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21 Apr 2008
Moody's lowers YRC's rating to Ba2; outlook negative
Approximately $900 million in debt securities affected
New York, April 21, 2008 -- Moody's Investors Service has lowered the ratings of YRC Worldwide
Inc. ('YRC'), Corporate Family Rating to Ba2
from Ba1. At the same time, Moody's downgraded the
ratings of YRC Regional Transportation's senior notes and YRC Worldwide's
convertible notes to Ba3 from Ba1, and upgraded the ratings of the
notes issued by the company's Roadway subsidiary to Baa3 from Ba1.
Under the terms of "equal and ratable" provisions contained
in the indentures, these notes will be granted a security interest
in certain assets of the company that ranks pari passu with the security
interest granted on those assets under the company's amended bank
credit facility. The rating outlook is negative. The downgrade
of the Corporate Family Rating considers the continued challenging operating
environment in the trucking sector which is expected to further constrain
YRC's earnings and cash flow, resulting in weaker credit metrics.
Moody's views favorably the company's announcement that it
has amended its senior revolving credit facility to provide increased
room under prescribed financial covenants as well as the renewal and amendment
of its Asset Backed Securitization facility. The ability to comply
with prior covenant levels would have become problematic for YRC in light
of anticipated earnings weakness. The amended covenants will enable
the company to maintain a good liquidity profile while implementing strategies
to improve operating performance.
According to David Berge, Vice President of Moody's,
"there is still significant headwind facing the company from what
is expected to be a deep and possibly prolonged recession in the trucking
market." Moody's expects that YRC, like most
less than truckload ('LTL') carriers, will report weak
operating results through 2008. The company should benefit from
recent cost saving initiatives, including the closure of unprofitable
business units in its regional segment, and enhanced operating flexibility
available under its new labor agreement with the Teamsters running through
2013. Nevertheless, cyclical operating pressures will continue
to weigh on overall financial performance.
Key credit metrics such as Retained Cash Flow to Debt, EBIT / Interest,
and Debt to EBITDA are currently weaker than those of many industry peers.
YRC has reduced its balance sheet debt since the 2005 acquisition of USF
Corporation, yet with the erosion of earnings during 2007 financial
metrics have deteriorated. Under Moody's analytic methodology,
the company carries a high debt burden related to adjustments for multi-employer
pension plans. While the multi-employer obligations are
viewed as debt-like in Moody's analysis, it is important
to note that they do not represent a large near term claim on cash.
Moody's anticipates that YRC will continue to apply free cash flow
to reduce indebtedness which should help to rebuild financial metrics
Moody's expects that the company will be able to generate sufficient
operating cash flow through 2008 to cover repayment of the $225
million of notes due in December. This will likely require that
operating ratios of at least 96-97% are achieved for the
second half of the year, and that cash contributions from working
capital in the fourth quarter follow historical seasonal patterns.
Given the challenges posed by the weak business environment, the
recent covenant amendment provides important stability to the company's
liquidity profile. YRC maintains a modest cash balance, and
typically experiences seasonal variances in its working capital requirements;
the fourth quarter generally exhibits a significant cash inflow from working
capital reductions. The company's $950 million revolving
credit facility and $150 million Term Loan contain a financial
covenant limiting its ratio of debt to EBITDA, as defined in the
agreement, to certain levels. While the company has remained
in compliance with the covenant through the first quarter of 2008,
continued earnings pressures might have resulted in the company being
unable to remain compliant in future quarters. The recently announced
amendment provides covenant headroom which should enable the company to
maintain an adequate liquidity profile. In exchange for covenant
relief, YRC is providing a collateral package comprised of certain
parcels of real estate and accounts receivable not pledged to its securitization
facilities. The company will also provide a pledge of 100%
of stock of domestic subsidiaries and 65% of stock of first tier
foreign subsidiaries. By virtue of the "equal and ratable"
provision, the Roadway and YRC Regional notes will gain a security
interest that ranks pari passu with the company's bank credit facility.
The outlook remains negative in recognition of the sensitivity of cash
flows and covenant cushion to changes in the company's operating
ratio. Considering YRC's and the LTL sector's overall
vulnerability to weaknesses in the U.S. economy and the
uncertainty surrounding the depth and duration of the current economic
downturn, Moody's believes there are significant challenges
facing the company in reaching its margin and cash flow goals.
The change in ratings of the senior notes, which had been rated
the same as YRC's Corporate Family Rating prior to the amendment
of the credit facility, reflects the effect of both the downgrade
in the CFR as well as collateral protection granted lenders under the
Roadway notes, which is not afforded to the YRC convertible notes.
The indenture for the Roadway notes and the indenture for the YRC Regional
Transportation notes provides that, in the event of YRC pledging
collateral as security for any other debt instrument, the Roadway
notes and YRC Regional Transportation notes will be secured equally and
ratably by a pledge of specified collateral. However, Moody's
views the collateral protection being afforded to the Roadway notes as
substantially superior to that of the YRC Regional Transportation notes,
effectively subordinating these notes to the Roadway notes. Per
Moody's Loss Given Default ('LGD') methodology,
the change in priority from senior unsecured class of debt to senior secured
has a substantial positive impact on the expected recovery on these notes
in the event of default. Conversely, the effective subordination
of the unsecured YRC Convertible notes and the YRC Transportation notes
to a substantial level of secured debt (Roadway notes and senior secured
credit facilities) implies weaker recovery under those notes in the event
The ratings could be downgraded if the free cash flow in 2008 were to
fall substantially below $200 million, therefore requiring
the company to rely more heavily on its revolving credit facility to refinance
the December maturities and likely the notes maturing in May 2009 as well,
assuming they cannot be refinanced in the capital markets. Ratings
could also be lowered if weaker operating performance were to impair the
likelihood of compliance with the new financial covenants in the company's
credit facility, possibly requiring waivers or further amendments
The ratings could be stabilized if free cash flows become strongly positive
in 2008 and 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 only minor
and temporary reliance, if any, on the revolving credit facility
to cover note maturities while maintaining ample cushion to covenants.
..Issuer: USF Corporation
....Senior Notes due 2009-2010,
to Ba3 (LGD4-63%) from Ba1
..Issuer: YRC Worldwide Inc.
....Probability of Default Rating, Downgraded
to Ba2 from Ba1
....Corporate Family Rating, Downgraded
to Ba2 from Ba1
....Senior Convertible Notes due 2023,
to Ba3 (LGD4-63%) from Ba1
..Issuer: Roadway LLC
....Senior Notes due 2008, to Baa3 (LGD2-14%)
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 69% of total FY 2007 revenue), and through
YRC Regional Transportation , a regional LTL business essentially
comprising YRC's acquired USF companies (about 25% 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
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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