S&P sees still-challenged financial makeup for restructured 3PL Neovia

Logistics provider Neovia has restructured its debt, but a report from S&P Global Ratings said the company is likely to receive a rating on its new debt that is still deep into junk bond territory.

In a report released earlier this month, S&P Ratings said it would expect Neovia to have a rating for its post-restructuring debt of no higher than CCC+.

“A ‘CCC+’ issuer credit rating indicates the appearance of an unsustainable capital structure without a specific envisioned default scenario over the subsequent 12 months,” S&P said in its report.

CCC+ is far from the bottom of the ratings chart at S&P Ratings (NYSE: SPGI). The lowest grade is D, representing a debt that has been defaulted. The debt of Neovia was rated D by the agency after the restructuring, which is standard practice after a company retires old debt for a new debt structure.

Above the grade of D are ratings of C and CC before getting to CCC-. Each of those grades also carries the possibility of a minus or plus rating.

Coming into the restructuring, S&P Ratings had given Neovia a CC for what it calls its issuer credit rating, reducing its rating from CCC- in August as the restructuring was looming. But it also said that since the restructuring was going to involve a debt swap that the company’s rating would be cut to D at that time, normal practice for a distressed credit exchange.

CC is the lowest possible rating for the creditworthiness of a company as a whole, besides D for default.

However, at the same time, S&P Ratings issued a rating to Neovia of C on its first-lien term loan. C is the lowest grade for the rating of a specific debt instrument.

Investment-grade debt, or “non-junk,” is considered to be anything with a BBB rating or above  at S&P and Fitch Ratings, with Baa the investment grade cut line at Moody’s (NYSE: MCO).

S&P’s action followed Neovia’s early November announcement that it had completed a “comprehensive business recapitalization and significant deleveraging of the company’s balance sheet.”

According to a statement released in early November about its restructuring, the company reduced its debt load by about $420 million and also received a cash infusion of about $60 million.

The cash came from a group of investors that was led by funds under the management of Oaktree Capital Management (NYSE: OAK-A), Ares Management (NYSE: ARES) and Vector Capital. Neovia said the group of investors are now controlling owners “and will continue to support the company’s long-term growth.”

Neovia did not respond to requests for comment. On its website, the company says it was founded in 1987 as Caterpillar Logistics Services “to provide logistics support to Caterpillar International (NYSE: CAT) and its partner companies in construction, mining, automotive, energy and other industries.”  

The 3PL, which became independent in 2012, said on its website that it has relationships with its 10 largest customers that average 14 years. 

In the prepared statement announcing the recapitalization, Jordon Kruse, a managing director at Oaktree, said the new funding “allows Neovia to continue expanding their industry-leading logistics capabilities and to increase value for their customers around the world.”

The S&P Ratings report was not quite as optimistic.

“Although we believe the restructuring has improved Neovia’s prospects, it is likely that we may continue to view its capital structure as unsustainable due to operational challenges exacerbated by customer losses,” the report said.

As is its practice, the S&P Ratings report does not address whether a company it is rating is profitable. Its focus is entirely on its ability to generate cash to be able to make interest payments on its debt.

It did spell out several financial statistics. S&P Ratings said Neovia had about $70 million in cash and $25 million available under revolving credit lines at the close of the refunding. S&P also said the company would be able to cut its interest payments by $30 million in 2023 as a result of the restructuring.

“[We view] macroeconomic environment as potentially more challenging for Neovia,” S&P Ratings said in its August ratings downgrade/ “We believe weaker economic activity could lead to lower volumes or a more difficult pricing environment for Neovia, given its smaller scale relative to other rated logistics companies.”

Where logistics companies have received ratings from agencies for their publicly traded debt, those have almost always carried speculative ratings, so Neovia is not alone.

While C.H. Robinson (NASDAQ: CHRW) carries a solid BBB+ investment-grade rating from S&P Ratings, Echo Global Logistics had a B- rating affirmed in October 2021. On the S&P scale, B- is only one step above the CCC+ rating that S&P signaled is likely to be assigned to Neovia’s debt.

At Moody’s, Transplace was at a B2 rating before its takeover by Uber Freight, which resulted in Moody’s pulling its debt rating. B2 at Moody’s is considered equal to a B rating at S&P.

Odyssey Logistics also carries a “corporate family rating” of B3 from Moody’s, though some individual debt is rated lower than that.

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