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Rating Action:

MOODY'S CONFIRMS RATINGS OF CANADIAN NATIONAL (SENIOR UNSECURED AT Baa2) AND BNSF (SENIOR UNSECURED AT Baa2)

20 Dec 1999
MOODY'S CONFIRMS RATINGS OF CANADIAN NATIONAL (SENIOR UNSECURED AT Baa2) AND BNSF (SENIOR UNSECURED AT Baa2) Moody's Investors Service confirmed the senior unsecured debt ratings of Canadian National Railway (CN), at Baa2, and Burlington Northern Santa Fe Corporation (BNSF), also at Baa2, following today's announcement of an agreement to merge the two companies in an all stock transaction. The confirmation is based on the leading market position of each railroad and Moody's expectation of improving free cash flow and continued moderate financial leverage at both CN and BNSF. The ratings outlook for BNSF is positive and the ratings outlook for CN is stable.


The actual merger is not expected before the third quarter, 2001 following a shareholder vote and regulatory review. In the interim, Moody's will evaluate developments in the regulatory approval process, which could be lengthy, the extent of any necessary integration expenditures, and the amount and sustainability of the incremental free cash flow stemming from the merger. It is possible that the ratings of the new group could be higher than the existing ratings of CN or BNSF given the magnitude of the potential merger synergies, particularly if the positive operating trends at CN and BNSF and the current economic conditions continue. Moody's notes, however, that the actual ratings of individual securities will depend on their relative position within the capital structure of the new company.


Ratings confirmed are:


Canadian National Railway- Issuer Rating, Debentures, Senior Notes, Bank Credit Facility at Baa2; Convertible Preferred Securities at Baa3; Pass Through Certificates at A3


Burlington Northern Santa Fe Corporation- Senior Unsecured Notes at Baa2; Shelf registration for Senior Notes at (P)Baa2; Equipment Trust Certificates at A1 and Aa3; General Mortgage Bonds at A3; short term rating at Prime-2


Illinois Central Railroad- Notes and Medium Term Notes at Baa2 (unconditionally guaranteed by Canadian National Railway)




According to Moody's, the merger contemplates formation of a new company - North American Railways, Inc. - which will issue new common shares; existing CN and BNSF shareholders will receive a new common share and a CN voting share (at a 1.05 ratio for CN shareholders) which will trade as a common security. North American Railways will operate the continent's most extensive railroad network with service from coast to coast in Canada, and single-line service through the Chicago gateway to Los Angeles, the Pacific Northwest and the ports of Vancouver, Halifax and south to New Orleans.


Moody's notes that this is essentially an end-to-end merger of the rail networks with relatively few overlapping points, rather than a merger with multiple cross-over of tracks that have proven difficult to integrate effectively in past railroad mergers. The CN's acquisition of the highly efficient Illinois Central Railroad was a similar end-to-end merger and continues on plan for realizing operating synergies following the second quarter, 1999 merger, according to Moody's. BNSF has completed a more complex merger in the western US and is now realizing a level of operating synergies beyond what was originally expected. Further, Moody's points out that a common train control system should limit network integration issues; the software for CN's existing train control system was purchased from the former Santa Fe Railway just before the BNSF was created. Finally, both CN and BNSF have invested heavily in their respective existing rail networks and fleet as part of their recent mergers, especially in the case of BNSF. Moody's anticipates some, but not significant, additional pre-merger expenditures to more efficiently connect the two systems. There are likely to be considerable efficiencies in operating a larger fleet, especially given the substantial investment by BNSF in new locomotive power.


Moody's notes that both CN and BNSF have recent experience in integrating another large railroad, and are expected to increase the free cash flow from operations and remain moderately leveraged going forward. However, Moody's also points out that this will be a different integration process in that it is more of a merger of equals, and is larger in size, complexity and overall market impact. Management anticipates a substantial portion of the potential revenue growth to come from freight diversion off the highway to the new rail network; nonetheless, Moody's anticipates a relatively high level of regulatory scrutiny to ensure competition because of the more extensive market position of the resulting North American Railway. This could result in, among other things, delay of regulatory approval, divestiture of certain routes (particularly around Chicago) or other pre-merger spending, which could modify the contemplated economics of the merger.


Canadian National Railway, headquartered in Montreal, Quebec, operates 17,000 miles of track across Canada and into the United States via the Illinois Central Railroad. Burlington Northern Santa Fe Corporation, headquartered in Fort Worth, Texas, is the holding company for The Burlington Northern and Santa Fe Railway, a Class 1 railroad which operates 34,000 miles of track throughout the western United States.


No Related Data.
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