MOODY'S CONFIRMS CSX CORPORATION'S COMMERCIAL PAPER RATING AT PRIME-2, DOWNGRADES LONG-TERM DEBT RATINGS OF CSX CORPORATION AND ITS SUBSIDIARIES (SENIOR AT Baa2)
New York, 4/23/1997 -- Moody's Investors Service confirmed CSX Corporation's (CSX) commercial paper rating at Prime-2 and downgraded the company's long-term ratings and those of its subsidiaries (senior unsecured to Baa2). In a related action, Moody's assigned a Baa2 rating to the company's $4.8 billion bank credit facility. The rating actions follows the recent accord between CSX and Norfolk Southern Corporation (NS) to acquire the assets of Conrail in approximately a 42%/58% split, and takes into account potential increased competitive pressures in Conrail's territory, weakened debt protection measurements at CSX following financing of its share of the acquisition, and the somewhat diversified nature of the company's operations. The transaction is subject to approval by the Surface Transportation Board (STB). This concludes the review process which was initiated on October 15, 1996.
Ratings affected are:
CSX Corporation: commercial paper rating confirmed at P-2; senior unsecured debt lowered to Baa2 from Baa1; shelf registration for senior unsecured debt lowered to (P)Baa2 from (P)Baa1.
CSX Transportation, Inc.: equipment trust certificates lowered to A1 from Aa3.
Baltimore & Ohio Railroad Company: equipment trust certificates lowered to A1 from Aa3.
Allegheny & Western Railway: first mortgage bonds lowered to Baa1 from A3.
Chesapeake & Ohio Railway: equipment trust certificates lowered to A1 from Aa3 and to A2 from A1.
Hocking Valley Railway: first mortgage bonds lowered to Baa1 from A3.
Sea-Land Services, Inc.: secured bonds lowered to Baa2 from Baa1.
Seaboard System Railroad, Inc.: equipment trust certificates lowered to A1 from Aa3 and to A2 from A1.
Louisville & Nashville Railroad Company: first mortgage bonds lowered to Baa1 from A3.
Monon Railroad: income debentures lowered to Baa3 from Baa2.
New rating: CSX Corporation $4.8 billion bank credit facility rated Baa2. In conjunction with the bid for Conrail, CSX negotiated in November 1996 a five year, $4.8 billion revolving credit facility. Administered by Chase Manhattan Bank, the facility is unsecured and ranks pari passu with other senior unsecured obligations of the Corporation. It provided back up liquidity to the company's commercial paper program and can also be used to finance the acquisition.
On April 8, 1997 CSX and NS agreed to a division of Conrail's lines and facilities by which CSX will obtain about 42% of Conrail based on revenues generated in 1995. CSX will operate routes between Boston and Cleveland through Albany and Buffalo with connecting lines to Montreal, New York and New Jersey and between Cleveland and St. Louis (former New York Central mainlines). In addition, CSX will operate a line connecting New York and Philadelphia and one between Toledo and Columbus, Ohio. CSX and NS will jointly operate Conrail assets in major terminal areas such as Detroit an northern and southern New Jersey, and share access to certain lines in Philadelphia and Indianapolis, and to the rail lines servicing the Monongahela coal fields in southwestern Pennsylvania. CSX will have access to a number of northeastern ports, including sole access to the port of Boston. The value of the transaction to CSX is $4.3 billion.
CSX and NS will jointly tender for the remaining outstanding shares of Conrail by May 23, 1997. As is customary in railroad mergers, the shares will be place in a voting trust, jointly controlled by the two companies, until STB approval. Following STB approval, Conrail is to remain as a separate entity with some assets jointly owned by CSX and NS at a holding company level and the remaining assets split according to the agreement and leased back to each of the two aquirors. CSX and NS will make rental payments sufficient to cover Conrail's debt payments and other expenses. This structure, which has not been finalized, is expected to be similar, operationally, to direct ownership of the assets by CSX.
CSX believes that it can effect significant cost savings from the combination of the two systems and increase its competitive position relative to truckers. Lower unit costs are anticipated from rationalization of manpower and equipment, and longer lengths of haul than Conrail previously enjoyed. Additionally, a more north/south focus should put the company in a better position to compete with the highway in the highly truck oriented eastern seaboard. Nevertheless, Moody's believes that it will take longer to generate incremental traffic benefits than to realize cost savings and that the added competition in Conrail's territory could lead to rate pressure in some sectors.
To date, CSX has purchased just under 20% of Conrail stock for a total cash investment of about $2 billion. The company plans on funding the remainder of the acquisition with debt. The Baa2 long-term rating on the company's senior unsecured debt takes into account the anticipated full amount of borrowings to fund the $4.3 billion transaction as well as the off-balance-sheet obligations. Although CSX is expected to apply free cash flow to debt repayment, it may take several years for financial parameters to return to pre-acquisition levels. Commercial paper is expected to be a significant portion of CSX's capital structure, particularly in the short-term. However, Moody's anticipates the company to term out a portion of its short term borrowings upon receiving STB approval for the transaction, thus achieving more balance between its short and long term obligations.
CSX plans on concentrating its borrowings at the holding company level, with the exception of certain asset-based financings. Structural subordination issues for holding company bondholders have been mitigated historically at CSX by the diversified nature of the company's businesses. Moody's believes this will continue to be the case, given the magnitude of incremental revenues from the purchase of Conrail relative the CSX's existing book of business.
The STB has announced a one-year review period from the date of filing. CSX and NS are expected to file a joint application sometime in June. CSX's ratings anticipate only minor modifications, if any, to the agreement by the STB. However, Moody's will continue to monitor developments with respect to the STB review process and may make changes as needed.
CSX Corporation, headquartered in Richmond, Virginia, is a diversified transportation company with operations in railroading, barging, shipping, and trucking.
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