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Rating Action:

MOODY'S DOWNGRADES ALL RATINGS OF NORFOLK SOUTHERN CORPORATION (SR. UNSECURED TO Baa1, SHORT TERM TO PRIME-2), AND LOWERS LONG-TERM RATINGS OF ITS SUBSIDIARIES (ETCs TO Aa3)

06 May 1997
MOODY'S DOWNGRADES ALL RATINGS OF NORFOLK SOUTHERN CORPORATION (SR. UNSECURED TO Baa1, SHORT TERM TO PRIME-2), AND LOWERS LONG-TERM RATINGS OF ITS SUBSIDIARIES (ETCs TO Aa3) New York, 05-06-97 -- Moody's Investors Service downgraded all of the ratings for Norfolk Southern Corporation (NS) and lowered the long-term ratings of its subsidiaries. In a related action, Moody's assigned a Baa1 rating to the company's $7.0 billion unsecured bank credit facility. The rating actions follow the recent accord between NS and CSX Corporation (CSX) to acquire the assets of Conrail in approximately a 58%/42% split respectively. In lowering NS's ratings, Moody's said that there is potential increased competitive pressures in Conrail's territory and that there will be weakened debt protection measurements at NS following the $6 billion financing of its share of the $10.3 billion acquisition. The transaction is subject to approval by the Surface Transportation Board (STB). This concludes the review process which was initiated on October 23, 1996.
The ratings downgraded are:
Norfolk Southern Corporation: short-term rating for commercial paper lowered to Prime-2 from Prime-1; senior unsecured debt, industrial revenue bonds, and counterparty ratings lowered to Baa1 from A1.
Norfolk Southern Railway Company: equipment trust certificates lowered to Aa3 from Aaa.
Southern Railway Company: equipment trust certificates lowered to Aa3 from Aaa.
Norfolk & Western Railway: equipment trust certificates lowered to Aa3 from Aaa; subordinated income debentures lowered to Baa2 from A2.
Virginia & Southwestern Railway: first gold bonds lowered to Baa1 from A1.
New ratings assigned are:
Norfolk Southern Corporation $7.0 billion bank credit facility rated Baa1, multiple seniority shelf registration rated (P)Baa1 for senior unsecured debt, (P)Baa2 for senior subordinated debt, and (P)"baa2" for preferred stock .
In conjunction with the recent agreement on the purchase of Conrail, NS is in the final stages of putting in place a $7 billion revolving credit in two parts - a $3.5 billion 364-day facility and a $3.5 billion five-year facility. To be administered by Morgan Guaranty Trust Company of New York, the revolver is unsecured and ranks pari passu with other senior unsecured obligations of the Corporation. It provides back up liquidity to the company's commercial paper program and can also be used to finance the acquisition.
On April 8, 1997, NS and agreed to a division of Conrail's lines and facilities by which NS will obtain about 58% of Conrail based on revenues generated in 1995. NS will operate the legs between Chicago and Cleveland (a former New York Central mainline) and the Conrial line between Cleveland and northern New Jersey via Pittsburgh and Harrisburg (mostly the former Pennsylvania Railroad mainline). In addition, NS will operate the line serving the metropolitan New York area between northern New Jersey and Buffalo through Binghampton, N.Y. (former Erie Lackawanna) and another between Buffalo and Harrisburg, PA. NS is also acquiring most of Conrail's lines in Michigan, Maryland, Delaware and Pennsylvania. NS and CSX will jointly operate Conrail assets in major terminal areas such as Detroit and in northern and southern New Jersey, and will share access to certain lines in Philadelphia, Indianapolis, and the rail lines servicing the Monongahela coal fields in southeastern Pennsylvania.
NS and CSX 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 NS and CSX at a holding company level and the remaining assets split according to the agreement and leased back to each of the two aquirors. NS and CSX will make rental payments sufficient to cover Conrail's debt payments and other expenses. This structure will allow NS to integrate its Conrail assets into its existing operations.
The acquisition will give NS a presence in the Northeast market and preserve a competitive balance with CSX. The company believes that it can effect significant cost savings from the combination of the two systems, but improving its competitive position relative to truckers and revenue growth are key to the ultimate success of the merger. Although this merger will not create much duplicative track or facilities, Moody's anticipates that NS will be able to lower unit costs as a result of some rationalization of manpower and equipment, longer lengths of haul than Conrail previously enjoyed, and higher asset utilization. Additionally, a more north/south focus and aggressive marketing of Triple Crown services should put the company in a better position to compete with the highway in the highly truck oriented eastern seaboard. Triple Crown, the joint NS-Conrail intermodal service, will be 100% owned by NS. Nevertheless, Moody's believes that integrating the two systems and bringing Conrail's operating ratio more in line with NS's will be a challenge, and that the added competition in Conrail's territory could lead to rate pressure in some sectors.
To date, NS has purchased just under 10% of Conrail stock for a total cash investment of about $1 billion. The company plans on funding the remainder of the acquisition with debt. The Baa1 long-term rating on the company's senior unsecured debt takes into account the anticipated full amount of borrowings to fund the remaining $5 billion. Moody's expects the company to apply free cash flow to debt repayment, but the agency said that given increased competitive pressures a return to historical debt-protection measurements could be delayed. NS plans on concentrating its borrowings at the holding company level, with the exception of certain asset-based financings. Moody's anticipates subsidiary debt levels to remain relatively low, in keeping with historical trends and indicated that structural subordination issues for holding company bondholders have been mitigated by certain provisions in the most recent indentures which limit subsidiary borrowings.
The STB has announced a one-year review period from the date of filing. NS and CSX are expected to file a joint application sometime in June. NS's ratings anticipate that the STB would only impose minor modifications, if any, to the agreement. However, Moody's will continue to monitor developments with respect to the STB review process and may make changes as needed.
Norfolk Southern Corporation, headquartered in Norfolk, VA, is the holding company for Norfolk Southern Railway Company and its subsidiaries, and North American Van Lines, Inc., a trucking company.

No Related Data.
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