A just-issued report on the economic health of 3PL GlobalTranz echoes a similar summary issued a few months earlier: The acquisitive company has a troubling debt load.
But from the perspective of GlobalTranz, part of the reason for a recent downgrade and that debt burden was that it did something a lot of companies did at the start of the pandemic and were advised to do: boost liquidity in uncertain times by drawing down revolving lines of credit.
In the Friday report, Moody’s Investors Service cut the company’s debt rating to Caa1 from B3, deeper into the noninvestment category of debt popularly known as “junk.” Moody’s defines Caa1 as debt that is “judged to be of poor standing” and is “subject to very high credit risk.”
The Moody’s move follows by about two months a similar action taken by S&P Global Ratings. In mid-April, S&P cut its rating on GlobalTranz’s debt to CCC+, a level roughly parallel with the Caa1 rating of Moody’s. The S&P definition of CCC+ is worded similarly to that of Moody’s.
In both reviews, the issue of leverage at GlobalTranz and its aggressive acquisition activity in recent years were central components of the changes.
Debt is debt, and money pulled down from a revolver “just in case,” as many companies do, is something that a ratings agency would look at.
CEO: Drawn-down revolver not being used to fund daily operations
But Renee Krug, GlobalTranz’s CEO, told FreightWaves in a phone interview that the company did pull down cash from its revolving credit line “and it is just sitting there.” “Moody’s wouldn’t have that information on what GlobalTranz would do with that,” she said. She stressed several times in the interview that GlobalTranz has used none of it to fund day-to-day operations.
What the company is planning on doing with it, Krug said, is putting a lot of it back. She said loan conditions are being “amended” that would allow the money to be returned to the revolving agreement, which would take it off the debit side of the balance sheet.
The Moody’s report mentioned GlobalTranz pulling down its entire revolving credit line but did not make reference to what the company officials said it was: a defensive act, similar to that undertaken by many companies at the start of the pandemic.
It did say that GlobalTranz was sitting on about $75 million in cash last month, which it said was “relatively modest considering the concerns around the weaker earnings and annual interest expense of about $33 million.” But the cash stockpile would have been even smaller had the revolver drawdown not taken place.
“Our modeling doesn’t show that we need to use any of those revolver funds,” Lara Stell, the company’s CFO, said on the phone call with Krug. “We could pay them back anytime we wanted to.”
Issues with a covenant, and a solution
Moody’s said there is “high probability” that GlobalTranz will not meet the requirements of a “springing leverage covenant.” A springing leverage covenant has been described as a “covenant-lite” requirement that only kicks in if a company fails to meet certain financial requirements and if it already has started to draw down funds from its revolving credit facility.
But Krug argued that the ongoing discussions to amend the revolving line of credit, and the subsequent payback of some of those funds, would allow GlobalTranz to stay within the requirements of the covenant.
In the interview, both Stell and Krug wanted to focus more on the creditworthiness of the company in terms of paying contractors such as drivers. In a subsequent email, Stell emailed a chart that showed GlobalTranz with a D&B score of 70, just under such industry behemoths as C.H. Robinson with a 73 and Echo Global Logistics with a 72.
The weak credit rating from the agencies, Krug said, “isn’t hindering us at all.”
Neither report provided figures on the size of GlobalTranz’s revenue or earnings before interest, taxes, depreciation and amortization (EBITDA).
While the two agencies gave GlobalTranz fairly identical ratings, they had somewhat different views of liquidity — though it should be noted that the S&P ratings are from April. Moody’s outlook on GlobalTranz is deemed “Negative,” and the report said the outlook is driven in party by its “expectation of profitability and liquidity to weaken through at least 2020 amidst deteriorating market conditions.”
But the S&P outlook is “Stable,” which it says “reflects our assessment of sufficient liquidity over the near term.” And while the S&P report does refer to leverage at the company that is “much higher than we expected,” it did note that the company has “minimal near-term debt maturities and low capital spending requirements.”
The back-to-back debt rating cuts stand in contrast to what happened just a year ago, when Providence Equity Partners bought GlobalTranz back from The Jordan Co., less than a year after Providence had sold GlobalTranz to Jordan. At the time FreightWaves quoted an unidentified investment banker not connected to the deal that said GlobalTranz had done so well during those nine months that The Jordan Co. realized a 100% profit from the sale of GlobalTranz back to Providence, which had sold the 3PL in June 2018 to Jordan for $400 million.
Moody’s said risks to the company are “increased” because of the private equity ownership nature of GlobalTranz, though Stell in the interview boasted of GlobalTranz’s “strong backing of our equity investors.”
Moody’s said the acquisitions the company has made have been mostly driven by debt, “limiting de-leveraging prospects and are likely to continue, given GTA’s modest scale” in the 3PL sector.
Debt/EBITDA ratio an issue
Moody’s said the company’s total debt/EBITDA ratio will “likely” remain more than eight times EBITDA through next year. “This is elevated for a cyclical company in highly competitive markets, and follows aggressive growth through acquisitions,” Moody’s said in discussing how GlobalTranz got to that point. “These factors increase concerns about the sustainability of the company’s capital structure.”
However, Krug noted that the debt/EBITDA ratio will contract when the money drawn from the revolving line of credit is put back into the company.
As for its current ratio, S&P Global said GlobalTranz’s debt/EBITDA ratio last year and this year will be 10X to 15X, compared to earlier expectations it had of “high” 8X last year and “high” 6X next year. S&P said it expects “improvement” to about 9X next year.
By contrast, a little more than a year ago, S&P Global affirmed the debt rating of leading 3PL C.H. Robinson and estimated its debt/EBITDA as 1X, having come down from 1.4X. Also just about a year ago, S&P Global said it had expected a debt/EBITDA ratio for 3PL TransPlace to drop to the “high” 5X from around 7X. (It isn’t clear whether that happened.)
As far as the company’s acquisition activities, Krug said there is nothing on the “imminent horizon.” But she also said GlobalTranz continues to look at acquisitions.
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