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Rating Action:

Moody's lowers YRC's rating to Ba2; outlook negative

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 over time.

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 of default.

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 of terms.

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.

Downgrades:

..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

Upgrades:

..Issuer: Roadway LLC

....Senior Notes due 2008, to Baa3 (LGD2-14%) from Ba1

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 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
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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