New York New York USA - Canadian Pacific Kansas City (CPKC), formed in April when Canadian Pacific Railway merged with Kansas City Southern, has been sued by bondholders for failing to repay more than US$1 billion after missing a deadline tied to the merger.
 
In a complaint filed on Wednesday night in Manhattan federal court, a trustee for Canadian Pacific's US$1 billion of 3 percent bonds maturing in 2041 said the railroad was motivated not to redeem the bonds because it would cost several hundred million dollars in extra interest payments to replace them.
 
Canadian Pacific had sold the bonds, plus US$1.4 billion of 2.45 percent bonds maturing in 2031, in late 2021 to help fund its approximately US$31 billion takeover of Kansas City Southern.
 
The merger combined the smallest of the seven big U.S. freight railroads, and created the only railroad linking Canada, the United States, and Mexico.
 
Wilmington Savings Fund Society, the trustee, said Canadian Pacific was supposed to redeem both bond series at 101 percent of face value plus accrued interest if U.S. Surface Transportation Board merger approval had not become "effective" by 25 Mar 2023.
 
The trustee said the agency approved the merger on 15 Mar 2023 but with an "effective" date of 14 Apr 2023, requiring the bond redemption, but that Canadian Pacific unilaterally and wrongly decided there was no effectiveness requirement.
 
"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.
 
Canadian Pacific, in a statement, said the 15 Mar 2023 decision meant it had no obligation to redeem the bonds.
 
"Any assertion to the contrary is wrong, and ignores the language of the indenture, which leaves the determination to Canadian Pacific," it added.
 
The case is Wilmington Savings Fund Society FSB vs. Canadian Pacific Railway Ltd. et al, U.S. District Court, Southern District of New York, No. 23-06787.
 
Jonathan Stempel.