Fitch Affirms Ryder System's Ratings at 'A-'/'F2' Following Peer Review; Outlook Stable
Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of Ryder System, Inc. (Ryder) at 'A-'/ 'F2', following the completion of its fleet leasing peer review. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
IDRS AND SENIOR DEBT
The ratings are supported by Ryder's established market position in the truck leasing business, growing market share in the logistics and supply chain solutions (SCS) business, good asset quality, relatively consistent operating performance through various cycles, appropriate leverage, solid liquidity, and a largely unsecured funding profile.
Rating constraints specific to Ryder include the company's pension obligation, which can have an impact on balance sheet leverage, and customer concentrations in the SCS segment. Rating constraints applicable to the broader truck leasing sector include cyclicality inherent in used vehicle pricing and the commercial rental business and potential regulatory impact on business trends.
The Stable Outlook reflects Fitch's expectation for continued economic access to the capital markets through various market cycles, limited sensitivity to rising interest rates, strong liquidity, appropriate leverage, and continued earnings growth over the Outlook horizon, driven by growth in full-service lease and contract maintenance revenue, as well as increased penetration in the supply chain outsourcing business.
Asset Quality Mean Reversion Expected
Ryder's asset quality and equipment valuation metrics are strongly influenced by the general condition of the domestic economy. Net accounts receivables write-offs were 1.43% in 2015, and modestly higher than the five-year average of 1.06% and which Fitch believes remains relatively low. Mean reversion is expected in the medium term, as Fitch views asset quality performance at current historical lows as unsustainable. That said, write-offs are not expected to approach peak levels experienced in 2009.
The company reported average gains on the sale of trucks, tractors, and trailers of 23.8% between 2011 and 2015. Gains on sales of equipment have been elevated in recent years given strong demand by buyers to purchase pre-2010 engines. Sales gains in the first-half of 2016 (1H16) declined 45.6% year-over-year, reflecting lower used vehicle pricing, offset by higher sales volume. Fitch expects gains on sale will continue to moderate in the medium- to longer-term given normalization of used vehicle pricing from historical highs.
Relatively Consistent Operating Performance
Ryder reported 6% operating revenue growth in 1H16, reflecting higher revenue across all operating segments, partially offset by a negative impact from foreign exchange. Pre-tax income decreased 6% to $205.5 million in 1H16, due to lower commercial rental revenue and reduced gains on used vehicle sales, partially offset by higher full-service lease results, lower insurance costs in dedicated transportation solutions (DTS), and increased pricing, new business, and increased volumes in DTS and SCS.
This translated into annualized pre-tax return on assets of 3.7%, which is modestly below the five-year average of 4%. Fitch expects operating performance to remain relatively consistent in 2H16, supported by growth in full-service leasing, tight management of fleet inventories, and controlling costs amid a weaker environment for rentals, and lower used vehicle prices.
Fitch believes interest rate sensitivity is relatively limited for Ryder as rental contracts are typically short term and increased funding costs can be passed through to the full-service lease customers. However, there is a slight lag on the leasing side given that contracts are typically intermediate-term; however, Ryder seeks to mitigate this by issuing term debt in an attempt to match-fund that portion of the business.
Ryder has an articulated long-term leverage target, defined as managed debt-to-equity including the present value of capital lease obligations of 2.25x-2.75x. Managed leverage amounted to 2.75x, as of June 30, 2016, which is within the target but modestly higher than the average of 2.54x since 2011, as capital expenditures have been funded with increased borrowings in recent years. For leasing companies, Fitch focuses on managed debt-to-tangible equity in its analysis of leverage. On this basis, leverage amounted to 3.51x as of June 30, 2016, which is consistent with the average of 3.59x since 2011.
Ryder's pension obligation is viewed as having a potential negative impact to the company's leverage profile given the accumulated net pension equity charge (after tax) of $577 million, which was due to the underfunded status (79% as of end-2015) of its defined benefit plans. Even so, Fitch expects leverage to decline toward the midpoint of Ryder's articulated range by end-2016, driven by retained earnings generation and lower capital expenditures. Fitch believes Ryder's leverage metrics are appropriate for its current ratings, and incorporate the expectation that Ryder will scale or pull-back on repurchase activity, as necessary, to manage leverage within its long-term target.
In December 2015, Ryder reinstated its antidilutive share repurchase program, which allows the company to repurchase up to 2 million shares of common stock in periodic, open-market transactions. In 1H16, the company repurchased a total of 321,718 shares at an average price per share of $68.05. We do not expect further material repurchases of common stock given that managed leverage is already near the top of Ryder's articulated range.
Solid Liquidity Profile
Fitch views Ryder's liquidity as solid, supported by the substantial cash generating capability of the operating lease portfolio. While free cash flow (FCF) generation was negative for 6M16, this is attributable to the firm investing primarily in full-service lease assets which are expected to generate meaningful cash earnings. When lease and/or rental demand declines, the firm has historically managed its fleet down quickly, resulting in positive FCF and an ability to de-lever, as was observed during the recent financial crisis.
In addition, corporate credit facilities serve as a source of contingent liquidity. Ryder has a $1.2 billion global revolving credit facility provided by a syndicate of 12 banks, which also serves as a backstop to its commercial paper issuance. Borrowing availability under the facility amounted to $425 million, as of June 30, 2016. Based on unrestricted cash of $66 million and estimated annualized operating cash flow of $1.5 billion, Ryder would have sufficient liquidity to address near-term debt maturities of $1.1 billion in the next 12 months.
Continued Funding Flexibility
Ryder is predominately funded through unsecured debt, which represented around 92% of total funding as of June 30, 2016. This is viewed positively by Fitch, as available unencumbered assets improve balance sheet flexibility in times of market stress. Sale-leaseback transactions and capital leases represented 8% of total funding. Borrowings from these sources have been modest, but remain important for Ryder, as they provide additional funding diversity.
The company has demonstrated strong access to various funding sources through a variety of market cycles. In 1H16, Ryder issued $300 million of unsecured medium-term notes maturing in November 2021. The proceeds from the issuance were used to repay maturing debt and for general corporate purposes. Fitch believes Ryder will continue to opportunistically access the capital markets to maintain funding diversity and optimize pricing.
IDRS AND SENIOR DEBT
Fitch believes positive rating actions are limited over the medium term. However, positive rating momentum could develop over the longer term from greater revenue diversification, stronger liquidity, and lower tangible balance sheet leverage.
Conversely, negative rating actions could be driven by an increase in tangible balance sheet leverage resulting from a decline in earnings and/or free cash flow beyond Fitch's expectations, or a substantial pension charge which inflates leverage meaningfully beyond the targeted range for an extended period. In addition, deterioration in the firm's competitive position, weaker asset quality metrics, an inability to realize residual values on used vehicles, a material increase in non-earning vehicles, and/or a decline in liquidity could also result in negative rating actions.
Established in 1933 and headquartered in Miami, FL, Ryder is one of the world's largest providers of highway transportation services. The company's stock is listed on the NYSE under the ticker 'R'.
Fitch has affirmed the ratings as follows:
Ryder System, Inc.
--Long-Term IDR at 'A-';
--Short-Term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured debt at 'A-'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
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