C.H. Robinson has held on to its investment grade debt rating of Baa2 from Moody’s Investors Service, with the ratings agency lauding the 3PL’s “disciplined approach to the balance sheet.”
In a recent review of the company, Moody’s said C.H. Robinson’s “strong market position in the U.S. freight brokerage market will continue to drive solid and consistent results despite challenges, including supply chain disruptions and rising fuel costs.”
There are not many direct comparisons between the C.H. Robinson (NASDAQ: CHRW) debt rating and similar companies, as most 3PLs do not have publicly traded debt.
Two of the more prominent 3PLs with publicly traded debt have since been acquired by other companies. GlobalTranz carried a junk debt rating from two agencies but has since been acquired by Worldwide Express. Echo Global Logistics, which was acquired last September by Jordan Co., had a B2 rating from Moody’s at the time of the acquisition, six steps down from C.H. Robinson. Like GlobalTranz, Echo’s debt rating was non-investment.
By contrast, the Baa2 rating of C.H. Robinson is investment grade, though only the second highest in the Moody’s scale.
The relatively brief report by Moody’s on its affirmation of C.H. Robinson’s debt does acknowledge the recent strong freight market indirectly. For example, the agency says that C.H. Robinson is experiencing “increases in accounts receivable.” And while it doesn’t explicitly say that is a direct result of rising rates, the almost two-year-long increase in rates that is now coming to an end would have been generating higher revenues and in turn higher accounts receivable.
At $4.1 billion, C.H. Robinson’s first-quarter revenues this year were more than 28% above the first quarter of 2021.
That greater amount of cash coming through the door helps the company’s credit position. “Increases in accounts receivable will be a use of cash for the first half of 2022, but should moderate later in the year as better pricing and working capital management take effect,” the Moody’s report said.
The Moody’s report offers no view on whether margins will strengthen or weaken. However, it does say that “rising transport costs and a lag in timing from renegotiated contracts that should recoup inflationary costs are also credit challenges.”
But currently, rates are falling and the lag in renegotiated contracts are a financial boon to brokerage houses, coming off a year during which margins showed little growth even as the book of business soared.
Another forward-looking part of the review is that while there may be risks to current margins, “Moody’s believes the company will maintain EBITDA margin of around 5% over the next 12 months.”
The Moody’s report, like all analyses for ratings agencies, focuses on the company’s ability to service its debt load. It has a strong focus on earnings before interest, taxes, depreciation and amortization, both in terms of the debt load multiple of EBITDA or as a margin. EBITDA margin is defined as the EBITDA percentage of total revenue.
Moody’s also said it expects the debt to EBITDA ratio to be “sustained” at a rate near 2X.
Ratings agencies also look at a company’s liquidity. In the case of C.H. Robinson, Moody’s said it expects “cash balances will be maintained at around $200 million.” Although C.H. Robinson turned to its revolving line of credit in 2021, Moody’s expects “this will reverse in 2022, becoming a significant source of cash.” As a result, free cash will be in excess of $500 million this year and next year.
C.H. Robinson also still has a little less than half its revolving credit line of $1 billion still available to it, according to Moody’s.