Moody's Downgrades CP Rail on Plans to Acquire DM&E

Moody’s Investors Service downgraded Canadian Pacific Railway Ltd. (CP) on Thursday, citing its debt-financed plans to acquire Dakota, Minnesota & Eastern Railroad Corp. for nearly $1.5-billion.

In order to finance the purchase of the regional railway, CP had drawn C$1.27-billion on its newly arranged C$1.8-billion 18-month bridge loan facility, before the shares were placed in a voting trust.

CP will not have control over operations or cash flows of DM&E until the deal closes, Moody’s notes, which is not expected until late in 2008.

The ratings agency said,

Moody’s believes that the purchase price of almost $1.5-billion suggests that CP has paid a premium for the DM&E at a time when the transportation market has likely already passed its peak. To finance this acquisition, CP has increased its debt substantially, by over 30% to approximately C$6-billion.

The move has resulted in Moody’s downgrading all the debt ratings for Canadian Pacific Railway Co. and its subsidiaries from a “senior unsecured” rating to Baa3 with a “stable” outlook. Baa3 is the lowest investment grade, and is just one-notch above junk status.

Moody’s said if CP were to decide to go ahead with its planned expansion into the coal-rich region of the Powder River Basin, “credit metrics could further deteriorate” to below Baa3 levels.