Swap railroad bonds, suggests Goldman

Goldman Sachs analysts have added Canadian National Railway’s 5.55% 2019 bonds to its list of “pans”. It says that at a z-spread of 71 basis points, the bonds trade too tightly compared to those of its peers. The bank suggests swapping out of the Canadian National Railway bonds and into the 4.7% 2019 bonds issued by Burlington Northern Santa Fe, and which trade at a z-spread of 105bp

Goldman says in a recent report that this 34bp differential is too large, even though CNR has lower leverage than BNSF, and is rated a notch lower by S&P at BBB+. On the other hand, the BNSF is a larger company than the Canadian operator, and its ownership by Berkshire Hathaway now rules out the possibility of share buy-backs, a threat that still looms for CNR creditors.