S&P Global Ratings today assigned its 'BBB+' rating to Canadian Pacific Railway Co.'s (CP) proposed US$3.1 billion senior unsecured notes.

We rate the company's unsecured notes 'BBB+', the same as the issuer credit rating (ICR) on CP, because no significant elements of subordination risk are present in the capital structure.

We believe CP will offer the proposed notes to the holders of Kansas City Southern's (KCS) unsecured notes due beyond 2023 with the intention of replacing those obligations at similar terms and with a new obligor. We expect CP will address KCS' notes due in 2023 over the next few months. The proposed debt-obligor exchange is contingent on the CP-KCS merger closing, which we expect will occur over the next few weeks. Upon closing of the transaction, we expect CP's pro forma adjusted debt-to-EBITDA ratio will be about 3.5x, followed by prospective deleveraging to about 2.5x by 2024. This corresponds with an adjusted funds from operations-to-debt ratio of 25%-30% in 2024 and is commensurate with our rating on the company. For more information about Canadian Pacific Railway Ltd., please refer to our analysis, published Dec. 2, 2022, on RatingsDirect.

Our 'BBB+' ICR with a stable outlook is unchanged and reflects our expectation that the company's credit measures will improve steadily over the next two years. We expect growth in earnings and solid free operating cash flow generation will be used toward debt repayment to facilitate improved leverage and coverage ratios.