FedEx Freight will begin life as an investment-grade credit

There aren’t many other LTL carriers with publicly-traded debt as a point of comparison. But at Ba2 at Moody’s and BB at S&P Global, XPO has a lower debt rating than FedEx Freight will carry into its spinoff. Those XPO ratings are both non-investment grade. 

Several other large LTL carriers do not have publicly-traded debt, such as Old Dominion Freight Lines (NASDAQ: ODFL) and ArcBest (NASDAQ: ARCB). LTL carrier Forward Air (NASDAQ: FWRD) is carrying a non-investment grade rating of B, several notches below both XPO and FedEx Freight. 

FedEx Freight will begin life with a debt load driven in part by an expected $4.3 billion dividend payment to FedEx. Reviewing the debt structure, S&P Global said FedEx Freight will issue a $600 million unsecured delayed draw term loan to go along with an estimated $3.7 billion in other unsecured debt to make the dividend payment.

It also has taken on a $1.2 billion revolving credit facility. However, S&P notes the line will not be tapped until the spinoff is closed. 

The current date for the spinoff is June 1.

The BBB- rating is being issued along with a stable outlook. Stable means that neither an upgrade nor downgrade is likely in the foreseeable future.

“The stable outlook incorporates our view that the company will generate and sustain funds from operations (FFO) to debt above 20%, reflecting an increase in average daily shipments, average weight per shipments and continued yield expansion in revenue per hundredweight,” S&P said in its report. “We assume the company’s credit measures gradually improve beyond calendar 2026, led by growth in its earnings and cash flow.”

The S&P Global (NYSE: SPGI) report recaps some of FedEx Freight’s key statistics, including revenue that is well above its competition. For example, Old Dominion had revenue of approximately $1.4 billion in the quarter ended September 30. In the quarter ended November 30, FedEx Freight reported revenue of about $2.2 billion.

Its approximately 26,000 doors, according to S&P, is the largest in the LTL industry. FedEx Freight will cover about 98% of all U.S. zip codes, “which we believe provides it with a competitive advantage over regional operators,” S&P said.

Another FedEx Freight statistic in the report: its largest customer is just 3% of fiscal 2025 revenue, with the top 25 customers accounting for 16% of revenue. 

While the report spends a significant amount of time discussing freight market conditions and the strength of LTL relative to truckload, it also addresses the costs that FedEx Freight will need to bear on its own now that it will be out from under the FedEx umbrella.

There will be “significant stand-alone costs (that) will weigh on margins, free operating cash flow and credit metrics in 2026 and 2027,” S&P said. But the rating sees “one-time technology infrastructure costs” disappearing after 2027. 

“In our view, these items are transformative and nonrecurring,” the ratings agency said.

In one of the key metrics used by ratings agencies, S&P said its estimate of adjusted EBITDA margins will drop this year to 16%-17% “due to temporary cost pressure.” But they will rise to 17%-18% next year and then “normalize” at 20%-21% in 2028 “from steady yield improvement and easing cost pressures.”

S&P also said once the transition costs are behind it, FedEx Freight is expected to return cash to shareholders via dividends and share repurchases.

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