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Rating Action:

Moody's lowers YRC's rating to B1; outlook negative

12 Nov 2008
Moody's lowers YRC's rating to B1; outlook negative

Approximately $550 million in debt securities affected

New York, November 12, 2008 -- Moody's Investors Service has lowered the ratings of YRC Worldwide Inc. ('YRC'), Corporate Family Rating to B1 from Ba2. The rating outlook is negative.

While the U.S. economy is having an adverse impact on YRC's financial performance, the ratings downgrade is primarily driven by certain structural weaknesses of the company, as well as YRC's need to improve its capital structure. The company has undertaken certain initiatives to address these issues. However, overall credit metrics are expected to remain at levels reflective of B1 issuers.

YRC has experienced difficult operating conditions in its overall less than truckload ('LTL') business throughout the cyclical downturn, with operating ratios system-wide falling behind those of key competitors. As a result, key credit metrics such as Retained Cash Flow to Debt, EBIT / Interest, and Debt to EBITDA continue to lag those of many industry peers, and currently map closer to companies in the B rating category. However, the primary weakness in YRC's structure lies in its YRC Regional (formally USF) operations. This segment, based predominantly in the upper Midwest, has significant exposure to long term erosion in the U.S. auto industry. As demand levels fall in this freight group, the company will have to rationalize its operating base to meet the lower-volume environment (i.e. fewer trucks and terminals). However, Moody's believes the company will face challenges in implementing the downsizing program without impairing YRC's service levels, customer base, and market share.

The other important consideration affecting the downgrade deals with YRC's need to improve its capital structure. YRC has maintained a leveraged capital structure that has ensued from the acquisitions of Roadway (2003) and USF (2005). As a result, the company faces significant levels of debt maturities over the next few years. Recently, YRC has addressed the most immediate of these concerns, having repaid about $325 million of notes due through May 2009. Still, YRC has substantial amounts of debt that will mature between 2010 and 2012. In addition to borrowings, Moody's notes the impact that YRC's multi-employer pension plans have on the company's capital structure. Moody's capitalizes the estimated liability implied by the company's costs paid into such plans, and adjusts debt accordingly. Although these plans do not present an identifiable re-financing event, as is associated with conventional debt instruments, YRC's participation in such plans will continue to be a significant component of the company's cost structure.

With these challenges facing the company over the near term, liquidity becomes a key consideration in Moody's analysis. Although the company has taken an important step to retire sizeable near term maturities, YRC needed to make heavy use of its $1 billion credit facility to do so. According to David Berge, Vice President of Moody's, "with more debt maturing between 2010 and 2012, it is now important for YRC to restore its liquidity to make sure the company can again meet these obligations." This will most likely need to be accomplished through free cash flow generation in 2009. Currently, the company is working on an ambitious and accelerated operational re-structuring program that is intended to address structural weaknesses in the company's operations. The speed and success of this initiative, along with developments in the U.S. trucking markets in general, will be important factors in YRC's ability to enhance its free cash flow over the near term, and bolster its liquidity condition.

The outlook remains negative in recognition of the company's vulnerability to weaknesses in the U.S. economy and the uncertainty surrounding the depth and duration of the current economic downturn. Further declines in freight volumes or pricing pressures in 2009 that might ensue from a prolonged recession would make it difficult for the company to generate cash flows at levels sufficient to restore liquidity in time to address debt maturities in 2010-2012.

The ratings could be downgraded if the company's free cash flows becomes negative in 2009, or if the company does not restore the availability under its $1 billion credit facility to at least $500 million, or if room under financial covenants prescribed under this facility were to severely limit borrowing. Rating could also be lowered if the company fails to extend its $600 million receivables securitization facility at next expiry (April 2009).

The ratings could be stabilized if free cash flows become strongly positive in 2009, with operating ratios returning to the mid-90% range. The company will have to demonstrate the maintenance of a solid liquidity position throughout this period, with less reliance on the revolving credit facility to cover note maturities while maintaining ample cushion to covenants.

Downgrades:

..Issuer: USF Corporation

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4, 58%) from Ba3

..Issuer: YRC Worldwide Inc.

....Probability of Default Rating, Downgraded to B1 from Ba2

....Corporate Family Rating, Downgraded to B1 from Ba2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to B2 (LGD4, 68%) from Ba3

YRC Worldwide does business through two national less-than-truckload (LTL) companies, YRC National Transportation, which comprises the long-haul operations that comprises the legacy Yellow and Roadway businesses (about 70% of LTM September 2008 revenue), and through YRC Regional Transportation , a regional LTL business essentially comprising YRC's acquired USF companies (about 22% of revenue). Through its YRC Logistics business unit, the company also offers logistics and supply chain services. YRC's broad service offering includes next day and expedited service throughout most of the country.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
David Berge
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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