Rating agency warns rail credit may be downgraded on merger

FILE - This Oct. 23, 2014 file photo shows a Norfolk Southern locomotive on Chicago's south side. Norfolk Southern has rejected Canadian Pacific’s proposal to combine the two railroads. Norfolk Southern Corp. said Friday, Dec. 4, 2015 that its board determined the proposal was “grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome and is not in the best interest of the company and its shareholders.” (AP Photo/M. Spencer Green, File)

OMAHA, Neb. (AP) — Rating agency Moody’s says Canadian Pacific and Norfolk Southern could face credit downgrades if the two railroads move forward with a proposed merger.

Moody’s said Monday that it hasn’t taking any action on the railroads’ ratings yet because it’s not clear Norfolk Southern will agree to Canadian Pacific’s buyout offer.

But as the probability of a merger increases, Moody’s says a negative rating action is likely. That’s because Canadian Pacific would have to borrow significantly more to finance the roughly $27 billion deal, and past railroad mergers have had integration problems.

So far Norfolk Southern has rejected Canadian Pacific’s offers to buy the railroad, but it hasn’t responded to CP’s latest bid.

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