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05 Apr 2000
MOODY'S INVESTORS SERVICE UPGRADES ARKANSAS BEST CORPORATION'S SUBORDINATED DEBENTURES TO Ba3 AND THE SENIOR IMPLIED RATING TO Ba1; RATING ON THE BANK CREDIT REMAINS UNCHANGED
Moody's Investors Service upgraded Arkansas Best Corporation's $33.4 million subordinated debentures to Ba3 from B1 and the $74.8 million cumulative convertible preferred stock to "ba3" from "b1". The senior implied rating was raised to Ba1 from Ba2. The rating on the company's $250 million senior revolving credit facility was unchanged at Ba1 as the collateral supporting the facility is expected to be released effective the end of March 2000 as the company will have met the facility's release condition of a leverage ratio of 1.9 or less for three consecutive quarters. The rating outlook is stable.
The rating upgrades reflects the company's strong, improved operating performance over the last two years as the combination of the strong economy and managed capacity growth has resulted in significant increase in pricing, modest growth in freight tonnage and continued improvement in the operating ratio. Arkansas Best's operating statistics now lead its national Less-than-Truckload (LTL) peer group. Further, the resulting increase in free cash flow has permitted reduction in debt to a level approaching that before the WorldWay Corporation (Carolina Freight and Red Arrow Freight) acquisition in 1995. Moody's believes that the economic environment will remain favorable for LTL carriers with the continued robust economy, further expansion of just-in-time operating philosophy, and the growth of e-commerce and that, therefore, revenue and earnings growth for Arkansas Best is likely in 2000. 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 company's relatively higher leverage than its national LTL peers, and the continued under performance of its non-core subsidiaries.
Arkansas Best realized operating income of $109.7 million in 1999, or an increase of 57% over the $70 million level of 1998, on a $115 million or 7.1% revenue increase to $1,722 million as its core operating subsidiary, national long-haul LTL carrier ABF Freight System, Inc. (74% of consolidated revenues and 97% of consolidated operating income) lowered its operating ratio by 2.6 points to 91.6% from 94.2%, increased tonnage by 1.8%, and increased pricing by about 7.0%. ABF Freight has achieved success in the two-day transit time lanes and stopped market share erosion to regional LTL competitors bringing its two-day tonnage to 36% of ABF's total. The company's other primary operating subsidiaries, regional LTL provider G.I. Trucking Co. (8% of revenues), intermodal marketing services provider Clipper Exxpress Co. (6.5% of revenues) and tire retreader Treadco, Inc. (11% of revenues) showed improvement over 1998, but still failed to achieve adequate returns on the capital invested. Moody's notes that Arkansas Best now owns 100% of Treadco as a result of the $23.7 million tender for the remaining 51% in the first half of 1999 and believes that the additional flexibility now possible provides opportunity for management to either effect a turn-around or explore other possibilities.
The company's credit statistics improved noticeably during the year as debt outstanding was reduced by $19.4 million to $194.2 million while book equity, due to the strong earnings, increased by $47.1 million to $221.1 million. This resulted in improvement to the lease adjusted debt to book equity ratio to 0.88x at 12/31/99 from 1.23x at 12/31/98 and lease adjusted debt to tangible equity to 1.7x from 4.4x. EBITDA to Interest coverage increased to 8.7x from 6.6x. The company has indicated that capital spending in 2000 will be between $85 to $95 million compared to about $61 million in 1999 as the company plans to add truck and terminal capacity. This level of spending will maintain the company's 3-year tractor replacement cycle and add about 4% in capacity. Despite this planned increase in capital spending, Moody's expects leverage to show a further decrease in 2000 from cash flow generated by ABF Freight and earnings improvement from the non-core subsidiaries.
The rating on the $250 million bank credit facility is unchanged at Ba1, despite the upgrade in the senior implied rating, because of the expected release of the pledged collateral consisting of substantially all accounts receivable and revenue equipment not already pledged under other debt obligations as the company's leverage ratio has met the 1.9 times release point. Advances on the facility however will continue to be governed by a borrowing base.
The Ba3 rating on the $33.4 million subordinated debentures, originally issued in 1986 by WorldWay, and the "ba3"rating on the $74.8 million cumulative convertible preferred stock, reflects their structural subordination. The preferred stock is convertible at the option of the holder into Arkansas Best common stock and is exchangeable at the option of the company into 5 3/4% convertible subordinated debentures.
The stable rating outlook assumes continuation of present operating performance of both the core and non-core operations, and further, that the company will continue 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 four primary 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; Clipper Exxpress, provides domestic freight services utilizing rail and over-the-road transportation; and Treadco, Inc, provides commercial truck tire retreading, new commercial truck tire sales and truck tire service.
No Related Data.
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