The credit outlook for truck parts retailer FleetPride has been reduced by Moody’s Investors Service.
The ratings agency retained Moody’s (NYSE: MCO) corporate family rating of B3. S&P Global Ratings (NYSE: SPGI) has a rating of B- on FleetPride debt, which is considered equivalent to a Moody’s B3 rating. But the S&P outlook on FleetPride is stable, whereas the company’s new outlook at Moody’s is Negative.
Those ratings were affirmed by the ratings agencies approximately a year ago. They are six notches below investment grade.
A Negative outlook at Moody’s “indicates a higher likelihood of a rating change over the medium term.” A Stable outlook, which is what Moody’s previously had on FleetPride, means there is a “low likelihood” of a ratings change.
“The change in outlook to negative reflects our expectation for key credit metrics, including debt-to-EBITDA, EBITDA-to-interest and free cash flow, to remain very weak as the domestic freight downcycle extends further into 2024,” Moody’s said in its report on FleetPride. “FleetPride’s strategy to better position its business for a trucking turnaround via tuck-in acquisitions and higher marketing spend continues but signs of a freight market recovery in the near term remain limited.”
A FleetPride spokesman declined comment on the Moody’s action.
Since the debt rating was affirmed by Moody’s and S&P Global a year ago, FleetPride – according to its website – has made further acquisitions: Wheelco Truck & Trailer Parts and Service, based in South Dakota, and Florida-based Raney’s Truck Center.
Regular acquisitions are such a significant part of the company’s long-term strategy that FleetPride has a webpage devoted exclusively to providing information to potential acquisition targets.
EBITDA ratio is higher than predicted a year ago
Moody’s said in its report on FleetPride that the company’s ratio of debt to earnings before interest, taxes, depreciation and amortization was more than 8X on June 30. In its rating report published last year, Moody’s had said it expected the ratio at FleetPride to remain near 6X.
The report cited “lower volumes, higher operating expenses and rising debt levels” as reasons for the increase in the debt-to-EBITDA ratio. The report also said FleetPride has been drawing on its revolving credit lines to complete its acquisitions.
But Moody’s also said it expected FleetPride’s liquidity to be “adequate,” holding a “modest cash position.” Its free cash flow is negative, “largely as a result of significantly higher interest expense.” The fourth quarter is usually a “seasonal cash burn” for FleetPride, according to Moody’s.
The report wasn’t entirely negative. “FleetPride’s credit profile is supported by its size and scale as the largest independent distributor of non-discretionary aftermarket parts to the heavy-duty truck market, broad inventory selection and strong customer base,” Moody’s said. “FleetPride continues to outperform broader industry trends with growth driven by increasing market share with smaller accounts, e-commerce, private label and service offerings.”
FleetPride is privately owned. Ratings agency reports do not disclose levels of profitability except indirectly, and the financial data provided by the agencies usually focuses exclusively on ability to cover debt service.
As far as the fundamental market-facing reasons for the deterioration in some credit metrics, Moody’s cited a now familiar litany to anybody in the trucking business.
“The North American freight market remains mired in a slowdown with more recent market conditions weak though not deteriorating,” the report said. “The level of freight volume is a strong indicator of overall fleet usage and thus the need for fleet operators to purchase replacement parts. The current downturn reflects a reduced need for replacement parts and/or operators pulling back on maintenance spending.”
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