Buyout of founder changes Daseke’s capital structure; S&P lowers outlook

The buyout of founder Don Daseke by flatbed operator Daseke Inc. has led S&P Global Ratings to shift its outlook on the company to “negative.”

The action by S&P Global Ratings (NYSE: SPGI) does not change the company’s actual debt rating, which was upgraded to B+ from B in August. However, a shift to a negative outlook from an upgrade in just four months is unusual.

But S&P analyst Geoffrey Wilson said the revised outlook to negative from stable has less to do with any change in S&P’s view of Daseke’s (NASDAQ: DSKE) day-to-day operations nor its projection of macroeconomic trends facing the flatbed operator. Instead, it is tied to the issuance of preferred shares to Don Daseke in buying him out, along with reconsideration of other preferred shares and how they fit in Daseke’s capital structure.

The new shares, referred to as a B series, carry a dividend payment of almost 9%. The dividend payment is treated as cash interest by S&P. The ratings agency view is that the new B series, along with S&P’s reconsideration of the equity treatment of an existing A series of preferred shares, has increased Daseke’s total debt burden.

While the buyout has multiple parts, S&P Global Ratings said its bottom line is that its calculation of the increase to Daseke’s S&P adjusted debt will be about $100 million. That will take its debt load up to about $900 million, S&P said.

S&P Global Ratings also said its estimate is that following the recent changes, the Daseke ratio of funds from operation (FFO) to debt, a key metric, will close 2022 in a 17% to 18% range, below a key benchmark of 20%, which can trigger a downgrade. But in keeping with S&P’s views that the company’s operations will improve next year, the ratings agency said it expects the FFO-to-debt ratio will rise to at least 20% next year “as it increases its revenue and expands its FFO through improved operating efficiencies.”

The reconsideration of the company’s debt load also will see its ratio of debt to earnings before interest, taxes, depreciation and amortization at the close of 2022 in the “high 3X range,” S&P Global Ratings said in a prepared statement. But it expects that to drop to 3.3X next year.

Wilson noted that the S&P outlook for growth at Daseke next year is 2% to 3%, separate from fuel surcharge movements. That estimate was built into the August upgrade to B+ from B. 

“We need to be very clear this action is not based on macroeconomics or businesswise activities,” Wilson told FreightWaves. Rather, he said, the move was made “because this company chose to incorporate changes into its capital structure. We’re not revising materially our forecast for that business. But when you put in more debt, this is what happens.” 

The $40 million in common stock that Daseke the corporation bought from Daseke the founder in November constituted 28.6% of its total outstanding common shares.

Moody’s (NYSE: MCO) increased its debt rating on Daseke in July, before S&P took its step. The B1 rating granted by Moody’s is considered equivalent to the B+ rating that S&P has on Daseke. As of Wednesday, Moody’s had made no changes to its outlook or rating on Daseke.

A spokesman for Daseke declined comment on the report.

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