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Rating Action:

Moody's downgrades CFR of Drive Chassis to B3, confirms second lien debt at Caa1; outlook negative

22 Jun 2020

New York, June 22, 2020 -- Moody's Investors Service ("Moody's") downgraded the corporate family rating ("CFR") and probability of default rating of intermodal chassis equipment provider Drive Chassis HoldCo, LLC ("Drive Chassis") to B3 and B3-PD, from B2 and B2-PD, respectively, and confirmed the Caa1 secured second lien debt rating. The ratings outlook is negative.

This concludes the review for downgrade that was initiated on March 26, 2020.

RATINGS RATIONALE

The downgrade of the CFR to B3 reflects Drive Chassis' very elevated financial leverage due in part to a material decrease in chassis usage amid an economic contraction ensuing from efforts to contain the coronavirus outbreak. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial credit implications of public health and safety. Debt/EBITDA was 8.5 times as of March 31, 2020 -- after Moody's standard adjustments - and could remain above 8 times at year-end 2020, in Moody's estimates. In addition, cash flow from operations lags Moody's prior expectations, which will slow down the company's radial tire conversion and fleet refurbishment initiatives and constrain its ability to repay debt.

Nonetheless, the ratings of Drive Chassis consider the company's position as one of three main providers of chassis rental equipment for the transportation of containerized cargo. Drive Chassis owns a a fleet of more than 240,000 chassis. The company has a market share of nearly 25% in the marine segment of the market. In the domestic intermodal transport segment, Drive Chassis is the sole provider of chassis pools for the transportation of 53' containers that are used by North American freight railroads and other large transportation and logistics companies. Access to port terminals, the capital that is required to build a sizeable fleet, the efficiency of the equipment pool model in the industry, and entrenched customer relationships establish barriers to enter this market and mitigate the risk that Drive Chassis' customers decide to acquire their own chassis equipment.

Furthermore, EBITDA margins remain high, even though below Moody's prior expectations. Drive Chassis' EBITDA margin was approximately 33% for the last 12 months ended March 31, 2020, which the company is likely to sustain given the cost savings from ongoing conversions to more durable radial tires and its ability to effectively manage maintenance and repair expenses.

Moody's considers Drive Chassis' liquidity to be adequate, taking into account its ability to adapt capital expenditures to fluctuations in cash flow from operations such that free cash flow is unlikely to turn negative, the absence of material debt maturities until 2024 and the $225 million availability under the $1 billion asset-based revolving credit facility.

The secured second lien debt rating is confirmed at Caa1, notwithstanding the downgrade of the CFR to B3. Although Moody's believes that the default probability has increased, as reflected in the downgrade of the probability of default rating to B3-PD, Moody's views the recovery prospects for the $825 million secured second lien term loan as likely to remain within expectations for a Caa1 rating. The secured second lien term loan has a second-priority claim on Drive Chassis' assets, compared to the first-priority interest of the $1 billion asset-based revolving credit facility.

The negative outlook reflects Moody's expectation that financial leverage will remain very elevated as a result of materially lower intermodal container volumes amid a contraction in US economic activity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Drive Chassis is able to sustain EBITDA margins of more than 35%, if debt/EBITDA is maintained at less than 6 times and free cash flow is consistently positive.

The ratings could be downgraded if Moody's expects that Drive Chassis unable to sustain EBITDA margins of at least 30%, in the absence of a steady decline in debt/EBITDA to less than 7 times, or if (FFO + Interest) / Interest is not sustained above 1.5 times. The ratings could also be downgraded if free cash flow is consistently negative.

Downgrades:

..Issuer: Drive Chassis Holdco, LLC

.... Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

Confirmations:

..Issuer: Drive Chassis Holdco, LLC

....Senior Secured Bank Credit Facility, Confirmed at Caa1 (LGD5)

Outlook Actions:

..Issuer: Drive Chassis Holdco, LLC

....Outlook, Changed To Negative From Rating Under Review

The principal methodology used in these ratings was Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Drive Chassis Holdco, LLC indirectly owns Direct ChassisLink, Inc. Headquartered in Charlotte, NC, Direct ChassisLink, Inc. is a leading provider of chassis equipment to the U.S. intermodal transportation industry. The company is privately owned by funds managed by Apollo Global Management, LLC and EQT Infrastructure.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rene Lipsch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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