailWorks' senior secured credit rating from BB-minus to B, and its subordinated note rating to triple-C plus from B. The ratings action affects the company's $200 million bank credit and $175 million in subordinated debt, according to S&P.

"I think they're walking on the edge right now," said Arthur W. Hatfield, an analyst with Morgan Keegan & Co.

RailWorks provides a variety of construction services, maintenance and products to Class I and regional railroads, passenger rail and transit rail authorities, among others. Hatfield is projecting a fourth-quarter loss of 20 cents per share for the company.

In December, RailWorks secured a new, more restrictive credit agreement with its lenders and announced that it expected to return to profitability early this year.

However, S&P analysts noted the company's limited financial flexibility, partly the result of a $50 million reduction in its revolving line of credit. The firm also noted RailWorks' aggressive financial projections in the face of reduced spending among Class I railroads and a softening U.S. economy.

RailWorks has curtailed its aggressive acquisition strategy and is instead focusing on streamlining operations and chipping away at a backlog of transportation contracts worth more than $900 million. Barring delays in those projects, the company could start generating needed cash and return to profitability this year. However, the Morgan Keegan analyst said time will be of the essence.

"The question is how long can they go before things really have to turn?" Hatfield said.

RailWorks employs about 30 people at its Baltimore headquarters and more than 3,500 nationwide. Its shares closed up 6 cents yesterday at $2.50.

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