The long-term debt ratings of Ryder have been reduced by Moody’s Investors Service, and the low resale value of trucks is cited as one of the key reasons for the move.
“A multi-year, negative trend in prices for used vehicles necessitated Ryder to lower residual values, which causes a considerable increase in depreciation expenses,” Moody’s said in its report on the truck leasing company. Keeping an accurate estimate on the value of its fleet is “critical to ensure adequate returns through pricing of lease contracts,” the report added.
Company accelerated depreciation on its fleet; more to come
The issue of accelerated depreciation for Ryder was front and center in the company’s quarterly earnings call on April 29. On the call, chairman and CEO Robert Sanchez said the company had taken $27 million in accelerated depreciation in the first quarter, and was expecting to take between $27 million and $30 million in the current quarter. After that, he said, “it really drops off in the second half of the year as those units really start to sell off.”
Sanchez also said on the call, “Used vehicle prices and sales volumes in the first quarter were generally in line with our prior expectations. However, sales activity fell significantly late in the quarter as the impacts of COVID-19 began to emerge. As a result, used vehicle inventory levels at Ryder and in the overall market are increasing.”
Moody’s acknowledged that the pace of the write-offs will slow. Still, “although the impact of the change in residual values will moderate over time, the trajectory to Ryder’s target of 11% to 15% adjusted returns on equity could take quite some time.”
The reduction in the rating to Baa2 from Baa1 for its issuer rating, with several series of unsecured debt also getting that cut, still keeps Ryder debt in investment-grade territory. Of the 10 ratings that are investment-grade, Baa2 is ninth on the list.
Of the Baa category, Moody’s says: “Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess speculative characteristics.”
Moody’s comments about Ryder’s underlying business are mostly positive. The rating, Moody’s said, “considers Ryder’s strong positions as one of the nation’s largest full-service truck leasing, rental and supply chain logistics companies.” The report said Ryder benefits from a “vehicle ownership outsourcing trend” and that it has “predictable and sizable cash flows.”
On the earnings calls, Sanchez said reduced capital expenditures this year were expected to be a factor in generating free cash flow at Ryder in excess of $600 million, which would be a record.
“Nonetheless, Ryder has to contend with a significant underutilization of its rental fleet and the negative impact on the company’s supply chain services business from a drop in U.S. automotive production in 2020,” the Moody’s report said, right after acknowledging the likely free cash flow record performance this year.
In an interview with FreightWaves, Rene Lipsch, a vice president and senior credit officer at Moody’s who led the review of the Ryder debt rating, said the resale value of trucks was not the only factor that came into play in Moody’s decision to lower the rating. It’s how the values impact the overall health of the business.
He said the company’s “capital base” has weakened. While the asset base at Ryder has been expanding, “the equity base has been pressured as a result of net losses,” Lipsch said.
Moody’s is focused on Ryder’s need to “adapt the size of its rental fleet in accordance with lower demand,” Lipsch said. Adapting the size of the fleet will mean disposals, “and the posting of these trucks is what we’re focused on.”
Moody’s noted that Ryder’s liquidity is good. It recently had a $400 million bond offering and Moody’s said various other changes in its debt structure yielded the company $1.2 billion in proceeds.
But the report also noted that Ryder has a “very modest cash balance.” At the end of the fourth quarter, Ryder, a company with revenues of $2.1 billion in the first quarter, only carried a cash balance of $74 million, though that rose to about $400 million at the end of the first quarter. The company has a revolving credit facility of $1.4 billion, but has a large commercial paper position and debt maturities are usually in excess of $1 billion per year, according to Moody’s.
The outlook for Ryder, according to Moody’s, is stable. That means an upgrade or downgrade is not likely in the foreseeable future. The rating could be upgraded on the basis of several factors, one of them being that the debt/EBITDA ratio is maintained below 3.25. Currently, it’s about 4.
Ryder’s stock in the last year is down 25.49%, closing on June 2 at $36.81.