Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDR) of
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
Fitch's 'Global Economic Outlook' (GEO), published
At
In
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
Gains on used vehicle sales as a percentage of proceeds from vehicle sales were 2.6% in the last-12 months (LTM) ended
Operating revenues decreased 5% during the six months ended
Ryder is predominately funded through unsecured debt, which represented 90.2% of total funding at
Fitch believes Ryder's liquidity profile remains adequate, consisting of cash on hand, operating cash flow and borrowing capacity on committed credit facilities. At
The company expects capital expenditures of
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
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 '
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. LTIDR 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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