Rating Action: Moody's confirms the ratings of YRC Worldwide, CFR at Caa1, senior secured at B1; outlook stable

Global Credit Research - 08 Jul 2020

New York, July 08, 2020 -- Moody's Investors Service ("Moody's") confirmed the ratings of truck carrier YRC Worldwide Inc. ("YRC") following YRC's announcement that the United States Department of Treasury intends to provide a $700 million loan to YRC under authorization of the CARES Act. The ratings include the Caa1 corporate family rating ("CFR"), the Caa1-PD probability of default rating and the B1 senior secured rating. The speculative grade liquidity rating was upgraded to SGL-3, from SGL-4. The ratings outlook is stable.

The confirmation of YRC's ratings balances the additional liquidity provided by the $700 million CARES Act loan and related amendments to the company's existing revolving credit facility and term loan, and the need to increase its earnings and cash flows sufficiently to service the increase in the company's debt.

This completes the review for downgrade that was initiated on March 31, 2020.

RATINGS RATIONALE

The Caa1 CFR considers the company's position as one of the largest less-than-truckload truck carriers in North America, thin operating margins and substantial debt balance, in part due to Moody's adjustments related to underfunded pension obligations. With a fleet of more than 14,000 tractors and a nationwide footprint comprising more than 350 terminals, YRC offers longer-haul shipments as well as regional, next-day and time-sensitive services. The $400 million of CARES Act funding earmarked for capital investments will expedite the replacement of aging tractors and trailers, yielding considerable cost savings through better fuel economy and lower maintenance and repair expenses. Earnings growth is also likely supported by the greater operational flexibility under last year's labor contract with the International Brotherhood of Teamsters and the company's ongoing network optimization strategy. Nonetheless, YRC's operating margins are typically very modest -- between 2.5% and 5% on a Moody's adjusted basis - despite prior initiatives to increase the company's profitability.

Calculated after Moody's standard adjustments, total debt will increase by approximately 25% once all of the available funds under the CARES Act loan are borrowed. Consequently, Moody's expects that debt/EBITDA will be elevated in the near-term, before reverting to approximately 7 times in 2021.

YRC's liquidity is adequate (SGL-3), despite the very limited availability under the company's $450 million asset-based revolving credit facility. Moody's estimates that the $300 million tranche A of the CARES Act loan will be ample to cover deferred employee healthcare and pension costs and other contractual obligations, while the $400 million tranche B for investments in tractors and trailers could help to sustain a greater cash balance over the next 12 to 18 months. Following the extension of the maturity of the revolving credit facility until January 2024, there are no material debt maturities until December 2022, when approximately $70 million of obligations under the Contribution Deferral Agreement with certain multiemployer pension plans are due. YRC also obtained a waiver for the minimum EBITDA covenant of the $600 million term loan until December 31, 2021, at which time the covenant will be reinstated but at a level that Moody's believes YRC is unlikely to breach.

The B1 senior secured rating reflects the relative priority of the secured debt claim of the term loan and the high proportion of unsecured liabilities in YRC's debt structure, which includes a large estimated liability for defined benefit and multi-employer pension plans, using Moody's methodology for calculating such liability.

The stable outlook is predicated on Moody's expectation that YRC will be able to increase its earnings in the next 12 to 18 months such that (adjusted) debt/EBITDA will trend towards 7 times, provided that the recovery in the US economy takes hold.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if the company improves (adjusted) operating margins to levels that enable the company to undertake a capital spending program of at least 5% of revenues, calculated on a Moody's adjusted basis. Other considerations include debt/EBITDA of less than 6 times, (FFO+interest)/interest of more than 2 times, the ability to maintain adequate headroom under financial covenants and maintaining ample cash.

The ratings could be downgraded if Moody's expects that (adjusted) operating margins remain below 2.5% for a prolonged period or that the company's cash balance diminishes to below $75 million. The ratings could also be downgraded if Moody's expects debt/EBITDA to remain in excess of 7 times or that (FFO+interest)/interest is less than 1.5 times on a sustained basis.

Confirmations:

..Issuer: YRC Worldwide Inc.

.... Corporate Family Rating, Confirmed at Caa1

.... Probability of Default Rating, Confirmed at Caa1-PD

....Senior Secured Term Loan, Confirmed at B1 (LGD2)

Outlook Actions:

..Issuer: YRC Worldwide Inc.

....Outlook, Changed To Stable From Rating Under Review

The principal methodology used in these ratings was Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

YRC Worldwide Inc. is a provider of over-the-road transportation services and has one of the largest less-than-truckload ("LTL") transportation networks in North America. The company offers longer-haul LTL shipments as well as regional, next-day and time-sensitive services, with a total fleet of approximately 14,100 owned and leased tractors. Revenues in the last 12 months ended March 31, 2020 were $4.8 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rene Lipsch VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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