C.H. Robinson is keeping its investment-grade-level rating with S&P Global, but it has fallen below a key benchmark and its outlook has been downgraded by the ratings agency.
S&P Global Ratings said in a report issued last week that the ratio of funds from operations (FFO) to debt at C.H. Robinson (NASDAQ: CHRW) had fallen to 41% at the end of the first quarter, dropping below the 45% level that is considered significant. That number was described by S&P Global as its “downgrade threshold,” though the company’s credit rating was not downgraded. Instead, what is known as the issuer credit rating was affirmed at BBB+.
A BBB, BBB+ or BBB- issuer credit rating is assigned to companies that are viewed by S&P (NYSE: SPGI) as having “adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments.” BBB+ is three notches above the cutoff between investment and non-investment-grade debt.
The negative outlook that S&P Global now has on C.H. Robinson could be seen as a prelude to a downgrade, as that is often the case with ratings agency actions. But any move could be a long time coming; in its definition of a negative outlook, S&P Global said a positive or negative outlook reflects “the potential direction of a long-term credit rating over the intermediate term, which is generally up to two years for investment grade and generally up to one year for speculative grade.” With BBB+ solidly in the investment grade category, the negative outlook for C.H. Robinson could stick around awhile before turning into a downgrade, if ever.
One of the concerns raised by S&P Global is the pace of corporate buybacks at C.H. Robinson. The ratings agency described it as “elevated” and is a reason why the FFO-to-debt levels are now at a number considered by S&P to be “weak.”
“We believe there is an increased potential that the company’s financial policies will limit its ability and willingness to preserve credit measures we view as commensurate for its rating,” S&P said. Those measures include that 45% FFO-to-debt level.
FFO to debt at C.H. Robinson was 64% at the end of 2020, S&P said.
In the company’s most recent earnings call with analysts, CFO Mike Zechmeister said C.H. Robinson had share repurchases of $51.2 million in the first quarter. The total amount of cash returned to shareholders was $125 million, as the company also paid out $73.4 million in dividends. S&P said share buybacks totaled about $1.46 billion in 2022, so a quarterly rate of $51.2 million in the first quarter would have been well below the average quarterly amount of buybacks last year.
A spokesman for C.H. Robinson, in response to an email query from FreightWaves, confirmed the company did begin slowing down buybacks in the fourth quarter of 2022 “given where we are in the freight cycle.”
“As has been the case for the past several years, our level of share buybacks results from our capital allocation strategy,” he said in an email. “We target an investment grade credit rating and fund the operation of our business from the cash generated. We prioritize close in investments, on a risk adjusted return basis, while growing our dividend in alignment with long term cash generation from the business. After any M&A activity, excess cash is used to buy back shares. In soft freight markets, we generally buyback less shares, all else equal.
Revolving debt is used by C.H. Robinson “to support liquidity” when spot rates spur a need for it, S&P said. That revolving debt gets paid back when spot rates allow it, according to S&P. “This dynamic began to change in early 2021, coinciding with a material increase in share buybacks,” it said.
In 2022, S&P said, debt at C.H. Robinson “remained high owing to past working capital-related funding and the company prioritizing shareholder distributions over debt repayment. Moreover, steeper-than-expected volume and pricing declines over the past two quarters have pressured the company’s EBITDA and FFO, and it is unclear when they will recover.”
The competing Moody’s ratings agency (NYSE: MCO), a few days after the S&P report, published what it refers to as an update on C.H. Robinson. But the Moody’s report took no action. The debt rating was not changed from its level of Baa2, which is considered weaker than the BBB+ at S&P. BBB+ at S&P is considered equivalent to Baa1 at Moody’s, and Baa2 is one step down from Baa1.
Moody’s also kept the outlook on C.H. Robinson at stable.
After recapping the market conditions faced by 3PLs, Moody’s appeared to take issue with the S&P findings.
“We expect the company to maintain a conservative balance sheet given a disciplined approach to share repurchases and acquisitions,” Moody’s said. “We believe over the long term that a combination of size and scale will allow the company to capture a greater share of the market than smaller carriers that are unable to meet demand.”
The decisions at C.H. Robinson on how much cash to spend on buybacks and how much on debt repayment in 2021 and 2022 would have been implemented under the former regime of Bob Biesterfeld, who was ousted as CEO at the start of the year. David Bozeman recently was named the replacement for Biesterfeld.
The S&P analysts could almost be seen as sending a signal to the new management when they said they were unsure of “management’s commitment to maintaining credit metrics appropriate” for a BBB+ rating. “As such, we believe there is less certainty that the company’s credit metrics will improve over the next two years.”
Cost cuts through staff reductions are “going according to expectations” at C.H. Robinson, S&P said. But if “business conditions weaken further than expected, management will have to identify additional savings opportunities, which may be limited, as it will want to avoid cutting too deep to remain adequately staffed for a rebound.”
Even though by dropping to a 41% FFO-to-debt rating the door might have been opened to an actual downgrade of the debt, S&P said it held off doing that because it believes “there is a path for restoring credit measures.
“We believe management is committed to improving its FFO to debt to above 45%, potentially by the end of this year, with reductions in share buybacks throughout the remainder of the year being one component of this,” S&P said.
Asked specifically whether C.H. Robinson believes it can get back to that 45% ratio, the spokesman said the company’s “capital allocation strategy” is geared to “target an investment grade credit rating to optimize our weighted average cost of capital.”
He also said the BBB+ rating by S&P has been assigned to C.H. Robinson since the company first accessed public debt markets in 2018.
Free operating cash flow is expected to be about $740 million this year and that should “enable opportunities to repay debt and restore credit measures to levels firmly in line with the rating,” S&P said. “However, this will depend on the company’s capital allocation priorities with respect to debt repayment and share repurchases.”
Given S&P’s optimism about the steps available to C.H. Robinson management, it gave the company a negative outlook rather than a downgrade. The negative outlook, the ratings agency said, “is based on our view of the financial policy uncertainty around buybacks, which the company may not curtail as needed, coupled with a possible prolonged trough in volumes and spot rates which do not rebound later in the year, precluding sustained FFO to debt above 45%.”
The opinions of ratings agencies are not comments on a company’s stock price. CHRW stock, trading at about $90.60 midday Tuesday, is down 9.9% in the last 12 months, but is down more than 25% since its 52-week high recorded in August 2022.
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