MOODY'S DOWNGRADES UNION PACIFIC SHORT TERM RATING TO PRIME-3 AND SR. UNSEC. TO Baa3
New York, 02-26-98 -- Moody's Investors Service downgraded the short term rating of Union Pacific Corporation (UP) to Prime-3 from Prime-2, and the senior unsecured debt rating to Baa3 from Baa2, as well as the debt ratings of UP's subsidiaries. The rating action reflects Moody's view that the congestion centered in UP's Southern line is more persistent and extensive than originally thought and that the timetable for implementing a comprehensive solution has become uncertain. This action takes into account UP's announced financial actions, including a dividend cut and the potential to issue long term securities, and considers the other options the company has to raise capital.
Ratings affected are:
Union Pacific Corporation: senior unsecured debt, pollution control bonds, and industrial revenue bonds to Baa3 from Baa2; counterparty rating to Baa3 from Baa2; senior debt shelf registration to (P)Baa3 from (P)Baa2; subordinated debt shelf registration to (P)Ba1 from (P)Baa3; preferred stock shelf registration to (P)"ba2" from (P)"baa2".
Union Pacific Railroad Company: equipment trust certificates and pass-through certificates to A1 from Aa3.
Missouri Pacific Railroad Company: first mortgage bonds to Baa1 from A3; equipment trust certificates to A1 from Aa3; general income debentures to Baa3 from Baa2; income debentures to Ba1 from Baa3.
Missouri-Kansas-Texas Railroad: 5.5% subordinated income debentures to Ba1 from Baa3.
Chicago and North Western Railway Company: pass-through certificates to A2 from A1.
Southern Pacific Rail Corporation: senior unsecured to B1 from Ba3.
Southern Pacific Transportation Company: first mortgage bonds to Ba2 from Ba1; pass-through certificates to Baa2 from Baa1.
Since the merger with the Southern Pacific Corporation, UP has experienced severe congestion in its system. Congestion in the northern lines has been addressed and traffic, including the core coal hauls, is generally moving better. However, the most persistent congestion is now centered in the lines along the Texas/Louisiana coast and most affects the chemical and petrochemical traffic. UP has set, but missed, several operating deadlines for measuring service improvement in its lines. Although service is improved, progress has neither been as rapid nor as permanent as expected. Moody's believes that UP has dedicated considerable resources to the problem, but most of the programs deployed to date have had only marginal impact. In Moody's opinion, the congestion is more likely a symptom of a problem which is more structural in nature rather than one to be solved with temporary rerouting or repositioning of crew or equipment. As the root cause of the problem has yet to be fully determined, neither the timing of specific programs nor the ultimate capital required to restore service and lost revenue can be defined at present. Moreover, as poor service to the shippers in the Gulf region now exceeds two quarters and the timetable for service to be restored is uncertain, some shippers may need to consider alternative means to transport product. As a result, in addition to the potential impact on cash flow from the loss of existing shipper revenue, the intermediate term growth prospects of UP are likely to be limited.
Moody's noted that the financial actions proposed by UP -- a greater than 50% cut in dividend to $.20 per share and the issuance of long term securities -- are helpful given the near term cash flow uncertainty and the $8.5 billion of total indebtedness at year-end 1997. Moody's pointed out that UP has substantial non-rail assets which could be monetized if necessary as well as some flexibility in the timing of its capital expenditure program. Moody's also pointed out that UP has made active use of commercial paper in its debt capital, but maintains strong alternative liquidity including a $2.8 billion multi-year credit facility syndicated among a strong group of relationship commercial banks.
Despite the service instability, UP has made progress in addressing the safety issues raised in the Federal Railroad Administration's September, 1997 report, and Moody's expects that UP management will remain vigilant on safety matters, consistent with the historically good safety record of the railroad. Nonetheless, future stability in the rating will be a function of restoring service to pre-merger levels, recovery of lost revenue and regaining the confidence of the shippers.
Union Pacific Corporation is a holding company headquartered in Dallas, Texas. Through its wholly-owned subsidiaries, UP is engaged in railroad and truck transportation.
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