Restructured 3PL Neovia gets higher but still troubled rating from S&P

Neovia Logistics, which after a recent restructuring had its debt rating cut to the lowest level on the S&P scale, now enters its new financial structure with a much higher grade.

S&P Global Ratings last week, after meeting with the 3PL’s management team, gave Neovia a rating of CCC+. That rating is the highest that S&P said in November that the restructured company would receive. 

While CCC+ is still substantially below the cutoff line for investment grade and non-investment grade, i.e., “junk” debt, it is still well above the bottom. 

“We met with management to better understand Neovia’s current operating environment and the new capital structure,” S&P Ratings (NYSE: SPGI) said in its report. 

But the CCC+ still comes with an outlook of negative. A negative outlook is not just pejorative. A negative rating, as S&P describes it, “reflects continued uncertainty around the company’s ability to attract and retain customers with profitable contract terms amid broader economic headwinds and expectations of a shallow recession in 2023.” A company’s outlook could be raised to neutral from negative even without a change in the company’s debt rating.

A move of that magnitude — from D to CCC+ — also comes with some optimistic commentary. The ratings of S&P and other ratings agencies are concerned with only one thing: the ability of the rated company to repay its publicly traded debt. The D rating came about because the earlier restructuring led to altered debt repayment terms, and S&P views that as an automatic ticket to a D rating, which is defined as “selective default.”

That restructuring reduced the company’s debt by $514 million. “However, operational challenges and modest free cash flow generation in 2023 lead us to view its current capital structure as unsustainable,” S&P wrote, even though annual interest expenses are expected to drop $30 million. The company’s debt-to-EBITDA ratio — arguably the most important metric for a debt rating — will close 2022 at about 10x, S&P said. With the adjustments made in the restructuring, that number is expected to decline to the high 8x area in 2023. 

By contrast, when S&P recently rated the debt of XPO spinoff RXO (NYSE: RXO), it said that company’s debt-to-EBITDA ratio would be 1x to 1.25x. A recent rating by Moody’s of Odyssey Logistics put that company’s ratio as improving from June 2021 to the time of its rating in August as having moved to 4.3x after being at 7x.

The restructuring pushed some maturities that were due in 2023 out to 2024, where there are “multiple maturities.” Other significant maturities occur in 2025 and 2027, according to S&P.

Ratings reports from agencies about privately held companies rarely disclose a company’s revenue, net income or operating profits.

The S&P report was detailed with specifics about some of Neovia’s ongoing business. It said Neovia’s contract with Jaguar Land Rover was responsible for 17% of the company’s revenue in 2022 but that it is “rolling off” at the end of 2023. The loss of a contract with Schaeffler Group created a $65 million “revenue headwind” in 2022. And a contract with Daimler Singapore might see “the scope of services … reduced.”

But the S&P report also highlights new business for Neovia, with Home Shopping Europe, John Deere, Trane, Mann & Hummel and INEOS listed as new customers. Contracts with some existing customers are solid enough that new facilities are being added to serve them, according to S&P.

The report also had supportive words for changes in operations. “Neovia is also using capital expenditures to pursue additional operational efficiencies that may result in the reduction of labor expenses over the next few years through greater technology implementation in the warehouse facilities it operates.” 

But that might not be enough. “Despite these improvements, we believe recent customer losses are substantial and will impair the company’s ability to increase revenue, EBITDA and free cash flow over the next few years,” the report said. New contracts will “take several years to ramp up, resulting in some margin dilution near term.” 

Defaults are sometimes kicked off by the failure of a company to meet a particular covenant in its debt. But S&P Ratings said the financial maintenance covenants in Neovia’s debt “are favorable to the company.” 

Neovia at publication time had not responded to requests for comment.

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