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Covenant follow: Strong third-quarter freight market will mean significant improvement in company’s OR

Covenant Logistics dropped two significant pieces of news at the close of stock market trading Wednesday.

First, it is having a very strong third quarter and sees significant improvement in its operating ratio. Second, it has reached agreement with Triumph Bancorp over the sale of the TFS factoring unit.

In the announcement of the two developments, the company’s executive vice president and CFO, Paul Bunn, said Covenant now expects an adjusted operating ratio in the low 90s. The company previously had said that its OR would be in the mid-90s. 

Covenant’s operating loss in the third quarter of 2019 was just under $2 million, with an OR of 100.9%. But the second quarter of this year was ugly, with an OR of 115.1% and an operating loss of $28.9 million.


Bunn also said freight revenue, excluding freight surcharges, would be between $190 million and $200 million in the third quarter. That actually would put it in the same range where third-quarter 2019 revenue came in at, which was just under $200 million. But it would be a significant step up sequentially from the second-quarter revenue of $179.5 million. 

Average freight revenue per tractor per week will be approximately $4,025 in the third quarter, Bunn said in his statement. That is a significant improvement over the $3,766 corresponding figure for the third quarter of 2019. It’s an even bigger jump from the second quarter, when that number was $3,647. 

In the statement, Bunn said there were several contributors to the expected improvement in Covenant’s performance. There has been “a significant improvement in freight fundamentals, including increased demand across markets and less industry-wide trucking capacity.” The company has benefited from a general improvement in the U.S. economy. And specific to Covenant, Bunn said the company has had a reduction in overhead and fixed costs “related to the ongoing execution of our strategic plan.” 

Bunn had said on the second-quarter earnings call that the “sloppy” earnings of that period came in part from Covenant having “pushed a lot of disruption and expense into a relatively weak freight quarter.” There were net charges for the period of $29.3 million in the quarter. But Bunn said further restructuring this year was not going to be on the level of what occurred in the second quarter.


“We are excited about the progress to date and remain focused on continuing to refine the business model so that it is less-cyclical, more sustainable, and operating in higher margin sectors where we can add value to our customers and for our stakeholders,” Bunn said in the statement. 

TFS sale to Triumph revived

In the other news released by Covenant after the stock market close, the Chattanooga, Tennessee-based truckload carrier said it and Triumph Bancorp had resolved their differences over the sale of Covenant’s TFS factoring division. The end result, according to Covenant Chairman and CEO David Parker, will mean “lower total value and more risk sharing for Covenant, while providing a clear path forward and a fair outcome.”

After the sale of the TFS factoring unit was announced in early July, Covenant said in releasing its second-quarter earnings that a dispute had arisen between it and Triumph over the value of the unit. Parker also said on the company’s earnings call that he would not address the issue with analysts, so details of the nature of the dispute were rumored but not confirmed.

But in the latest announcement, Covenant said the dispute was over $66 million in assets in the TFS portfolio. Covenant said the value of the original deal was a sale of $122.3 million for a portfolio of $103.3 million plus an “earn-out” opportunity for Covenant of as much as $9.9 million.

Under the terms of the new sale, the purchase price has been cut to “approximately” $108.4 million, “representing the cash amount received by Covenant at closing and a modest premium” to the $103.3 million of assets in the portfolio. 

Roughly $62 million in assets in the portfolio, close to the value of the disputed $66 million, were put in a “loss sharing pool” to be repaid “with proceeds other than those generated from ordinary working capital factoring.” Covenant will indemnify Triumph for losses up to $45 million. 

Triumph, which is a banking company, also provided Covenant with a line of credit of up to $45 million, secured by tractors and trailers, that can be drawn on through September 2025 to cover any of the shared losses. “This will allow Covenant to maintain its existing cash and line of credit for liquidity and general corporate purposes,” Covenant said in its release.


Covenant and Triumph will also work together to collect and minimize losses from the accounts in the loss pool.

Given the potential losses, the proceeds to Covenant from the sale of TFS may be less than the $108.4 million in cash it will get at closing of the factoring division. But in addition to the new $45 million line of credit from Triumph, Covenant said it has $16.2 million in cash and $58.3 million in existing revolving credit capability to cover any losses.

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.