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Rating Action:

Moody's raises ratings of Kansas City Southern and Kansas City Southern de Mexico

Global Credit Research - 15 Nov 2010

Approximately $1.7 billion in debt securities affected

New York, November 15, 2010 -- Moody's Investors Service has upgraded the ratings of Kansas City Southern ("KCS"), corporate family rating to Ba3 from B1, and Kansas City Southern de Mexico S.A. de C.V. ("KCSM"), corporate family rating to B1 from B2. The ratings outlook for both KCS and KCSM is positive. At the same time, Moody's raised the debt ratings of The Kansas City Southern Railway Company ("KCSR") and Southern Capital Corporation and maintained their positive outlooks.

The rating were raised in recognition of dramatically improved operating results realized in 2010 at both KCSR, the U.S. railroad, and Mexican railroad KCSM, and expectations that both entities will continue to exhibit robust financial performance over the next few years as demand will continue to grow in most freight groups at the railroads in a robust pricing environment. The ratings upgrades also reflect the important steps that KCS has taken in re-financing a substantial amount of debt and improve its debt maturity profile.

Both KCSR and KCSM have experienced a rebound in freight volume in 2010 at a faster pace than the rest of the Class I railroad sector. This has resulted in operating margins, returns, and cash flow that are supportive of the ratings upgrades. 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, 10% and 25%, respectively throughout the year to October 2010. This has supported strong pricing growth in 2010 (approximately 6% year-over-year) , which the company expects to maintain going into 2011. Because of these factors, both the U.S. and the Mexican railroads have seen operating ratios drop well below 80% in 2010, and it is expected that they will be able to sustain 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. In addition to the April 2010 $225 million public offering of KCS stock which was used primarily to prepay high coupon KCSR and KCSM debt coming due between 2012 and 2016, the company has recently announced a planned tender for KCSM's 7-5/8% notes due 2013 and 12-1/2% notes due 2016, to be financed through debt issued by KCSM. Through this program of re-financing, the company has been able to not only reduce debt by almost $350 million during the year, but has also materially improved its debt maturity schedule. All 2012 maturities have been repaid, while 2013 maturities have been reduced substantially. Nevertheless, after the current refinancing is completed, KCS will still face approximately $450 million of maturities in 2013, suggesting the need for continued re-financing efforts over the next two years.

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 continue to see steady revenue growth over the near term at improving margins, which will result in improved earnings and positive free cash flow over this period. This could result in credit metrics that are supportive of higher ratings at both companies. Moody's anticipates that such an outcome could be achieved even under a slow macroeconomic growth scenario in North America.

Ratings at KCS or KCSM could be upgraded if their respective railroad operations were to show steady and sustained growth in yield and volume the next 12-18 months without any material deterioration in service metrics. The railroads would have to demonstrate a continuous track record of strong positive free cash flow generation while maintaining capital investments at current levels. For KCS, operating ratios at its U.S. operations (KCSR and U.S. guarantors) would need to remain consistently in the low-70% range throughout the cycle to warrant upward rating consideration, with Debt/EBITDA falling below 3.0 times and EBIT/Interest above 3.5 times. At KCSM, Debt/EBITDA of below 3.5 times and EBIT/Interest above 3.0 times would need to be demonstrated for upward rating consideration. A restoration of more robust cash balances would also factor into a rating upgrade at KCSM. Ratings at KCS or KCSM could face downward revision if operating conditions were to weaken to a point that either railroad's Debt/EBITDA exceeds 4.0 times, if EBIT/Interest falls below 2.0 times, or if deterioration in liquidity becomes a constraint on either company's operating or investing activities.

Upgrades:

..Issuer: Kansas City Southern

....Probability of Default Rating, Upgraded to Ba3 from B1

....Corporate Family Rating, Upgraded to Ba3 from B1

....Multiple Seniority Shelf, Upgraded to (P)B1, (P)B2 from (P)B2, (P)B3

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

....Multiple Seniority Shelf, Upgraded to (P)B1, (P)B2 from (P)B2, (P)B3

....Senior Secured Bank Credit Facility, Upgraded to Ba1 from Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 from B2

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

....Corporate Family Rating, Upgraded to B1 from B2

....Senior Secured Bank Credit Facility, Upgraded to Ba3 from B1

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 from B2

..Issuer: Southern Capital Corporation

....Senior Secured Equipment Trust, Upgraded to Ba1 from Ba2

The last rating action was on June 18, 2010 when Moody's changed the ratings outlook for both KCS and KCSM to positive from stable.

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.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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.

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.

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

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

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's raises ratings of Kansas City Southern and Kansas City Southern de Mexico
No Related Data.
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