DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Ryder System, Inc. (Ryder or the Company), including the Company’s Long-Term Issuer Rating of A (low) and Short-Term Issuer Rating of R-1 (low). Concurrently, DBRS Morningstar confirmed the R-1 (low) Guaranteed Short-Term Promissory Notes rating of Ryder Truck Rental Canada Ltd., reflecting the guarantee from Ryder. At the same time, DBRS Morningstar revised the trend on all ratings of Ryder and its related entity to Negative from Stable. The Company’s Support Assessment is SA3, which results in its Long-Term Issuer Rating being equalized with its Intrinsic Assessment (IA) of A (low). Meanwhile, Ryder Truck Rental Canada, Ltd.’s Support Assessment is SA1.
KEY RATING CONSIDERATIONS
The Negative trend reflects DBRS Morningstar’s view that the current economic downturn caused by Coronavirus Disease (COVID-19) pandemic will place pressure on the Company’s commercial rental truck demand and automotive supply chain volumes. Further, this environment will potentially exacerbate the decline in used truck values, resulting in further increases in the Company’s depreciation expense levels creating a notable headwind to earnings. DBRS Morningstar notes that the full impact of the coronavirus remains unclear, including the severity of the disease, as well as its duration before it runs its course and the economy reopens at levels approaching pre-coronavirus levels.
The confirmation of the ratings reflects Ryder’s top-tier commercial fleet management franchise, underpinned by its solid Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS) businesses. The confirmation also considers the Company’s sound balance sheet profile, including its solid liquidity and capital positions.
Given the Negative trend, an upgrade in the near term is unlikely. Nonetheless, if the Company is successful in restoring earnings generation, while navigating the current challenging environment and maintaining sound credit performance, the ratings could return to a Stable trend. Conversely, ratings could be downgraded should the current operating environment become more protracted or deeper than anticipated, leading to additional revenue pressures and continued lower profitability. Ratings would also likely be lowered if there is a material increase in leverage or deterioration in the Company’s liquidity position.
Established in 1933, Ryder has a deeply entrenched presence in the North American markets, along with a modest footprint in Europe, primarily in the United Kingdom. Overall, the Company is a market leader in the North American truck leasing space, providing a broad set of products and services, including full-service leasing, leasing with maintenance, short-term commercial rental, contract maintenance, and a wide array of logistics management services that are designed to optimize a customer’s supply chain. Finally, the Company’s top-tier franchise reflects a strong and conservative management team, which provides an offset to the impact of the coronavirus headwinds.
Earnings generation has been challenged over the past year by weakening truck values. The weak secondary market for trucks has led to an acceleration in depreciation expense, lower gains on the sale of used trucks and higher levels of used vehicle inventory. Indeed, the Company reported a $110 million loss for 1Q20, as compared to $45 million of net income in 1Q19. The loss was primarily driven by Ryder’s previously reported shift towards accelerating depreciation costs related to its truck portfolio. This followed a $24 million loss for full year 2019, also largely due to higher vehicle depreciation. Of note, the coronavirus pandemic has created additional headwinds for the Company, including pressure on commercial rental volumes and a steep decline in auto supply chain related business, driven by the shut-down of auto manufacturing plants in North America. We note that auto manufacturers have announced the imminent resumption of manufacturing at their North American plants, which should benefit the SCS segment’s revenues going forward. Importantly, the Company has also been successful in shifting some of its truck rental fleet into its leasing business. Finally, the FMS business, which represents the majority of the Company’s revenues, has performed well to date, despite the evolving pandemic. Indeed, the Company reported that only a moderate level of customers have requested payment deferrals.
Although the Company’s risk profile is somewhat pressured due to elevated asset risk, operating and interest rate risks remain sound. With the continuing decrease in used truck values, residual value risk has increased and led to the increase in vehicle depreciation expense. Additionally, credit risk remains well managed, reflecting the Company’s conservative underwriting standards and a customer base comprised of large corporates that have historically resulted in moderate credit losses. That said, the Company’s customer base has some customer concentration, which could pressure its bottom line, especially if several of these customers have financial difficulties.
Despite currently being above its targeted range, the Company’s leverage (debt-to-equity) was acceptable at 3.6x at March 31, 2020, up from 3.2x at YE19. Overall, the Company’s leverage was well below the average of DBRS Morningstar’s rated fleet management peers. Meanwhile, funding continues to be solid, primarily consisting of unsecured senior debt and committed bank facilities. Importantly, funding is diverse by source, as well as by investor, and is well-aligned with the asset base. Liquidity is solid, reflecting available committed liquidity totaling $1.8 billion, including cash of $800 million, approximately $900 million of availability under Ryder’s $1.4 billion global revolving credit facility (expires September 2023), and $100 million of availability under a $300 million receivable-backed financing facility. Liquidity is bolstered by the Company’s ability to access the capital markets having completed two senior note issuances totaling $800 million since the onset of the coronavirus outbreak. Debt maturities are well spaced out with the Company having just $300 million of senior notes maturing over the remainder of 2020.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are the Global Methodology for Rating Non-Bank Financial Institutions, September 24, 2019 (https://www.dbrsmorningstar.com/research/350802/global-methodology-for-rating-non-bank-financial-institutions), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers, March 10, 2020 (https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers), DBRS Morningstar Criteria: Guarantees and Other Forms of Support, January 22, 2020 (https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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