Could Another Transportation Bankruptcy Leave Creditors Empty Handed?
Trucking industry bellwethers, including UPS, FedEx, and Amazon, continue to enjoy steady delivery volumes and pricing power. Yet their collective lack of forward guidance reflects an industry with uncertainty, particularly for underperforming truckers. Celadon Group Inc. and its 25 subsidiaries recently had their bankruptcy case close with operations mostly shuttered, unsecured creditors receiving nothing, and secured creditors incurring significant financial losses, according to IBJ. To avoid landing in bankruptcy courts as Celadon did, certain trucking companies have already taken extraordinary measures to reconfigure their capital structures.
Spotting Covenant Risks
Underperforming transportation companies, albeit less risky with COVID-19 better controlled, still face operating headwinds, cumbersome debt loads, and tight net working capital. The five financially stressed operators shown below each have a high-risk FRISK® score (the “red zone” being the bottom half of the "1" [highest risk]-to-"10" [lowest risk] scale) and DBT Index that signals prompt payment behavior. This commonly occurring discrepancy is what we call the “Cloaking Effect,” where companies will pay their bills on time despite their financially distressed state.
|Country||Company||FRISK® score||DBT Index|
|United States||Yellow Corporation||1||9|
|Switzerland||CEVA Logistics AG||3||9|
|United States||Daseke Inc.||5||9|
|United States||U.S.A. Truck, Inc.||5||9|
|France||XPO Logistics Europe SA||5||9|
Trucking companies with red zone FRISK® scores exhibit financial distress and heightened bankruptcy risk, despite reporting consistently prompt payment behavior.
However, it is critically important to stay alert. The FRISK® score will accurately reveal your most distressed counterparties, which can then be further evaluated through news alerts, financials, filings, and credit ratings in the CreditRiskMonitor service. We will review two of these companies below on their latest FRISK® score trends, operating performance, and credit transactions.
Yellow Corporation, formerly known as YRC Worldwide Inc., has extensive trucking networks covering international and local destinations. Being the recipient of a treasury loan under the U.S. CARES Act, this massive liquidity injection helped the company restore its depleted maintenance budget. The investment spend was allocated to revitalize its trucking fleet (where operating leases were replaced with tractor trailer purchases) and modernize its technology platforms. Yellow Corporation’s FRISK® score of “1” continues to indicate heightened financial stress and bankruptcy risk. The company’s Q1 2021 financials marked its fourth consecutive quarterly net loss, and gross and net debt expanded by 9.3% and 20%, respectively, due to drawdowns on its 6.5% U.S. Treasury Loan Tranche B. In addition, its less flexible 9.5% term loan carries a step-up EBITDA covenant, which becomes effective in Q3 2021. According to management, discussion, and analysis (MD&A) disclosures (readily available within the CreditRiskMonitor service), the company anticipates that its contractual obligations will be satisfied:
“Management expects, based on actual and forecasted operating results, the Company will meet this covenant requirement for the period it becomes effective and the next 12 months.”
However, adjusted EBITDA will need to meet $200 million by Q2 2022, but that measurement was not met in 2020 and even reached a low mark of $171 million in Q1 2021. So, unless operating performance shows a material and sustained recovery, further credit amendments could be required.
Daseke, Inc. focuses on flatbed and specialized freight in North America. The company’s FRISK® score improved from a “3” to “5,” in part due to:
- TTM EBIT turning positive in recent quarters,
- Market capitalization rising and providing a larger equity cushion,
- A term loan facility being retired, which reduced gross debt by 12.7%
This debt repayment, however, clipped working capital back to $84.4 million, or the lowest balance since FY 2019. All five divisions reported falling sales in the first quarter of 2021, primarily resulting from lower charged rates and miles driven, which resulted in a 14.6% revenue decline year-over-year. The company’s MD&A also disclosed covenant relief on Apr. 29. The ABL amendment involved a series of contract adjustments, including the removal of its total leverage financial covenant:
“[The Company] entered into the Fifth Amendment to Fifth Amended and Restated Revolving Credit and Security Agreement…(c) removed the Borrowers’ total leverage financial covenant, which had been tested on a quarterly basis and (d) provided additional covenant flexibility in the form of increased debt, lien, investment, disposition and restricted payment baskets.”
Several of the company’s leverage ratios still rank in the bottom quartile of the industry, as shown in the peer analysis section of its CreditRiskMonitor credit report.
Broader delivery demand has surged in 2021, yet certain operators still face performance pressures and are managing their weak balance sheets. The FRISK® score provides risk professionals a first-step evaluation on where to pinpoint high-risk exposures, especially when industry conditions reverse for the worse. Contact CreditRiskMonitor and we’ll show you how we can help you track the ongoing risks in the broader transportation sector and other industries globally.