Moody's Investors Service Monday said it has downgraded Union Pacific Corp.'s long-term debt ratings and may upgrade Southern Pacific Rail Corp.'s ratings following last week's decision by the Surface Transportation Board to approve Union Pacific's acquisition of Southern Pacific.
Moody's downgraded Union Pacific's senior unsecured debt to "Baa2" from "A3" and reduced its rating on Union Pacific's primary subsidiaries to "Aa3" from "Aa2." The acquisition will increase Union Pacific's debt burden and weaken its debt-protection measurements, the New York-based agency said.Moody's also downgraded Union Pacific's pollution control bonds and industrial revenue bonds to "Baa2" from "A3."
Union Pacific, based in Bethlehem, Pa., will pay $5.4 billion for the ailing Southern Pacific in a transaction that requires the merged companies to give access to certain tracks to competitors such as Burlington Northern Santa Fe Corp.
The combined company will become the largest railroad in the United States, with 31,000 miles of track, 72,000 employees and annual revenue of $10.6 billion. It and Burlington Northern Santa Fe would control about 90 percent of rail freight traffic in the Western United States.
Moody's said it is considering whether to upgrade its current "Ba3" rating on San Francisco-based Southern Pacific. The agency will make a decision after assessing the structure of the merger, including the treatment of Southern's debt obligations within the new company.
"In addition to the operating benefits which SP is expected to derive, the extent to which Southern Pacific's debt obligations are assumed or guaranteed by UP could have favorable implications on the ratings," Moody's said.
The agency raised its rating on the first mortgage bonds of Missouri Pacific Railroad Co. a Union Pacific subsidiary, to "A3 from "A2."
Moody's will consider whether to upgrade the first mortgage bonds of Southern Pacific Transportation Co., a Southern subsidiary, from its "Ba1" level.