The debt ratings of Odyssey Logistics & Technology Corp. were held steady by Moody’s Investors Service in a recent review, a little more than a year after the ratings agency downgraded them.
However, the outlook for the Connecticut-based company was changed to stable from negative. While that change has no impact on the actual rating, it does signal that the company’s finances are at a level where the rating does not have the short-term possibility to be downgraded — a negative outlook — or the potential to be upgraded, which would carry a positive outlook.
The action taken by Moody’s affirms the debt rating of B3 for what Moody’s refers to as the “corporate family rating,” B3-PD for the probability of default, B2 for its first lien senior secured rating and Caa2 for its second lien senior secured rating. All those ratings were established by Moody’s review of Odyssey in 2020.
Odyssey’s home page describes the company as a full-service logistics provider, with offerings in freight forwarding, truckload, intermodal and LTL. It is privately held.
Privately held companies’ debt ratings reports issued by agencies such as Moody’s and Standard & Poor’s Global Ratings provide otherwise rare insight into their finances. The Moody’s report notes that Odyssey’s revenue for the 12 months ended March 21 was roughly $880 million. The debt ratings reports often do not disclose such information, given that their focus is the company’s ability to service its debt. Even in a company with growth in revenue, the ability to service its debt does not necessarily grow in tandem with the rising top line.
While the secured lien has a lower debt rating, it is the B3 corporate family rating that is most significant. B3 is the sixth-highest among the ratings that Moody’s refers to as “not prime,” which elsewhere can be described as “non-investment grade” or more colloquially, junk. There are five levels of not-prime debt beneath the B3 level.
Comparing Odyssey’s debt rating to other 3PLs is not always an apples-to-apples exercise. But looking at similar companies, the Odyssey ratings put it on a par with soon-to-be-acquired Transplace’s B- rating from S&P Global, higher than the S&P CCC+ rating at GlobalTranz, but well below the Ba-1 rating Moody’s recently gave to XPO (NYSE: XPO) spinoff GXO (NYSE: GXO), and significantly below the BBB+ rating held at S&P by C.H. Robinson. (NASDAQ: CHRW). (GlobalTranz is merging with WorldWide Express, which ultimately may impact its debt rating.)
Although the Odyssey ratings were affirmed at the same level as last year and the only change is the outlook, the difference in language between the report of last year and this year is stark.
In 2020, Moody’s said it expected Odyssey’s free cash flow “to remain weak as cost savings gradually reverse and working capital uses cash to support growth. … As a result, the opportunity for meaningful debt reduction will be limited.”
But in the recent review, it said that Moody’s sees free cash flow for Odyssey as “comfortably positive in 2021, even with higher investments to accommodate topline growth.” It said it expects free cash flow to rise in 2022.
One key difference between the two outlooks: the timing of the pandemic. When the downgrade was announced in 2020, it was late June and the full impact of the coronavirus on economic activity was still not known. Moving the company’s outlook to negative at that time was influenced by “Moody’s expectation that Odyssey’s weak free cash flow generation will continue into 2021 as a result of the recessionary impact from the coronavirus pandemic.”
But the strong freight market of 2021 is highlighted early in the recent report. “Improving market conditions in domestic freight forwarding and intermodal have resulted in a strong rebound in results since Q2 2020 which Moody’s expects to continue well into 2022, boosted by strengthening demand, tight capacity and a healthy pricing environment,” the ratings agency said.
In the 2020 downgrade, Moody’s said its earlier assumption was that it expected Odyssey’s debt/earnings before interest, taxes, depreciation and amortization to drop to 6X. But at the end of 2019, it had blown out to 6.6X, and then deteriorated further in the first quarter of last year to 7.6X.
In the 2021 review, Moody’s said debt/EBITDA was still above 7X at the end of the first quarter. But it added that it expects that ratio to approach the “low 6X range” by the end of the year, “largely driven by steadily improving earnings.”
In a prepared statement provided to FreightWaves, Cosmo Alberico, the company’s COO and CFO, did not address the ratings agency move directly. But he did speak positively about the company’s performance.
“We’ve never lost sight of what makes Odyssey strong: our agility,” he said in the statement. “While we offer a wide range of supply chain solutions for our clients, two things have bolstered our business during the continued over-the-road trucking capacity shortage: the first is our extensive intermodal network and ability to offer creative alternatives in the face of obstacles. The second is how we helped international customers navigate congestion for incoming products at U.S. ports. Our customers have always relied on us to keep them moving. But especially this year — we leaned into our technology, data and people with deep industry expertise to create a more personalized offering for each unique customer challenge.”
Moody’s views cash at Odyssey in 2021 as adequate. Run-rate cash is $30 million to $40 million, and there is “at least” $40 million available under a $60 million revolving credit line, Moody’s said. It added that it expects the revolver to be refinanced.
That gives Moody’s confidence about the company’s liquidity, which it said had “[come] under pressure in prior quarters.”