Magazine article American Banker

Norfolk Southern's Bank Links Evolved in Conrail Deal

Magazine article American Banker

Norfolk Southern's Bank Links Evolved in Conrail Deal

Article excerpt

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. …

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