MOODY'S CONTINUES TO MONITOR DEVELOPMENTS IN PROPOSED MERGER OF UNION PACIFIC CORPORATION AND SOUTHERN PACIFIC RAIL CORPORATION
New York, January 19, 1996 -- Moody's Investors Service continues to monitor developments in the proposed $3.9 billion merger of Union Pacific Corporation (UP) and Southern Pacific Rail Corporation (SP). The merger is subject to approval from the Surface Transportation Board (STB), a successor group of the Interstate Commerce Commission (ICC) that will rule on the transaction. The companies filed a "Railroad Merger Application" with the ICC on November 30th, 1995, which will be reviewed under a 255-day schedule. If the review is completed within that time frame, the merger could become effective by the end of the summer of 1996.
The proposed transaction is expected to result in an increase in UP's financial leverage and a weakening of its debt- protection measurements, indicating downward pressure on the ratings if the transaction is consummated. Nevertheless, Moody's noted that the operating strength of the combined systems, along with UP's plan to fund a portion of the acquisition with equity, should maintain UP's long-term debt ratings well within the Baa category. At the same time, SP would likely benefit from UP's superior service quality and asset management, which could have positive implications for its ratings.
According to the rating agency, the proposed transaction is consistent with UP's growth strategy and efforts to refocus on core transportation activities. Moody's believes that meaningful cost savings and operating efficiencies could be derived from the combination of the two systems, which would form the nation's largest railroad in terms of revenue. The combined entity would be able to provide extended single-line service throughout the western United States, and would be strategically positioned to serve the Mexican market.
Moody's noted that uncertainties remain regarding the ultimate structure of the transaction and the ultimate outcome of the STB approval process and time frame. Consequently, Moody's will monitor developments in the proposed merger and will make any necessary rating adjustments as details become more certain.
The current ratings are:
Union Pacific Corporation -- A3 rated senior unsecured debt, pollution control bonds, and industrial revenue bonds; A3 counterparty rating; (P)A3 rated shelf registration for senior unsecured debt; (P)"a3" rated shelf registration for preferred stock; (P)Baa1 rated shelf registration for subordinated debt; and Prime-2 commercial paper rating.
Union Pacific Railroad Company -- Aa2 rated equipment trust certificates and pass through certificates.
Missouri Pacific Railroad Company -- Aa2 rated equipment trust certificates; A2 rated first mortgage bonds; Baa1 rated general income mortgage bonds; and Baa2 rated income debentures.
Chicago & Eastern Illinois Railroad Company -- Baa2 rated income debentures.
Chicago and North Western Railway Company -- A2 rated pass through certificates.
Texas & Pacific Railway Company -- A2 rated first mortgage bonds.
Southern Pacific Rail Corporation -- Ba3 rated senior unsecured notes.
Southern Pacific Transportation Company -- Baa1 rated pass through certificates; and Ba1 rated first and refunding mortgage bonds.
Union Pacific Corporation is a holding company headquartered in Bethlehem, Pennsylvania. Through its wholly-owned subsidiaries, UP is engaged in railroad and trucking transportation, as well as oil, gas and mining. Southern Pacific Rail Corporation, headquartered in San Francisco, California, is the holding company for both Southern Pacific Transportation Company and The Denver and Rio Grande Western Railroad Company.
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