United Road, a major hauler of automobiles, is looking at a weak market for new vehicle production as well as used car sales, prompting a ratings agency to change its outlook for the company’s parent.
S&P Global Ratings (NYSE: SPGI) in late October affirmed its negative outlook for URS Holdco Inc., United Road’s corporate owner, as negative. The move does not affect the company’s debt rating, which was affirmed at CCC+.
S&P Global Ratings defines its CCC rating as falling under the definition of speculative, also known as non-investment grade or more informally as “junk” credit. S&P’s non-investment-grade ratings begin with BB and step down to B before reaching the CCC level, with plus or minus grades possibly being attached. A CCC+ rating would put a company roughly in the middle of the non-investment-grade ratings.
There are further steps of CC and C before default, which brings a rating of D.
Moody’s, the primary competitor to S&P Global Ratings, affirmed its grade of Caa1 in June. The ratings of Caa1 for Moody’s and CCC+ for S&P Global Ratings are considered equivalent. Moody’s (NYSE: MCO) also has a negative outlook for URS Holdco.
“We expect further delays in the U.S. domestic light vehicle production recovery to contribute to ongoing weak performance for URS,” the S&P Global report said. “URS’ financial performance is likely to remain weak over the next 12 months amid subdued new vehicle sales in the U.S.”
“It’s for all the reasons everyone expects,” United Road President and CEO Mark Anderson said of the S&P move to a negative outlook. The reasons he cited include the auto industry shutdowns that began with COVID and continued into a lowered delivery rate in the past year due to tight supplies of new vehicles.
“Our revenue went down, our earnings went down and when you have those things go down, and your debt stays at a consistent level, you’re going to get a downgrade,” Anderson said, though the move to a negative outlook is not technically a downgrade. United Road’s rating held at CCC+; a move lower than that would be considered a downgrade.
The Ratings group at S&P earlier in the year forecast that light vehicle sales would increase 2% in the U.S. in 2022, but it now expects a 4% to 6% contraction “before improving in 2023 as automakers’ supply improves.” Its forecast for 2023 is a 5% to 7% improvement, though as the report notes, that is off a base that will show a decline this year.
Looking forward, Anderson said the company’s revenue has “bounced back, so we’re really pleased with where things are.” Initial forecasts called for deliveries of nearly 16 million new vehicles this year, Anderson said; the end number is likely to be closer to 14 million, he added.
United Road says it hauls more than 4 million vehicles annually and believes it is the industry leader in size.
URS posted free operating cash flow deficits of $2 million in 2020 and $16 million in 2021, S&P Ratings said. Like most ratings agency reports on a company’s debt position, figures on revenue, operating income and net income are almost never disclosed by a ratings agency.
United Road does not publicly release figures on its revenue or profits. It is owned by private equity firm Carlyle Capital.
The S&P Global report says the cash flow position at URS benefited from the divestiture of Team Drive Away, a company it only bought in 2019. Anderson said Team Drive Away was sold several months ago. He did not disclose the sale price.
Free cash flow deficits are projected to be $3 million in both 2022 and 2023 once the boost from the Team Drive Away sale is ended. After that, S&P Ratings said, “we expect URS will need to draw on its asset-based lending revolving credit facility to fund operations over the next 24 months.”
The test for the company will come in September 2024, when a term loan becomes due. “Amid ongoing weak performance and slow recovery, we expect URS to face significant challenges refinancing [the] term debt facility,” the S&P report said.
Higher interest rates have increased interest expenses by $3 million this year, to approximately $33 million, rising an additional $5 million next year to around $39 million, S&P Ratings said. “We view URS as having limited flexibility to generate additional cash if its operations remain weak,” the S&P report said.
As a result, S&P Ratings said it expects debt to earnings before interest, taxes, depreciation and amortization will be above 10X for fiscal 2023, a level most companies would consider high.
In its report, S&P Ratings discusses several specific operating facets of the company. It says United Road did have a better first half of 2022 in terms of new vehicle transport volumes but said it was mostly “through a one-time bump from a large automaker. We do not expect it to sustain this growth unless automobile production and demand improve.”
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