MOODY'S DOWNGRADES AMERCO -- SENIOR IMPLIED TO Ba2, OUTLOOK STABLE
New York, September 25, 2002 -- Moody's Investors Service downgraded the ratings of AMERCO,
senior implied and senior unsecured, to Ba2 from Ba1. The
downgrade is based on our expectation that adjusted debt will continue
to be high while financial performance, which has recently been
hurt by losses at its insurance operations, will continue to be
weak. The downgrade also reflects weak cash flow from operations,
which requires an ongoing sale of assets and access to financial markets
for refunding, and a reduced liquidity position, which is
aggravated by the high seasonality of its rental operations. Countering
these negatives are the U-Haul brand's strong name recognition
in the consumer rental market, a steady growth in the core rental
operations we expect to continue, reasonable extension into storage
markets, and a substantial, largely unencumbered asset base.
The outlook is stable, and assumes that the company can demonstrate
ongoing efficient access to funding alternatives to meet near-term
debt maturities, as well as manage with lower than historic levels
of alternate liquidity as U-Haul enters its seasonal low period
for operating cash flow. If the company is unable to address these
concerns in the near term, the ratings could be pressured.
Ratings downgraded are:
AMERCO Senior implied and senior unsecured and medium term notes to Ba2,
subordinated shelf to (P)Ba3, and preferred shelf to (P)B1
AMERCO's core moving and storage operation, U-Haul,
is the clear leader in its market. However, margins are unlikely
to grow significantly and the business employs a considerable amount of
capital. U-Haul also sells various moving products through
its stores and dealerships, as a natural extension of its rental
operations. Storage operations have been the biggest growth area
and U-Haul is now number two by number of rooms available.
The storage industry is very fragmented and highly regionalized with numerous
independent operators, although U-Haul's systems and name
recognition suggests the company is positioned to have some price influence
in certain markets.
Outside of moving and storage, Moody's believes that AMERCO
has addressed a number of the operating problems at its Republic Western
('RepWest') insurance subsidiary. RepWest recorded
statutory losses over the last two years, although firming conditions
in the property casualty commercial lines sector should result in earnings
improvement. However, the degree of improvement may be dampened
by continued adverse development on prior year reserves. Nonetheless,
RepWest is unlikely to generate any more than a very modest income without
taking on more risk in its underwriting -- a strategy that
is unlikely, in our view. Consequently, AMERCO's
insurance operations are not expected to produce a return to justify the
capital invested in them. The volatility inherent to the property
& casualty insurance business, as well as RepWest's small
capital base, could still result in AMERCO needing to post additional
regulatory capital beyond the $57 million of real estate that was
recently contributed. With little cash flow expected and the risk
of loss remaining in its run-off operations, insurance is
a modest drag on AMERCO's risk profile at best and could still produce
downward pressure on the AMERCO rating.
AMERCO's cash flow from operations has been negative, with
the company relying on ongoing sale of used equipment and access to various
funding sources to meet investment needs and debt maturity obligations.
For the last fiscal year, cash from operations less CAPEX was a
negative $45 million, as the company funded operations through
lease financing and the sale of property to Storage Acquisition Corporation
(SAC), a company owned by a senior manager of U-Haul International.
Should AMERCO be unable to sell its property on a regular basis (although
it has done so thus far), or be unable to access new financing on
reasonable terms, AMERCO could have difficulty making adequate investment
in its business to support its competitive position. AMERCO has
a relatively short debt maturity profile with several large maturities
over the near term.
AMERCO's rental business has a high degree of seasonality in operations,
with most of the cash flow generated in the spring and summer months.
Cash is used during the rest of the year, depending on the timing
of capital investment. The company recently extended its bank credit
facility to mature in June, 2005, but at a smaller than anticipated
amount of $205 million. All of the facility is now drawn,
according to the company. The smaller committed amount, when
combined with the beginning of its slow season, limits AMERCO's
investment flexibility and creates additional challenges in managing its
maturing debt over the next year. The company advises that it is
working on funding strategies to relieve the cash flow pressure and more
appropriately match its liability structure to its asset base and cash
For the last five years, adjusted indebtedness has grown steadily,
mostly through increases in off balance sheet lease financing for equipment.
Lease expense nearly doubled over the last five years to $172 million
for FY 2002. EBITDAR (earnings before interest and taxes,
plus depreciation plus lease expense), at $408 million for
the last fiscal year and flat over the last three years, is expected
to improve only modestly over the near term. Adjusted debt to EBITDAR
is relatively high at 5x (using the modified present value method).
The decline in adjusted debt for the last fiscal year is because capital
spending was reduced to a level that is not likely to be sustainable,
in Moody's view. While we do not anticipate that U-Haul
will expand its fleet, normal replacement implies a moderately higher
level of CAPEX going forward than is currently being expended.
U-Haul does have some flexibility in that it can materially cut
spending in any one year if need be as a somewhat older fleet is not likely
to affect rental operations in the short run.
In considering AMERCO's financial flexibility and liquidity,
Moody's takes into account a number of potentially significant contingencies
including, support of a $125 million bank facility for Texas
storage facilities, a residual value guaranty for $203 million
on certain truck leases, and an IRS review of approximately $332
million of deductions taken in connection with payment to dissident shareholders
that could be disallowed.
AMERCO completed several transactions with Storage Acquisition Corporation
(SAC) whereby SAC purchased property from AMERCO (as well as other parties)
and used the property as collateral for loans. Proceeds were used
to develop certain storage locations, which U-Haul manages
for a fee. U-Haul retains a subordinated note when selling
the properties. SAC is owned by Mark Schoen, who also owns
approximately 15.6% of AMERCO common stock. While
AMERCO does not own SAC, it has begun to consolidate this entity
in the reported financial results. AMERCO does not guaranty the
SAC debt, nor does AMERCO's debt cross default to SAC notes.
However, Moody's believes there is some residual liability.
In Moody's view, AMERCO is likely to support the SAC debt
as long as AMERCO itself remains solvent. This is because SAC has
been a source of financing in the past, the ownership of SAC by
a senior manager of U-Haul, and that default by SAC could
severely diminish the value of AMERCO's holdings of SAC notes.
Such support could be in the form of purchase of certain properties or
sale of additional properties or deferral of payments under the management
agreement, for example.
With the extension of the bank facility, the banks received guarantees
from substantially all of AMERCO's domestic non-insurance operating
subsidiaries. The bank facilities also contain restrictive covenants
for minimum net worth and minimum fixed charge coverage, and maximum
leverage --- AMERCO has some, but not substantial,
cushion in these covenant tests.
Earlier this year, AMERCO issued notes through its real estate subsidiary
(AMERCO Real Estate Corporation, or 'AREC') that are
expected to be secured by certain of AMERCO's real properties.
The amount of this transaction, together with the guarantees for
the bank credit agreement, fall within the priority debt basket
permitted by the indentures to the senior unsecured notes.
While AMERCO's senior unsecured obligations are now effectively
subordinated to the bank lenders and real estate, Moody's
did not notch the senior unsecured rating down from the senior implied
rating. This is because of the relatively low portion of secured
debt compared to total debt, and the large amount of still unencumbered
assets available to all debt holders.
Approximately 60% of AMERCO's stock is controlled by officers,
directors, family members and an ESOP Trust, and the two top
officers control about one-third of the total shares. Consequently,
this insider group remains in control of AMERCO operations and finances.
AMERCO has made efforts to improve the quality of the Board, having
added three new outside directors since 1998 and is expected to continue
to work on improving the quality of its corporate governance, as
well as improve the transparency of its operations and finances.
According to Moody's, AMERCO is current with all of its SEC
filings and disclosure requirements, although the company did need
to use the extension period for filing its Form 10-K in connection
with consolidation of SAC. The company recently changed auditors.
The previous auditors did not qualify their financial report nor issue
an adverse opinion, although they did advise the Board certain areas
of weakness in internal controls. According to the company,
these matters are being addressed with the new auditors. Moody's
also notes that the company recently decreased the salvage value and extended
the life of certain trucks and treats interest income as revenue,
which have a positive effect on reported operating income.
AMERCO has a significant, unencumbered asset base ---
including substantial and diversified real estate spread across the continental
U.S. and Canada. Gross property plant and equipment
(PP&E) reported by AREC as of fiscal year 2002 was $917 million,
and net PP&E was $609 million. The company advised that
approximately 75% of the property was acquired during the period
from 1975-1984, so the properties, in aggregate,
could provide some hidden value
AMERCO also continues to benefit from the strength of U-Haul.
The U-Haul brand has top-of-mind recognition among
consumers, the company has long experience in managing a dealer
network, has an asset base appropriately sized and aged for its
needs, and has made system improvements to maximize equipment utilization.
U-Haul has the broadest market coverage by far, and its nearest
national competitor is operating under bankruptcy protection. The
business has nearly doubled in size since 1992, growing steadily
at about 5.5% annually with an operating margin (before
lease expense) ranging from 8 to 10% in general. Revenues
continued to grow over the last three years, although at a lower
pace. Profits from the core business have also been fairly steady.
AMERCO is a holding company, based in Reno Nevada, with interests
in consumer truck rental, storage, real estate and property
& casualty and life insurance.
Michael J. Mulvaney
Moody's Investors Service
Vice President - Senior Analyst
Moody's Investors Service