New York, 04-03-95 -- Moody's Investors Service downgraded the credit ratings of Union Pacific Corporation (UP), Union Pacific Railroad Company (UPRR), and certain other railroad subsidiaries of UP. In a related action, the rating agency upgraded the equipment trust certificate rating of Chicago & North Western Railway Company. The rating actions acknowledge the business and operating benefits stemming from the planned acquisition of Chicago and North Western Transportation Company (CNW) by UP, but also consider the higher financial leverage and weaker debt-protection measurements resulting from the debt-funded transaction. The rating actions conclude a review of the ratings of UP and CNW initiated on March 10, 1995.
The ratings downgraded are:
Union Pacific Corporation -- senior unsecured debt to A3 from A2; pollution control and industrial revenue bonds to A3 from A2; counterparty rating to A3 from A2; shelf registration for senior unsecured debt to (P)A3 from (P)A2; shelf registration for preferred stock to (P)"a3" from (P)"a2"; and commercial paper rating to Prime-2 from Prime-1.
Union Pacific Railroad Company -- equipment trust certificates to Aa2 from Aa1.
Missouri Pacific Railroad Company -- equipment trust certificates to Aa2 from Aa1; first mortgage bonds to A2 from A1; general income mortgage bonds to Baa1 from A3; and income debentures to Baa2 from Baa1.
Chicago & Eastern Illinois Railroad Company -- income debentures to Baa2 from Baa1.
Texas & Pacific Railway Company -- first mortgage bonds to A2 from A1.
The ratings upgraded are:
Chicago & North Western Railway Company -- equipment trust certificates to A2 from A3.
According to Moody's, UP and CNW have executed a definitive agreement pursuant to which UP will acquire all of CNW's outstanding common stock for $35 a share in cash. In addition to the debt-funded purchase price, Moody's noted that CNW has about $1 billion of debt outstanding, as well as a significant amount of operating leases, which will substantially increase the combined entity's financial leverage, both on a nominal and rent-adjusted basis.
The rating actions anticipate that operating synergies and cost saving opportunities will benefit earnings and cash flow, and enable UP to gradually improve the operating ratio of the combined entity over the intermediate term. Moody's believes that growth potential for the company could be derived from increased demand for low-sulfur Powder River Basin coal, as well as enhanced intermodal service between Chicago and the West Coast achieved through the combination of the two rail systems. Although higher capital spending levels could occur over the next few years, the company expects that improved equipment utilization may limit such increase. Moreover, the rating agency expects cash flow from operations to be sufficient to fund spending requirements while steadily reducing outstanding indebtedness. The rating agency also noted that its rating outlook anticipates that UP will manage its external growth activities prudently until debt-protection measurements are restored.
The upgrade of CNW's debt rating considers the operating and financial benefits attendant to its inclusion in a larger group, but also recognizes that UP has neither assumed nor offered other direct support for CNW's outstanding indebtedness.
Union Pacific Corporation, headquartered in Bethlehem, Pennsylvania, is the holding company for Union Pacific Railroad Company, a Class I railroad. Chicago & North Western Transportation Company, headquartered in Chicago, Illinois, is the holding company for Chicago & North Western Railway Company.
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