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Rating Action:

Moody's Affirms ratings of Kansas City Southern and Kansas City Southern de Mexico; outlook positive

18 Jun 2010

Approximately $1.7 billion in debt securities affected

New York, June 18, 2010 -- Moody's Investors Service has affirmed the ratings of Kansas City Southern ("KCS"), corporate family rating at B1, and Kansas City Southern de Mexico S.A. de C.V. ("KCSM"), corporate family rating at B2, and has changed the outlook for both companies to positive from stable. At the same time, Moody's affirmed the debt ratings of The Kansas City Southern Railway Company ("KCSR") and Southern Capital Corporation and changed their outlooks to positive from stable. In addition, Moody's has assigned a B1 rating to KCSM's proposed senior credit facility, and a Ba2 rating to KCSR's senior secured credit facility.

The rating outlooks were changed to positive in anticipation of improving operating results through 2010 at both KCSR, the U.S. railroad, and Mexican railroad KCSM, due to expectations that demand will continue to grow in most freight groups at the railroads in a robust pricing environment. The positive rating outlooks also reflect the important steps that KCS has taken in re-financing a substantial amount of debt and improving its debt maturity profile.

Both KCSR and KCSM have experienced a rebound in freight volume growth in 2010 at a faster pace than the rest of the Class I railroad sector. With strong pricing growth expected for 2010, it is becoming increasingly likely that operating margins, returns, and cash flow will result in credit metrics supportive of higher ratings at both entities. After dramatic weakening in volume in 2009 owing to recessionary conditions that severely impacted the railroad industry, KCSR and KCSM have seen unexpectedly strong weekly volume rebounds of, on average, 15 and 30%, respectively in the first half of 2010. This has supported strong pricing growth in 2010: approximately 6% in the first quarter, which the company expects to maintain throughout the year. Because of these factors, both the U.S. and the Mexican railroads have seen operating ratios drop below 80% in the first quarter of 2010, and it is expected that they will be able to improve on this measure going forward.

Along with the rebound in operating performance, the company has undertaken re-financing steps which have helped to reduce leverage and improve its debt maturity profile. Through the use of proceeds from the April 2010 $225 million public offering of KCS stock as well as cash balances held mostly at KCSM, the company has been able to repay approximately $240 million of high-coupon debt (9-3/8% to 13%), with another $60 million expected to be repaid upon completion of this program in mid-2010. Most of this debt reduction involves KCSM senior notes; as such, this entity will see the most improvement in credit metrics. Because this debt reduction program required use of the majority of KCSM's cash on hand, it is important that the company was able to arrange a new $100 million senior secured credit facility to ensure that KCSM can maintain an adequate liquidity profile. Beyond the deleveraging benefits, the company's re-financing program, which included a $300 million offering of KCSM notes due 2018 completed in the first quarter, has been instrumental in addressing some of the company's looming debt maturities. Prior to the notes and equity offerings, KCS was facing $460 million of maturities due in 2012 and $675 million due in 2013. With the re-financing, all of the 2012 notes maturities will have been repaid. However, a substantial amount of debt remains to mature in 2013, suggesting the need for continued re-financing efforts over the next two to three years.

The Ba2 rating of KCSR's credit facility, amended in May 2010 to extend its maturity to 2013, reflects the amount and quality of assets pledged as security to this facility, and the substantial amount of unsecured debt at the U.S. operations that are junior in claim to this facility. The Loss Given Default Assessment of LGD-2 reflects Moody's estimates of relatively good recovery of principal under this facility in the event of default, supporting the rating three notches above KCS's corporate family rating per Moody's Loss Given Default Methodology.

The B1 rating on the proposed KCSM senior secured notes, which is one notch above the corporate family rating, similarly considers the sizeable amount of unsecured debt in that entity's capital structure that is junior to this facility. However, it is Moody's view that the collateral package and subsidiary guarantees provided to this facility is not strong enough to warrant any additional notching. Moody's Loss Given Default Methodology is not applied to Mexican entities including KCSM.

Neither KCSR nor KCSM guarantees the other's debt, nor are the obligations of KCSR and KCSM cross defaulted to each other. Therefore, Moody's provides separate corporate family ratings for both KCSM and KCS.

The positive outlooks for both KCS and KCSM reflect Moody's expectations that the companies will see robust improvement in credit metrics by the end of 2010 as freight volumes continue to improve co-incident with an economic recovery in the U.S.

Ratings at KCS could be upgraded if the U.S. operations (KCSR and U.S. guarantors) were to show a steady trend of improving volume and yield over the next 6-12 months, resulting in operating ratios sustained below 80%, and positive free cash flow generation. Debt/EBITDA at the U.S. operations of less than 3.5 times and EBIT/Interest in excess of 2.5 times over a prolonged period would support upward rating consideration. Ratings at KCS could face downward revision if operating conditions were to instead weaken to a point that the U.S. operations' Debt/EBITDA exceeds 4.5 times, if EBIT/Interest approaches 1.5 times, or if deterioration in liquidity (either inadequate cash available to U.S. operations or insufficient availability under its revolving credit facility) becomes a constraint on the company's operating or investing activities.

Similarly, ratings of KCSM could face upward revision if sustained improvement results in Debt/EBITDA of below 4.5 times and EBIT/Interest in excess 1.8 times, with operating ratios maintained below 80%. Ratings could be lowered at KCSM if the company's free cash flow were to be substantially negative for a sustained period causing a substantial draw in the company's cash balances. KCSM's ratings could also be lowered if EBIT/Interest falls below 1.2 times or if Debt/EBITDA were to exceed 5.0 times.

Because of KCSM's sizeable contribution to KCS's business (40% of the parent company's consolidated revenue), the ratings difference between KCSR and KCSM will not likely exceed the current one-notch differential. Over the long run, this suggests that further uplift to KCSR's ratings could be hindered if KCSM's operating performance substantially lags that of its U.S. counterpart, particularly if KCSM were to encounter liquidity or re-financing difficulties that might require material support from the parent company.

Assignments:

..Issuer: Kansas City Southern Railway Company (The)

....Senior Secured Bank Credit Facility, Ba2 (LGD2-20)

..Issuer: Kansas City Southern de Mexico, S.A. de C.V.

....Senior Secured Bank Credit Facility, Assigned B1

Outlook Actions:

..Issuer: Kansas City Southern

....Outlook, Changed To Positive From Stable

..Issuer: Kansas City Southern Railway Company (The)

....Outlook, Changed To Positive From Stable

..Issuer: Kansas City Southern de Mexico, S.A. de C.V.

....Outlook, Changed To Positive From Stable

..Issuer: Southern Capital Corporation

....Outlook, Changed To Positive From Stable

The last rating action was on January 7, 2010 when Moody's assigned a B2 rating to senior notes issued by KCSM.

The principal methodology used in rating Kansas City Southern and City Southern de Mexico was Moody's Global Freight Railroad Methodology, published in March 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website

Kansas City Southern ("KCS') operates a Class I railway in the central U.S. (The Kansas City Southern Railway Company, `KCSR') and, through its wholly-owned subsidiary Kansas City Southern de Mexico, S.A. de C.V. (`KCSM'), owns the concession to operate Mexico's northeastern railroad.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
David Berge
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms ratings of Kansas City Southern and Kansas City Southern de Mexico; outlook positive
No Related Data.
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