MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF NORFOLK SOUTHERN CORP. (SENIOR TO A1) AND CSX CORP. (SENIOR TO Baa1); CONTINUES TO REVIEW RATINGS OF BOTH COMPANIES FOR POSSIBLE FURTHER DOWNGRADE; REVIEWS DEBT RATINGS OF CONRAIL INC. FOR POSSIBLE DOWNGRADE
New York, 02-04-97 -- Moody's Investors Service downgraded the long-term debt ratings of Norfolk Southern Corporation (Norfolk Southern) in recognition of the company's planned purchase of up to 9.9% of Conrail, Inc. (Conrail) stock, in its ongoing effort to gain control of that company. Norfolk Southern's Prime-1 rating for commercial paper is unchanged, but remains under review along with Norfolk Southern's long-term ratings for possible downgrade. Moody's also downgraded the long-term debt ratings of CSX Corporation (CSX) and its subsidiaries, and kept the ratings under review for possible further downgrade. CSX owns just under 20% of Conrail's stock and has an agreement with the company's management to purchase 100% of Conrail in a cash and stock deal. CSX's Prime-2 rating for commercial paper is not under review. In a related action, Moody's placed the long-term debt ratings of Conrail, Inc. and the short-term and long-term debt ratings of Conrail, Inc.'s, subsidiary, Consolidate Rail Corporation, under review for possible downgrade. The merger is subject to approval by the Surface Transportation Board (STB).
The rating actions affecting Norfolk Southern are:
Norfolk Southern Corporation: senior unsecured debt, industrial revenue bonds, and counterparty rating lowered to A1 from Aa3.
Norfolk & Western Railway: subordinated income debentures downgraded to A2 from A1.
Virginia & Southwestern Railway: first gold bonds lowered to A1 from Aa3.
The Aaa rated equipment trust certificates of Norfolk Southern Railway Company, Southern Railway Company, and Norfolk & Western Railway as well as the Prime-1 rated commercial paper of Norfolk Southern Corporation remain unchanged.
All ratings of Norfolk Southern remain under review for possible downgrade.
The rating actions affecting CSX are:
CSX Corporation: senior unsecured debt lowered to Baa1 from A3; shelf registration for senior unsecured debt lowered to (P)Baa1 from (P)A3.
CSX Transportation, Inc.: equipment trust certificates lowered to Aa3 from Aa2.
Baltimore & Ohio Railroad Company: equipment trust certificates lowered to Aa3 from Aa2.
Allegheny & Western Railway: first mortgage bonds lowered to A3 from A2.
Chesapeake & Ohio Railway: equipment trust certificates lowered to Aa3 and A1 from Aa2 and Aa3.
Hocking Valley Railway: first mortgage bonds lowered to A3 from A2.
Sea-Land Services, Inc.: secured bonds lowered to Baa1 from A3.
Seaboard System Railroad, Inc.: equipment trust certificates lowered to Aa3 and A1 from Aa2 and Aa3.
Louisville & Nashville Railroad Company: equipment trust certificates lowered to Aa3 from Aa2; first mortgage bonds lowered to A3 from A2.
Monon Railroad: income debentures lowered to Baa2 from Baa1.
The long-term ratings of CSX remain under review for possible further downgrade.
The ratings of Conrail placed under review for possible downgrade are:
Conrail Inc.: shelf registration for senior unsecured debt rated (P)A2, for senior subordinated debt rated (P)A3 and for preferred stock rated (P)"baa1"; A3 counterparty rating.
Consolidated Rail Corporation: equipment trust certificates rated Aa1; senior unsecured debt rated A2; shelf registration for senior unsecured debt rated (P)A2 and for ETCs rated (P)Aa1; commercial paper rated Prime-1.
The transaction has evolved to a situation whereby Norfolk Southern and CSX have expended significant amounts of cash for Conrail stock. CSX has purchased just under 20% of Conrail stock for a total cash investment of about $2 billion, while Norfolk Southern's tender offer for up to 9.9% of Conrail's shares, which expires today, will require an investment of approximately $1 billion. Although a significant amount of uncertainty surrounds the ultimate outcome of the current struggle between Norfolk Southern and CSX for control of Conrail, the bidding war underscores the heightened long-term risks related to increased competitive pressures and financial leverage facing both companies. Additionally, based on a range of potential outcomes, Moody's believes that the credit profile of both companies will weaken, prompting an interim rating action.
Under the terms of the merger agreement CSX has reached with Conrail's board, CSX would purchase up to 40% of the shares of Conrail for cash and the remainder for a combination of CSX common stock and convertible preferred stock. Norfolk Southern has indicated that it would finance its proposed acquisition of Conrail with debt. At this time, both parties have reached a standstill as Norfolk Southern cannot exceed 10% ownership without triggering a poison pill and CSX cannot exceed 20% ownership under a Pennsylvania law provision without shareholder approval. Conrail shareholders voted on January 17, 1997 not to opt out of this provision. All three companies are meeting to discuss possible compromise solutions to the bidding situation. These could involve trackage rights and line sales to maintain a competitive balance in the eastern U.S. rail industry. The STB has indicated a one-year review process from the date of an application filing for the proposed transaction. In its ongoing review process, Moody's will consider the ultimate structure and financing requirements of the transaction, the position of borrowings within each organization, and the relative competitive strength of each franchise, and take appropriate rating action as information becomes available.
Conrail's debt ratings were placed under review for possible downgrade, reflecting the likelihood that Conrail's cash flow will be called upon to support a higher level of debt if either transaction occurs. Moody's indicated that, depending upon the structure of the transaction, the company's long-term debt ratings could remain well within the investment grade category.
Norfolk Southern Corporation, headquatered in Norfolk, VA, is the holding company for Norfolk Southern Railway Company (NSR). CSX Corporation is a holding company headquartered in Richmond, Virginia for CSX Transportation, Inc. (CSXT). Conrail, Inc., headquartered in Philadelphia, Pennsylvania, is the holding company for Consolidated Rail Corporation. NSR, CSXT, and Consolidated Rail Corporation are all Class I railroads.
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