A day after Moody’s kept the debt ratings of less-than-truckload (LTL) carrier YRC Worldwide mostly steady, S&P Global Ratings raised a key rating.
The rating agency increased its issuer credit rating on YRCW to CCC+ from CCC. The positive aspects it cited for the move are the restructuring of the company’s debt following a capital infusion by the U.S. Department of Treasury and that the company’s near-term debt maturities are “modest,” as S&P described them.
S&P Ratings already had a CCC+ on a term loan at YRCW. It held that rating steady.
Moody’s had affirmed its rating on YRC at Caa1. By some measurements of comparison, Caa1 and CCC+ are essentially identical. It could be argued that the S&P move just brings its rating on YRCW up to the same level as Moody’s.
It might be seen as progress that the primary risk facing the company, according to S&P Global, is something facing everybody in the trucking business – “the uncertainty regarding the duration and extent of the coronavirus pandemic impact and recession.”
But in the long-term, S&P Global still sees significant risks to YRCW. Its exposure to manufacturing and retail markets are a concern. But the report also says that exposure to the sectors, combined with YRC’s “heavy pension burden…lead us to believe its capital structure remains unsustainable over the long term.”
The S&P Global Ratings report on YRCW sounds many of the same themes that Moody’s focused on in its decision to keep most of the company’s ratings intact. If anything, the S&P report is somewhat more pessimistic about the company’s long-term prospects, in part because of its ongoing commitments to the Teamsters multiemployer pension plans, like that administered by Central States.
YRCW will remain “highly leveraged” as a result of those pension obligations, the S&P report said. “YRC”s credit metrics remain stretched, which reflects its high debt and significant off-balance sheet, debt-like obligations related to its mostly union workforce,” the S&P report said.
It estimated that the obligations to the pension plans are about $8 billion. At the end of the first quarter, the company’s debt was listed as $880 million.
Both the S&P and Moody’s report focused on the boost to liquidity that the $700 million capital infusion by the Treasury Department is giving the company. The planned purposes of that money – interest payments, equipment purchases and pension fund contributions – are not liquidity per se. But liquidity should benefit otherwise, S&P said.
The loans should provide “liquidity headroom,” the S&P report said. “YRC has significant capital expenditure requirements focused primarily on the replacement of revenue-generating equipment,” the S&P report said. ‘Newer equipment should lower YRC’s overall maintenance costs and benefit earnings.”
The outlook for the company is “stable,” which means the conditions that contributed to the current rating are such that a downgrade or upgrade of the rating is not likely in the near-term.
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