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Rating Action:

Moody's downgrades Norges Statsbaner AS to Aa2; outlook stable -- (Norway)

Global Credit Research - 16 Dec 2010

Approximately USD980 million of debt affected

Milan, December 16, 2010 -- Moody's Investors Service has today downgraded to Aa2 from Aa1 the long-term issuer rating and senior unsecured ratings of Norges Statsbaner AS ("NSB"). Concurrently, the rating agency has affirmed the company's Prime-1 (P-1) short-term rating. The outlook on the ratings is stable. This rating action concludes the review for downgrade initiated by Moody's on 28 July 2010.

RATINGS RATIONALE

"This rating action was triggered by Moody's downgrade of NSB's baseline credit assessment (BCA) to 6 (equivalent to A2) from 5 (equivalent to A1), which reflects both the poor performance posted by the company in the past two years and Moody's expectation that, in the medium term, NSB will be unable to restore credit metrics that are compatible with a BCA of 5," says Marco Vetulli, a Moody's Vice President-Senior Credit Officer and lead analyst for NSB.

Moody's Aa2 ratings for NSB reflect a combination of the following inputs:

- A BCA of 6 (on a scale of 1 to 21, where 1 represents the lowest credit risk and 6 equates to A2)

- The Government of Norway's sovereign rating of Aaa with stable outlook

- The very high default dependence of NSB on its sole shareholder (Government of Norway)

- The high likelihood of extraordinary government support.

The very high default dependence of NSB on the Norwegian government reflects: (i) the very high level of operational and financial links between NSB and its sole shareholder, evidenced by the fact that approximately 35% of the company's revenues are represented by direct government subsidies (not taking into consideration the indirect subsidies arising from the exemption from paying network access fees granted to NSB's passenger rail division); and (ii) the high degree of overlap of revenue base between NSB and its sole shareholder, as both entities generate most of their income in Norway.

Moody's assessment of a high probability of support for NSB from the Norwegian government is based on: (i) NSB's 100% ownership by the Kingdom of Norway; (ii) its position as the country's dominant passenger and freight train operator; (iii) government participation in NSB's activities, through not only the appointment of all the company's board members, but also the setting and following up of its strategic goals; and (iv) the government's influence over NSB's financial condition through the level of subsidies provided to the company for its passenger transportation activities.

A BCA of 6 (A2-equivalent) reflects the following constraints:(i) competitive pressures exerted on NSB's small domestic freight franchise by strong global freight players; (ii) the current railway infrastructure, which limits the growth of NSB's rail services (especially rail passenger services); (iii) the limited dimension of the company in respect to other European railways companies; and (iv) NSB's increasing leverage following its implementation of its current capital investment programme.

However, more positively, the BCA of 6 also reflects: (i) Moody's expectation that NSB's financial performance and liquidity will continue to be supported by a stable stream of revenues from public procurements (around 35% of passenger traffic revenues are derived from "public procurement") and indirect subsidies; (ii) the rating agency's expectation that, over the coming years, private competitors will not gain market share that is substantial enough to lead to a major weakening of NSB's role in the provision of public transport services in Norway; and (iii) significant hidden reserves in the company's real estate assets.

The stable outlook reflects Moody's view that NSB's financial profile and credit metrics are well positioned in the Aa2 rating category and that its BCA is well positioned within the 6 (A2) rating scale. The stable outlook is predicated on Moody's assumption that NSB will be able to negotiate with the government a management contract for the period 2011-2015 on a timely basis and this contract will foresee public purchases contribution in line with the increasing production volumes that the company has built up over the last few years. The stable outlook is also predicated on the expectation of an improvement in credit metrics through 2011.

Moreover, the stable outlook is also in line with the stable outlook of the sovereign's ratings. At this point, Moody's does not expect any change in dependence or support levels for the company.

Upward rating pressure could be driven by a change in NSB's BCA to 5 from 6, as evidenced by a sustainable improvement in operating performance and credit metrics, inter alia, a debt/EBITDA ratio below 4.5x and an RCF/net debt ratio in the high teens.

Negative rating pressure could arise from a weakening of NSB's BCA to 7 from 6, which could come about if NSB were to exhibit by the end of 2011 credit metrics with, inter alia, a debt/EBITDA ratio above 5.5x and a retained cash flow (RCF)/net debt ratio below the low teens. Moody's could also adjust NSB's BCA downwards if concerns about liquidity were to arise. A further downgrade of NSB's issuer rating level could be triggered by a downgrade of Norway (which is, at this point, unlikely in the medium term) and/or a perceived weakening in the close links between NSB and its sole shareholder.

Moody's most recent rating action on NSB was implemented on 28 July 2010, when the rating agency placed on review for possible downgrade the company's Aa1 issuer rating. Concurrently, Moody's affirmed the company's (P)1 short-term rating.

The principal methodologies used in this rating were Global Passenger Railway Companies published in December 2008, and Government-Related Issuers: Methodology Update published in July 2010.

NSB is one of the largest Norwegian transportation companies. Its parent company is 100% owned by the State of Norway and is responsible for train operation (both passenger and freight transportation) as well as management of railway stations and rolling stock. NSB reported operating revenues of approximately NOK11.1 billion (USD1.76 billion) as of the end of August 2010 on a last-12-months (LTM) basis.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Milan
Marco Vetulli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's Italia S.r.l
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Telephone:+39-02-9148-1100

Moody's downgrades Norges Statsbaner AS to Aa2; outlook stable -- (Norway)
No Related Data.
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