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15 Dec 2000
MOODY'S INVESTORS SERVICE UPGRADES ARKANSAS BEST CORPORATION'S BANK LOAN RATING TO Baa3
Approximately $348 Million of Securities Affected.
New York, December 15, 2000 -- Moody's Investors Service upgraded Arkansas Best Corporation's $250
million senior revolving credit facility to Baa3 from Ba1, the $69.5
million cumulative convertible preferred stock to "ba2" from "ba3",
and the $28.6 million subordinated debentures to Ba1 from
Ba3. The rating outlook is stable.
The rating upgrades reflect the Company's strong and improved operating
performance over the last several years as well as improvement in the
capital structure and financial flexibility resulting from a successful
debt reduction program. The ratings also recognize the Company's
competitive market position among the national long-haul less-than-truckload
(LTL) motor carriers, further growth opportunities in two-day
markets, and the potential for further debt reduction. These
factors are expected to support the Company's cash flow through the intermediate
term, and provide continued strength to debt protection measurements.
The steadily improving operating financial performance since 1996 has
been achieved through a combination of the strong economy and favorable
industry dynamics, modest growth in freight tonnage and prudently
managed capacity growth, industry-wide pricing increases,
and improved operational productivity, demonstrated in a record
of continued improvement in the operating ratio (ratio of operating expenses
after depreciation to operating revenue). Arkansas Best's operating
statistics now lead its national LTL peer group. As an example,
the operating ratio of the Company's flagship unit ABF Freight System,
Inc. declined to 91.6% in 1999, noticeably
below its three primary larger competitors. Further, the
resulting increase in free cash flow has permitted reduction in debt to
a level approaching that before the 1995 acquisition of WorldWay Corporation
(Carolina Freight and Red Arrow Freight).
Despite the perceptively softening freight market and higher labor costs
(as per terms of the 1998-five year Teamster's agreement) and fuel
costs, Moody's believes that the operating environment should still
remain generally favorable for LTL carriers (and notes that fuel expense
for LTL's, unlike TL's, is not a major cost element).
The tight level of LTL industry capacity combined with the on-going
expansion and institutionalization of just-in-time operating
practices and the shortening of shippers' "approved vendors" lists,
putting a premium on service scope and quality, are to the Company's
advantage. Further, the Company's ability to reasonably quickly
balance its labor level to business activity offers some protection in
an economic downturn with labor accounting for almost two-thirds
of total operating expenses. However, the ratings also reflect
the historic cyclical nature of the trucking industry, the highly
competitive trucking/transportation environment, the industry's
high labor and capital intensity, the less than desired performance
of Arkansas Best's non-core subsidiaries, and the high level
of goodwill carried on the balance sheet.
Arkansas Best realized operating income of $105.8 million
in the first nine months of 2000, or an increase of 39.4%
over the $75.9 million level in the year earlier period,
on a $137 million or 10.8% increase in revenue to
$1,403 million. ABF Freight System, accounting
for 74% of consolidated revenues and 95.5% of consolidated
operating income, lowered its YTD operating ratio by 2.1
points to 90.2%, increased tonnage by 1.5%,
and increased yield through rate increases of 5% plus in each of
September 1999 and August 2000. The Company's other operating subsidiaries,
regional LTL provider G.I. Trucking Co. (8.7%
of revenues), intermodal services provider Clipper Group (7%
of revenues), and tire retreader Treadco, Inc. (10%
of revenues) showed major improvement over comparable 1999 period,
but still failed to achieve Company goals and an adequate return on invested
capital. Positively, Moody's notes that effective November
1, 2000, Goodyear Tire & Rubber and Treadco formed joint
venture company (60%/40%) Wingfoot Commercial Tire Systems
LLC which combined the two entities' commercial tire service center operations.
Treadco has an option, between April 2003 and April 2004,
to put its JV interest to Goodyear for a price of $72.5
million plus net worth adjustment. Conversely, Goodyear has
the right, between April 2003 to October 2004, to purchase
Treadco's interest for cash at a call price of $77.5 million
plus net worth adjustment. Treadco's put option offers a potential
long-term solution to dispose of this, in Moody's opinion,
less than adequate performer, accounting for 10% of the Company's
revenue but only 4% of operating income in the first nine months
of 2000, and thus an avenue for further significant debt reduction.
The Company's credit statistics continued to improve during the year-to-date
period ending September 2000, as debt was reduced by $7 million
from year-end 1999 to $203 million while book equity,
benefiting from the strong retained earnings, increased by $49
million to $270 million. This resulted in improvement to
the lease adjusted debt to book capitalization ratio to 43% at
September 30, 2000 from 49% at December 31, 1999 and
lease adjusted debt to tangible book capitalization to 55% from
65% (goodwill of about $106 million). Moody's observes,
however, that included in the Company's book equity is the rated
$69.5 million preferred stock issue. At the holder's
option the issue is convertible to the Company's common at a conversion
price of about $19.69 per common share (approximately current
market price), and, at the Company's option, either
redeemable or exchangeable into a 5 ¾% convertible subordinated
debt issue due 2018.
Coverage for the nine-month period was strengthened as Debt to
EBITDA dropped to 1.0x, down from 1.4x at year-end
1999. EBIT to interest coverage in the period increased to 8.1x
from 5.4x in the comparable 1999 period. Gross capital spending
in 2000 is expected to reach approximately $100 million,
compared to about $76 million in 1999, as the company has
maintained its three-year road tractor replacement cycle and has
added about 4% truck capacity and expanded its terminal network.
In the event of a deeper than anticipated economic slowdown in 2001,
capital spending can be substantially lowered by limiting fleet replacement
without significantly jeopardizing operations. Moody's expects
leverage to show a further decline from retained cash flow generated by
ABF Freight and from either improved contribution or sale of its non-core
The Baa3 rating on the $250 million bank credit facility reflects
its unsecured nature and the modest amount of subordinated debt.
The original pledged collateral supporting the facility, substantially
all accounts receivable and revenue equipment, was released at the
end of March 2000 as the Company had met the facility's release condition
of a leverage ratio of 1.9x or less for three consecutive quarters.
Advances on the facility continue to be governed by a borrowing base.
Moody's also notes that terms of the bank facility include limits on common
stock repurchase and preferred stock redemption.
The Ba1 rating on the $28.6 million subordinated debentures,
originally issued in 1986 by WorldWay, and the "ba2" rating on the
$69.5 million cumulative convertible preferred stock,
reflects their contractual subordination. The preferred stock is
convertible at the option of the holder into Arkansas Best common stock
and at the option of the Company, redeemable or exchangeable into
5 3/4% convertible subordinated debentures.
The stable rating outlook assumes further debt reduction, continuation
of present operating performance of both the core and non-core
operations, and the Company's continued ability to pass on the majority
of diesel fuel price increases to its customers in the form of fuel surcharges.
Arkansas Best Corporation, headquartered in Fort Smith, Arkansas,
is a transportation holding company consisting of three main operating
subsidiaries: ABF Freight System, Inc., provides
national LTL service throughout North America; G.I.
Trucking Company, offers regional LTL service in the western half
of the US; and Clipper Group, provides domestic freight services
utilizing rail and over-the-road transportation.
And through a 40% JV interest in Wingfoot Commercial Tire Systems,
it provides commercial truck tire retreading, new truck tire sales
and truck tire service. Revenues totaled $1.7 billion
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Andris G. Kalnins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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