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DUFF & PHELPS: SOUTHERN PACIFIC RAIL CORPORATION $375 MILLION SENIOR NOTES DUE 2005 RATED 'B+'

 NEW YORK, July 20 /PRNewswire/ -- Duff & Phelps Credit Rating Co. has assigned a preliminary rating of `B+' (Single-B-Plus) to the planned offering of up to $375 million of senior notes due 2005 by Southern Pacific Rail Corporation (formerly Rio Grande Industries, Inc.). The rating reflects Southern Pacific's relatively high financial leverage, moderate operating profitability, continued reliance on asset sales, and the structural subordination of the notes to the debt held at operating subsidiaries. The rating is also contingent on a reduction in consolidated debt from a planned initial public offering of roughly $400 million by Southern Pacific Rail Corporation.
 The $375 million senior note offering and IPO are part of a recapitalization plan designed to reduce overall indebtedness, lower interest costs and improve liquidity. Proceeds from these offerings will be used to retire approximately $300 million of high cost subordinated indebtedness of both SPTC Holding, Inc. and Rio Grande Holding Inc., $203 million of total bank debt at the operating subsidiaries, and redeem $75 million of 12 percent preferred stock at Southern Pacific Rail Corp. An additional $110 million is designated to purchase equipment now operated under operating leases. Pro forma for the offerings at March 31, 1993, consolidated total indebtedness will decrease by $130 million, from $1.446 billion to $1.316 billion.
 Southern Pacific has made important strides to improve operating profitability by reducing employee headcounts, consolidating maintenance facilities, and improving equipment reliability. However, operating profitability is still weak and the company depends on the sale of surplus real estate and rail lines to provide for debt service and normal roadbed and equipment capital expenditures. While Southern Pacific has realized approximately $1.4 billion from asset sales over the last three years, substantial uncertainty exists as to the amount and timing of such asset sales, especially with the sale of transit corridor parcels to public agencies. However, the expected closing of the $260 million Alameda Corridor transaction in the third quarter of 1993, combined with cash from operations and unused bank lines, gives the company sufficient liquidity over the near term.
 Based on the completed recapitalization, D&P also expects that it will upgrade its rating of Southern Pacific Transportation Company's $290 million 10.5 percent senior secured notes due 1999 from `BB-' (Double-B-Minus) to `BB' (Double-B). These notes were originally issued in a private placement under Rule 144A. This upgrade would reflect an approximately $180 million reduction in bank debt at SPTC as part of the recapitalization plan, and the buyout of certain operating leases.
 Southern Pacific Rail Corporation is a holding company for two principal operating subsidiaries: Southern Pacific Transportation Company (SPTC) and The Denver and Rio Grande Western Railroad Company (D&RG). Based on a $400 million IPO and $375 million senior note offering, SPTC will have total indebtedness of $845 million and D&RG $96 million. All of this debt is structurally senior to the $375 million of senior notes being offered.
 -0- 7/20/93
 /CONTACT: Thomas P. Razukas, CFA, or Scott J. O'Shea, 212-908-0200, both of Duff & Phelps Credit Rating Co./


CO: Southern Pacific Rail Corporation ST: IN: TRN SU: RTG

WB -- NY027 -- 6677 07/20/93 10:17 EDT
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Publication:PR Newswire
Date:Jul 20, 1993
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