MOODY'S CONFIRMS DEBT RATINGS OS CANADIAN NATIONAL RAILWAY COMPANY AND ILLINOIS CENTRAL RAILROAD COMPANY (SENIOR AT Baa2)
New York, 06-11-98 -- Moody's Investors Service confirmed the Baa2 senior unsecured debt rating of Canadian National Railway Company (CN) and assigned a Baa2 rating to the company's existing $1.8 billion bank facilities. In a related action, Moody's confirmed the Baa2 senior unsecured rating of Illinois Central Railroad Company (IC) and IC's Prime-2 rating for commercial paper. The ratings reflect the significant reduction in CN's cost structure since the 1995 privatization and anticipate that further cost improvements and top-line revenue growth, combined with synergies from the IC acquisition, will facilitate improving debt protection measurements for creditors of the combined group. The ratings also take into account CN's higher financial leverage from the largely debt financed acquisition of IC, the integration risks in merging the two railroads and the potential for delay in obtaining the requisite regulatory approvals. Confirmation of IC's rating also anticipates that CN will take appropriate measures to preserve the position of IC debt holders within the group. The rating outlook for both companies is stable.
Ratings confirmed are:
Canadian National Railway Company -- Baa2 rated Notes and Debentures; Baa1 rated defeased Euronotes (in-substance defeasance in 1995); A3 rated Pass Through Certificates; and (P)Baa2 shelf registration.
Illinois Central Railway Company -- Baa2 rated Notes and Debentures; Baa2 Medium Term Notes; (P)Baa2 shelf registration for senior debt; and Prime-2 rating for commercial paper.
According to Moody's, CN improved perfomance since its privatization largely by reducing headcount and rationalizing the track network. As a result, its operating ratio is now comparable to the U.S. Class I peer group. CN's future operating strategy, which anticipates productivity-driven cost reductions as well as top-line growth, will be more challenging to implement particularly as the economic cycle matures in Moody's view. Nonetheless, Moody's expects CN's operating results to continue improving faster than the U.S. Class I peer group and for CN to achieve operating performance parity with the U.S. railroads over the intermediate term.
The IC acquistion is viewed as consistent with CN's overall strategy. While integration risks exist, the CN/IC merger is expected to be less complex than other recent rail mergers in that the two systems are end-to-end with no cross over points. IC is the sixth largest of the U.S. Class I railroads, and is an efficient operator that has consistently produced among the best operating statistics in the industry. Moody's believes that some of the operating practices within IC could be applied to CN's operations, especially as CN seeks to grow revenue by improving service. For example, combining CN's accelerated locomotive acquisition/upgrade program with IC's experience in routing is expected to provide the basis to operate a scheduled railroad throughout the combined system.
Moody's anticipates moderate revenue growth for the group due to improved service offerings and longer hauls for the combined system, particularly from the auto, forest products and intermodal flows. These gains will come principally from the opportunity for North-South traffic to bypass Chicago with single line service which will be attractive to shippers seeking faster delivery times. Although some potential exists to capture traffic from trucking with improved service, especially in the auto and merchandise flows between the Upper Mid West states and Ontario, Moody's anticipates only modest market share growth over the intermediate term.
Approximately 75% of the financing for CN's $2.4 billion acquisition of IC was in the form of debt resulting in pro-forma leverage statistics which are among the highest for the railroad peer group. However, unlike other recent rail mergers, Moody's does not anticipate material incremental capital expenditures to be required by the combined group because of the end to end nature of the rail network and the relatively efficient operations of IC. Moreover, the integration of the systems is expected to be less complex than other recent mergers, thus increasing the probability of achieving the anticipated merger synergies. Consequently, Moody's expects the incremental cash flow to be evident quickly after the merger is completed, facilitating meaningful reduction in debt over the intermediate term.
Moody's further noted that the merger of the IC is subject to approval of various authorities including the Surface Transportation Board (STB), and not anticipated before the end of 1st quarter, 1999. While the regulatory review will be rigorous, especially on the environmental and safety issues, Moody's ratings assume that STB approval will not require any material modifications to the merger agreement. However, Moody's will continue to monitor the ratings implications of any developments throughout the regulatory review process.
In assigning a Baa2 rating to CN's $1.8 billion bank credit facilities, Moody's noted that the facility includes an $800 million one-year term loan and a $1 billion five-year revolving credit tranche. The initial drawdown of $1.6 billion was used to provide bridge financing in March, 1998 for the acquisition of the IC shares. The facility is unsecured and ranks pari-passu with other senior indebtedness of CN. The facility has been syndicated among 22 international banks by Co-Arrangers Goldman Sachs and the Bank of Montreal.
Canadian National Railway Company, headquartered in Montreal, Canada, is the largest of two Canadian railroads with about 15,300 miles of track moving freight in North America. Illinois Central Corporation, headquartered in Chicago, is a holding company for Illinois Central Railroad Company, a Class I railroad, the Chicago Central and Pacific Railroad Company and Cedar River Railroad, which together operate 3,500 miles of track between Chicago, Illinois and Waterloo, Iowa and the Gulf of Mexico.
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