Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDR) of Ryder System, Inc. (Ryder) at 'BBB+' and 'F2', respectively.

The Rating Outlook remains Negative. Fitch has also affirmed the senior unsecured debt and commercial paper (CP) ratings at 'BBB+' and 'F2', respectively. Today's rating actions have been taken as part of a periodic peer review of fleet leasing companies, which is comprised of four publicly rated firms.

KEY RATING DRIVERS

IDRs, SENIOR DEBT AND COMMERCIAL PAPER

The maintenance of the Negative Rating Outlook reflects Fitch's expectation that Ryder's leverage will remain elevated over the medium-term, given downside earnings pressure from the social and economic effects of the coronavirus and the negative impact of low rates and more volatile equity markets on the firm's pension obligation. While a reduction in capital expenditures is expected to benefit FCF and allow for some reduction in debt in 2020, leverage is expected to remain elevated, compared with the firm's target and historical metrics, at year-end.

The rating affirmations reflect Ryder's established market position in fleet management solutions (FMS), dedicated transportation solutions (DTS), and supply chain solutions (SCS); the company's strong asset quality; relatively consistent operating cash flow generation; solid liquidity; and a largely unsecured funding profile.

Ryder's ratings are constrained by the company's pension obligation, which can have a meaningful impact on balance sheet leverage, and inconsistent operating performance in recent years. Rating constraints applicable to the broader truck leasing sector include customer concentrations in the SCS segment; cyclicality inherent in the commercial rental business; sensitivity to used vehicle pricing and residual value risks; as well as the potential regulatory impact on business trends.

Fitch believes that the coronavirus will have a modest impact on Ryder's financial metrics over the medium-term, notably asset quality and earnings and profitability. Fitch believes that customer-credit risks will remain elevated and that renewed social-distancing measures given continued high positivity rates for new coronavirus cases in the U.S. could pressure Ryder's operating cash flow generation. Still, the impact of these risks is believed to be manageable given the diverse customer portfolio, prudent residual value management, and limited contracted deferral activity to date.

Fitch's 'Global Economic Outlook' (GEO), published Sept. 7, 2020, forecasted global GDP in 2020 to contract 4.4%; improved from a 4.6% contraction forecasted in June, noting that the initial phase of economic recovery from coronavirus-related lockdowns has been faster than expected. Even though the coronavirus has yet to be contained, Fitch's base case assumption assumes that major advanced economies will avoid renewed national lockdowns, but economic activity will not fully return to pre-virus levels until 4Q21 in the U.S.

At June 30, 2020, Ryder's leverage (debt-to-equity) was 3.8x; up from an already elevated 3.2x at YE19 and above its long-term target of 2.5x-3.0x, as a revision in residual value estimates hurt earnings in 2Q20 as well as elevated cash balances, which increased leverage by 0.4x. On a net basis, leverage was 3.4x as of the same date. For leasing companies, Fitch focuses on managed debt to tangible equity in its analysis of leverage, which includes the present value of lease obligations in debt and excludes goodwill and intangibles in equity. On this basis, Ryder's leverage was 5.1x at June 30, 2020 up from 4.2x at YE19 and above the four-year average of 3.4x from 2016-2019. Fitch had expected some improvement in Ryder's leverage over the course of 2020 as positive FCF generation was expected to offset earnings pressure in 2H20, but now it seems any meaningful improvement will be delayed to 2021. Fitch views Ryder's pension obligation as having a potential negative impact on the company's leverage profile given the accumulated net pension equity charge (after tax) of $667 million, which is driven by the underfunded status (85% as of end-2019) of its defined benefit plans.

In December 2019, the board authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under Ryder's employee stock plans. Under the program, management is authorized to repurchase up to 1.5 million shares of common stock until December 2021. In 6M20, the company repurchased 303,000 shares for $12 million. In 2Q20, management decided to temporarily suspend the program to manage its leverage position, which Fitch views favorably.

The firm's asset quality trends and equipment valuation metrics are strongly influenced by the general condition of the domestic economy. Net accounts receivable write-offs, as a percentage of revenue generating assets were 0.2% in 2019, which was consistent with the four-year average from 2016-2019. Ryder's asset quality performance reflects a relatively diverse lease portfolio, the essential business-use of the vehicles, and the presence of economic stimulus, which have supported client payment rates in the current environment. While Fitch believes Ryder's asset quality metrics could deteriorate modestly given elevated new cases in the U.S., write-offs are not expected to materially exceed peak levels of 0.3% experienced in 2009 if Ryder's customers remain solvent and continue to make their payments.

Gains on used vehicle sales as a percentage of proceeds from vehicle sales were 2.6% in the last-12 months (LTM) ended June 30, 2020, lower relative to average reported gains of 10.2% from 2016-2019 and below 5.8% observed in 2009. Fitch believes used truck gains for Ryder will continue to be negatively affected in the near term by higher vehicle inventory and weaker pricing. The gain percentage is influenced by market conditions, age of fleet, and method of disposal. At the end of 2Q20, Ryder reported used vehicle inventory of 14,000 units; well above the company's target range of 7,000-9,000 units, reflecting a greater number of units coming off-lease and downsizing of the rental fleet. Fitch expects Ryder will continue to opportunistically dispose of its vehicles through the retail and wholesale channels for the remainder of 2020 to further reduce used inventory to 10,000 units by year-end.

Operating revenues decreased 5% during the six months ended June 30, 2020 (6M20) year over year, to $3.4 billion driven by reduced demand in commercial rental (FMS) and automotive (SCS) businesses, although all business segments reported a decline. Earnings are expected to remain pressured in 2H20 given a decline in lease and rental activity, growth in used vehicle inventory, and a modest increase in credit issues for customers in higher risk market segments. While Fitch believes the health crisis could begin to ease in 2H20, the economic recovery is expected to be gradual, with U.S. GDP not returning to pre-COVID levels until late 2021.

Ryder is predominately funded through unsecured debt, which represented 90.2% of total funding at June 30, 2020; consistent with the upper-end of Fitch's 'a' category funding, liquidity and coverage benchmark range of 50%-90% for finance and leasing companies, with an operating environment score in the 'a' category. Fitch views this favorably, as available unencumbered assets improve balance sheet flexibility in times of market stress. Sale-leaseback transactions and capital leases account for the remainder of Ryder's funding profile. Borrowings from these sources have been modest but remain important to Ryder as they provide funding diversity.

Fitch believes Ryder's liquidity profile remains adequate, consisting of cash on hand, operating cash flow and borrowing capacity on committed credit facilities. At June 30, 2020, Ryder had $1.2 billion of borrowing availability on its revolving credit facility (adjusting for outstanding CP) and $93 million undrawn on its trade receivables program. Year-to-date, Ryder has completed $1.5 billion of financing, including adding a $400 million, 364-day unsecured term loan facility with a syndicate of eight banks and issuing, in aggregate, $800 million of senior unsecured debt in the U.S. market, across two tranches with semi-annual fixed rates of 4.625% and 3.35%. Proceeds from the issuances were used to reduce borrowings by approximately $1 billion and for general corporate purposes. Fitch believes liquidity should be sufficient to address approximately $1 billion of debt maturities over the next 12 months, should market access be less attractive in the near term.

The company expects capital expenditures of $1 billion to $1.3 billion for the full year in 2020, which will result in positive FCF for the year and can be used to reduce borrowings and manage liquidity given the challenging economic environment. When lease and/or rental demand declines, the firm has historically quickly managed its fleet down, resulting in positive FCF and an ability to de-lever, as was observed during the last financial crisis.

The equalization of the senior unsecured debt rating with Ryder's Long-Term IDR reflects the firm's predominately unsecured funding profile and unencumbered asset coverage available to senior noteholders, which suggest average recoveries in a stress scenario.

According to Fitch's 'Non-Bank Financial Institutions Rating Criteria', a Long-Term IDR of 'BBB+' maps to a short-term IDR of 'F2' or 'F1'. In order to achieve the higher rating, Ryder would need to have a minimum Funding, Liquidity and Coverage (FLC) score of 'a'. Ryder's FLC score is currently 'bbb'. Accordingly, Fitch has affirmed Ryder's Short-Term IDR at 'F2'.

Ryder's CP rating is equalized with its short-term IDR.

RATING SENSITIVITIES

IDRs, SENIOR DEBT AND COMMERCIAL PAPER

Factors that could, individually or collectively, lead to negative rating action/downgrade could be driven by a sustained increase in managed debt to tangible equity of 6.0x resulting from a decline in earnings and/or FCF beyond Fitch's expectations or a substantial pension equity charge. In addition, deterioration in the firm's competitive position, weaker asset quality metrics, an inability to realize residual values on used vehicles and reduce non-earning vehicles, and/or a decline in liquidity could also result in negative rating actions.

The potential for a rating upgrade is limited at present, given the challenging economic backdrop from the coronavirus pandemic and the company's leverage, which is currently above management's long-term target.

However, factors that could, individually or collectively, lead to positive rating action/upgrade, including a revision of the Rating Outlook to Stable, include a sustained reduction in leverage below 4.0x on a managed debt to tangible equity basis (or below 3.0x on a debt to equity basis), an improvement in earnings trends, and a reduction in used vehicle inventory to a more normalized level. An Outlook revision would also be conditioned on the maintenance of an adequate liquidity profile.

The rating assigned to the senior unsecured debt is equalized with the long-term IDR, and would be expected to move in tandem. A material increase in secured funding, and/or a material reduction in unencumbered assets could result in a widening of the notching between Ryder's long-term IDR and unsecured notes.

The short-term IDR is primarily sensitive to the long-term IDR and would be expected to move in tandem. However, a material improvement in Ryder's FLC profile, resulting in an upgrade of the subfactor score to 'a' could result in an upgrade of the short-term IDR to 'F1'.

The CP rating is equalized with the short-term IDR and would be expected to move in tandem.

Established in 1933 and headquartered in Miami, FL, Ryder is one of the world's largest providers of highway transportation services, with revenue generating equipment totaling $9.6 billion at June 30, 2020. The company's stock is listed on the NYSE under the ticker, 'R'.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

ENTITY/DEBT	RATING		PRIOR
Ryder System, Inc.	LT IDR	BBB+ 	Affirmed		BBB+
ST IDR	F2 	Affirmed		F2

senior unsecured

LT	BBB+ 	Affirmed		BBB+

senior unsecured

ST	F2 	Affirmed		F2

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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