C.H. Robinson has had its credit rating downgraded for the first time in at least six years, but its latest rating of BBB, down from BBB+, does keep the 3PL as an investment-grade credit rating.
The downgrade comes just slightly less than one year after S&P reduced the outlook on C.H. Robinson (NASDAQ: CHRW) to negative from stable while affirming its BBB+ rating. A move to a negative outlook usually ends either with a downgrade (possibly many months later, as in the case of C.H. Robinson) or a reinstatement of a company to a stable outlook.
The ratings of the various agencies are an expression of its view on the capability of the debt issuer to ultimately repay its debt.
S&P Global’s website on C.H. Robinson’s debt ratings show the 3PL first garnered a BBB+ rating in 2018.
The S&P Global Ratings move on C.H. Robinson debt did come with the stable outlook being reinstated.
The irony in the move is that it comes just a few weeks after a first quarter earnings report that by several metrics showed the start of a turnaround at C.H. Robinson on the back of operational steps it has taken. But not as a result of an improving freight market which remains a tantalizing prospect, not a reality. Investors reacted to that report by driving up the price of C.H. Robinson, an action that may have involved the covering of short positions as C.H. Robinson was reported to be one of the most heavily shorted stocks on Wall Street.
However, it was a different set of metrics that led S&P Global to make its move on C.H. Robinson.
BBB is the second-lowest investment grade rating on the S&P (NYSE: SPGI) scale. There are not many 3PL peer companies with publicly traded debt for purposes of comparison. RXO’s rating at S&P Global is BB+, which is below the investment grade cutoff. But RXO (NYSE: RXO) has a rating (and a negative outlook) of Baa3 from Moody’s, who along with Fitch Ratings and S&P dominate the ratings business. That Baa3 rating for RXO is investment grade.
Moody’s in March said it had completed a “periodic review” of C.H. Robinson without taking any action. The rating from Moody’s is Baa2, which is considered on the same level as BBB at S&P and also is investment grade.
In response to a FreightWaves query, C.H. Robinson issued the following statement:
“C.H. Robinson’s debt ratings remain comfortably into investment grade. Now, S&P and Moody’s each rate our debt 2 notches into investment grade. We will continue to manage our key metrics to ensure that we maintain our investment grade credit rating, and we’ll continue our disciplined approach to investments, dividends, acquisitions and share repurchases. We are also in the process of implementing a new operating model which is driving improved results across our key metrics.”
In its report, S&P Global said the funds from operations (FFO) ratio at C.H. Robinson “will not recover sufficiently above the 45% threshold until the end of 2025,” which the ratings agency notes would be about 2.5 years after the move to a negative outlook last year.
And while S&P sees the freight market beginning to recover, “we believe the pace at which the market recovers will not be sufficient for CHRW’s metrics to recover in the timeframe needed to maintain its ‘BBB+’ rating.”
An FFO ratio can be measured in multiple ways; it is considered a leading indicator for real estate investment trusts (REITs). But at C.H Robinson, the ratio is calculated as a comparison to the company’s debt levels. Despite the stronger operations in the first quarter, the FFO to debt comparison was not healthy for C.H. Robinson.
“Subsequent to the outlook change to negative, shortly after the company released its first quarter 2023 results (41% FFO to debt), CHRW’s FFO-to-debt metric declined in five successive quarters and is currently at 26% as of the first quarter of this year,” S&P Global said.
The ratings report maps out how C.H. Robinson’s finances got to the point of the downgrade in its debt rating after years of stability.
According to the report, C.H. Robinson’s adjusted gross profit was down 28% last year to $2.6 billion. That came after a significant expansion of its operations, as was the case for many 3PLs during the post-pandemic freight boom.
The slowdown “left CHRW unable to adjust its debt levels accordingly (which had grown alongside its FFO during the 2021-2022 freight boom during the COVID pandemic) to preserve its metrics,” S&P Global said. “CHRW’s short-term debt grew during the pandemic as rising rates led to negative working capital, as is typical for the industry.”
But when things got better, according to S&P Global, the company took its improved cash flow from operations and devoted significantly more of it to stock repurchases than debt repayment by a ratio of about 3:1.
Other commentary in the report about C.H. Robinson’s earnings are mostly positive. The ratings agency said it expects adjusted gross profit (AGP) to increase by 2% this year and that increased productivity will increase FFO on an absolute basis. The report noted many of the aspects of the first quarter earnings report that gave a boost to its stock price: monthly AGP per load improving sequentially each month of the first quarter, pricing disciplines and reductions in headcount.
But from the perspective of S&P Global, the most important finding in its report is this one: “We believe the relative pace of improvement will likely preclude metrics from improving sufficiently above 45% within the next 24 months.”
C.H. Robinson has halted share repurchases, which was noted by S&P Global.
But the company did need to tap $120 million from a revolving credit line in the first quarter, partly offsetting repayment of a $175 million senior note last August. “The draw was attributed to the pricing environment in its ocean segment, as rates temporarily rose (but have since normalized) from the shipping disruption in the Red Sea contributing to working capital turning negative at around $160 million,” S&P said. “We believe this working capital can reverse over the next quarter and for the draw to be repaid.”
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