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16 May 2005
MOODY'S CONFIRMS YELLOW ROADWAY RATINGS (SENIOR IMPLIED AT Ba1), DOWNGRADES USF RATINGS TO Ba1; OUTLOOK STABLE
Approximately $1.2 billion of debt affected
New York, May 16, 2005 -- Moody's Investors Service confirmed the debt ratings of Yellow Roadway
Corporation ('Yellow Roadway')-- senior implied at Ba1
-- and assigned a Ba1 rating to $250 million of senior unsecured
floating rate notes. In a related action, in anticipation
of Yellow Roadway's acquisition of USF Corporation ("USF"), Moody's
downgraded the senior unsecured debt rating of USF to Ba1 from Baa1.
USF is being acquired in a transaction valued at $1.4 billion
that will increase the indebtedness of the combined group.
Yellow Roadway is expected to close its acquisition of USF on or about
May 24, 2005, at which time the company will issue its guaranty
for the $250 million of USF notes currently outstanding.
The rating outlook for both companies is stable. This concludes
the review on Yellow Roadway and USF debt ratings opened on February 28,
2005, when the acquisition was announced.
The ratings take into account Yellow Roadway's successful management
of its acquisition of Roadway Corporation by achieving synergies and debt
reduction targets somewhat ahead of plan; the company's greater
market presence with considerable size and scale as the #2 over-the-road
transportation company in the U.S. behind UPS; the
increased cash flow and profits expected from the continued strong demand
for transportation services; and, the limited integration risks
as USF's operations and brand will be kept separate from the existing
Yellow Roadway operations. The rating anticipates somewhat increased
leverage following the acquisition, although credit metrics will
remain reasonably good for the rating level and are expected to improve
quickly as debt is reduced from free cash flow. The rating is balanced
by the large size of the acquisition at a relatively high purchase multiple,
at a later stage in the economic cycle than with Roadway; the different
business model of the regional less than truck load (LTL) operations of
USF compared to the national LTL operations of Yellow Roadway; the
history of autonomy among USF's units which created somewhat different
systems and operating cultures; the lower than peer performance by
some USF units despite the strong economic environment; the high
exposure to the Teamster's work force of the combined company;
and the high sensitivity of the trucking sector to changes in the economic
The stable outlook reflects the expectation of a robust near-term
operating environment for the trucking sector which should enable the
company to generate sufficient free cash flow to restore pre-merger
credit metrics before the end of FY 2006.
The rating or the outlook could be pressured down should trucking volume
fall sharply over the near term, adversely affecting operating performance;
if capital investment is substantially higher than expected and the company
is unable to fund the capital spending with internally generated funds;
if USF's operating ratio can not be reduced to levels similar to
that of industry peers; if free cash flow turns negative for an extended
period of time; or, if adjusted debt to EBITDAR increases above
The rating or outlook could be upgraded if the company is able to reduce
debt faster than expected and be able to sustain an adjusted debt to EBITDAR
ratio of less than 2:0x and interest coverage greater than 10x over
the cycle; if the company is able to continue to generate consolidated
returns greater than the weighted average cost of capital; if it
improves the relations with the unions to increase the prospects of a
satisfactory new contract without work disruption; and if it broadens
overall liquidity to comfortably ensure coverage of maturities and other
cash outflows throughout the cycle.
As with the Roadway acquisition, we expect management will maintain
the distinct market identity for USF, and keep its operations separate
from Yellow Transportation and Roadway. This limits the integration
risk and worked successfully in the Yellow Roadway merger. Moody's
notes that USF's one or two-day service offerings,
combined with the existing Express and Next-Day service of Yellow
Transportation and New Penn does round out the service package for the
merged company. Nonetheless, compared to the Roadway acquisition,
we believe it will be somewhat more difficult to extract full value from
USF's broader suite of services without some cross-selling
or some degree of operating connection between USF and Yellow Roadway's
other business units. As well, USF's regional less
than truckload (LTL) units operate with a somewhat different model than
the national LTL operations of Yellow Transportation and Roadway,
in terms of terminal operations, equipment utilization and scheduling
and capital investment. Yellow Roadway's previous experience
with non-unionized regional LTL's produced moderate financial
results (the former SCS Transportation, and its acquisition of Jevic),
although we note that those businesses were owned under a slower business
environment, with a different management group and were non-union.
USF's trucking subsidiaries have had a long history of operating
autonomously with limited coordination with the other units. USF
management has been in the early stages of programs designed to increase
the cooperation of the units under its 'Team One' strategy,
but that program has progressed slowly with limited apparent success.
We anticipate Yellow Roadway management will focus on accelerating the
process, by cross-fertilizing best practices within the USF
business unit, simplifying information technology systems,
and reorganizing certain operations to extend reach. A meaningful
portion of the returns for Yellow Roadway from this acquisition will depend
on it ability to improve USF's profitability to approach its industry
leading past performance levels, in Moody's view.
Moody's notes that Yellow Roadway will become one of the largest
employers of Teamsters drivers, as USF units are largely unionized.
We also note that Yellow Roadway has taken pain to develop the confidence
of union leadership, as well as the rank-and-file,
since the Roadway acquisition by remaining consistent with initial strategies
of not eliminating jobs by merging the operations. USF took some
aggressive, but necessary, actions with respect to its unionized
northeastern trucking operation which may have challenged the rapport
with the unions. With approximately three years remaining on the
National Master Freight Agreement, Yellow Roadway's developing
cooperation with the union should present the opportunity to negotiate
a new agreement without disruption in operations.
Moody's also points out that Yellow Roadway and USF participate
in multi-employer pension plans. Contributions to these
plans have been substantial -- Yellow Roadway alone contributed nearly
$800 million during 2004 to various health and pension plans.
Contributions to these plans are set under labor contract terms,
and can be forecasted through the life of the labor contracts.
However, Yellow Roadway has disclosed that with respect to one of
the plans in which it participates, if the company were called on
to provide funds through an excise tax, it could have a material
effect on its financial results. The ratings do not anticipate
a significant increase in funding of multi-employer pension plans
during the near term. As well, Yellow Roadway sponsors a
single-employer pension plan, which the company has frozen
to new entrants, to which we anticipate contributions over the next
several years to be in the $60 million per annum level, consistent
with recent contribution levels.
Yellow Roadway's leverage will increase moderately to fund the cash
portion of the acquisition. Pro-forma for the acquisition,
adjusted debt to EBITDAR will increase to 2.6x from 1.5x
at year end 2004, and pro-forma retained cash flow to debt
will decrease to approximately 30%, from approximately 69%.
While the intermediate term operating environment for trucking is not
likely to be as strong as during the period following the Roadway acquisition,
we expect conditions to remain favorable enough over the near term for
Yellow Roadway to rapidly reduce debt through free cash flow. The
company's forecasts for corporate synergies (approximately $40
million per annum within the first 12 months increasing to a run rate
of approximately $80 million annually by the end of year 2) are
relatively modest and achievable. We expect the company will apply
free cash flow to debt reduction, rather than share repurchases,
such that credit metrics are expected to be roughly restored to pre-acquisition
levels by the end of the first fiscal year.
To fund part of the acquisition, Yellow Roadway plans to issue $250
million of senior unsecured Floating Rate Notes ("Notes").
These Notes will be guaranteed by substantially all domestic operating
subsidiaries of the company. This is similar to the support arrangement
that currently exists for all of Yellow Roadway's notes and bank
debt. The company also increased its unsecured bank Revolver to
$850 million and extended the maturity for an additional one year
to 2010. Given the company's current liquidity and operating
performance we do not expect the facility will be drawn, although
approximately one-third of the total will be used to issue letters
of credit. The facility includes two financial covenants --
maximum ratio of debt to EBITDA and a minimum ratio of cash flow (as defined)
to interest -- under which the company has considerable headroom
at this time. The existing accounts receivable sale facility (not
rated) will also be increased to $650 million, of which approximately
$450 million will be used to finance the acquisition. This
account receivable sale facility matures in May, 2006 and,
should the facility not be extended prior to that date, the company
would need to rely on the unused portion of the bank facility or cash
balances to finance incremental receivables. Scheduled debt maturities
are modest, although Yellow Roadway's convertible notes totaling
$400 million are puttable for cash at various specific dates beginning
Yellow Roadway Corporation: senior unsecured, senior implied
and issuer ratings confirmed at Ba1; $250 million Floating
Rate Notes assigned Ba1; Roadway LLC guaranteed global notes confirmed
USF Corporation: senior unsecured rating downgraded to Ba1 from
Baa1; shelf downgraded to (P)Ba1 from (P)Baa1.
Yellow Roadway Corporation, based on Overland Park, Kansas
owns subsidiaries that operate in the national less --than-truckload,
next day and logistics markets. USF Corporation, based in
Chicago Illinois, owns subsidiaries that operate in the regional
less-than-truckload, next day, truck load and
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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