Tough freight market hits Echo’s debt ratings, down a notch at S&P

The credit rating of Echo Global Logistics has taken a one-notch downward hit by S&P Global Ratings, with its interest costs rising and its revenue sliding on the back of the weaker freight market.

Moving to B- from B pushes the credit rating of Echo, which was acquired by The Jordan Co. two years ago, further into non-investment-grade territory. The entire class of B ratings is defined as “highly speculative.” At B-, it is six notches less than BBB-, the lowest investment-grade rating on the S&P scale.

S&P Ratings (NYSE: SPGI) did leave Echo’s recovery rating as a “3,” which means there would be a 50% to 75% chance of recovery in the event of a default.

Echo had been a publicly traded company prior to its 2021 acquisition by Jordan Co. Before that, its financial performance was reported every three months. S&P’s move on Echo opens a door to again see how the 3PL is doing, albeit without any information on operating or net profits or loss.

Besides the recovery rating, Echo received another vote of stability from S&P Ratings: The outlook on its B- debt rating was listed as “stable,” which means another downgrade or upgrade in the near to medium term is not likely. “Despite the current freight recession, Echo’s cash position and liquidity resources are sufficient to absorb expected negative free operating cash flow until the freight demand environment improves,” S&P Ratings said in its report issued late last week.

Echo’s debt load relative to its earnings before interest, taxes, depreciation and amortization has risen, a key reason for the downgrade. According to S&P Ratings, the agency had expected that ratio to be in the low to mid-5X range in 2023. Expectations were that organic revenue would decline by 5%, with total revenue stable because of the impact of the May 2022 acquisition of Roadex, a cold chain warehouse and transportation provider.  

But S&P now sees debt to EBITDA rising to 7X this year before narrowing back to the mid-6X area next year. And a key reason for that is that revenue this year is expected to decline by 14% to 16%, with a bounce back in 2024 to a positive 3% to 5% range.

EBITDA margins — the company’s EBITDA as a percent of revenue — is expected to be in the 3% to 4% range both years, according to S&P Ratings. But the EBITDA margin in 2022 was 4.7%, and S&P Ratings attributes the decline to the impact from both the Roadex acquisition and the November 2022 purchase of Fastmore, a freight forwarder.

Higher interest rates will mean $19 million in additional interest expense, S&P Ratings said, though it does not provide a figure on what its costs are now. Meanwhile, adjusted EBITDA will be $35 million less than its earlier forecast, again, with no figure on what the $35 million is being taken from.

The freight market will rebound “somewhat” next year, “with capacity beginning to show signs of exiting the market,” S&P said. With contract rates now in place likely to look up at rising spot rates as the freight market improves, that lag means that Echo’s “working capital could be pressured,” which could mean a “use of cash during the initial freight recovery.”

The end result: “The challenging operating and elevated interest rate environment could pressure Echo’s ability to generate meaningfully positive free cash flows (FCF) over the next few years,” S&P Ratings said.

The combination, even in a better freight market, means that “Echo will likely face multiyear headwinds generating free cash flow,” the agency said. FCF will be negative $5 million to breakeven this year and negative $15 million to $10 million next year. That figure is an enormous drop from S&P Ratings’ original call of free cash flow of $55 million to $60 million in 2023 and 2024.

In a statement released to FreightWaves, Pete Rogers, Echo’s CFO, said the company has been cash flow positive in the last 12 months. It has accomplished this “while accelerating investment in both technology and people.

“We have continued to drive profitable market share gains through the freight recession and are well positioned to further leverage the increased investment when the freight market recovers,” Rogers said. 

“New awards in Echo’s managed transportation business unit, and full-year revenue contributions from recent acquisitions, were more than offset by softness in its transactions segment as both contract and spot brokerage were weaker year over year,” S&P Ratings said in recapping the current state of business at Echo. In that discussion, S&P Ratings noted that 60% of the company’s business is now contract, though it does not say what it had been previously; that year-on-year load count was down 6.5% through June 30; and gross profit per load was weaker.

The two acquisitions, Roadex and Fastmore, both are suffering revenue declines this year, according to S&P Ratings. “Air and ocean freight forwarding is particularly soft with ocean container rates declining nearly 90% and air cargo rates down 30% year over year through September,” S&P Ratings said.

Given Echo’s ownership by Jordan Co., S&P Ratings does not see it out of the acquisitions game. With Jordan’s backing, “we expect Echo will continue to opportunistically deploy cash and could look to lever up to pursue acquisitions in the future.” Buit the end result could be that debt levels relative to EBITDA won’t improve, the agency said.

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