MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF UNION PACIFIC CORPORATION (Sr. to Baa2) AND ITS PRIMARY SUBSIDIARIES (ETCs to Aa3), AND PLACES THE DEBT RATINGS OF SOUTHERN PACIFIC CORPORATION ON WATCH FOR POSSIBLE UPGRADE
New York, 07-08-96 -- Moody's Investors Service downgraded the long-term debt ratings of Union Pacific Corporation (UP), senior unsecured to Baa2 from A3, and those of its primary subsidiaries, ETC's to Aa3 from Aa2. These actions do not affect UP's commercial paper rating which is confirmed at Prime-2. Moody's also placed the long-term debt ratings of Southern Pacific Rail Corporation (SP) and its subsidiaries under review for possible upgrade. These actions were prompted by the Surface Transportation Board's (STB) announcement that it has approved the merger of UP and SP contingent upon resolution of a number of issues. The ratings of Union Pacific Corporation also take into account structural subordination issues arising from its holding company status and its concentration in one industry. In a related action, Moody's has reassessed the structural treatment of certain obligations that have been assumed by the Union Pacific Railroad Company and the Missouri Pacific Railroad Company through past acquisitions, resulting in the upgrade of certain ratings.
Ratings downgraded are:
Union Pacific Corporation: senior unsecured debt, pollution control bonds, and industrial revenue bonds to Baa2 from A3; counterparty rating to Baa2 from A3; senior debt shelf registration to (P)Baa2 from (P)A3; subordinated debt shelf registration to (P)Baa3 from (P)Baa1; preferred stock shelf registration to (P)"baa2" from (P)"a3".
Union Pacific Railroad Company: equipment trust certificates and pass-through certificates to Aa3 from Aa2.
Missouri Pacific Railroad Company: first mortgage bonds to A3 from A2; equipment trust certificates to Aa3 from Aa2; general income debentures to Baa2 from Baa1; income debentures to Baa3 from Baa2.
Ratings upgraded are:
Missouri-Kansas-Texas Railroad: 5.5% subordinated income debentures due 2033 to Baa3 from Caa.
Chicago and North Western Railway Company: pass-through certificates to A1 from A2.
Ratings placed on watch for possible upgrade are:
Southern Pacific Rail Corporation: senior unsecured rated Ba3.
Southern Pacific Transportation Company: first mortgage bonds rated Ba1; pass-through certificates rates Baa1.
On July 3, 1996, the STB, voted 3 to 0 in favor of the merger of the Union Pacific with the Southern Pacific, pending satisfactory resolution of a number of conditions. UP believes that the conditions will not prevent the company from moving ahead with the merger. The combined company will form the largest railroad in the U.S., will be able to provide extended single-line service throughout the western part of the country, and be strategically positioned to serve the Mexican market. Moody's believes that meaningful cost savings and operating efficiencies ultimately will be derived from the combination of the two systems. Nevertheless, the transaction will increase UP's debt burden and weaken its debt-protection measurements. Additionally, the complexity of integrating the two systems will be a challenge for management. The long-term debt ratings of Union Pacific Corporation reflect UP's status as a pure holding company and the structurally subordinate claim that its creditors have over the assets and cash flow of its subsidiaries - Union Pacific Railroad Company and Missouri Pacific Railroad Company. The structural issues have become more relevant as the company has become almost exclusively focused on one line of business as a result of acquisitions and divestitures over the past several years.
In its review of SP's debt ratings, Moody's will assess the structure of the transaction, including the treatment of SP's debt obligations within the new group. In addition to the operating benefits which SP is expected to derive, the extent to which SP's debt obligations are assumed or guaranteed by UP could have favorable implications on the ratings.
Union Pacific Corporation is a holding company headquartered in Bethlehem, Pennsylvania. Through its wholly-owned subsidiaries, UP is engaged in railroad and truck transportation. 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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