DBRS Confirms All Ryder System, Inc. Ratings and Changes Trend on Short-Term Rating to Negative

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt ratings of Ryder System, Inc. and Ryder Truck Rental Canada Ltd. (collectively, Ryder or the Company) at BBB (high) with Stable trends. DBRS has also confirmed the Company’s Commercial Paper (CP) ratings at R-1 (low) but changed the trend to Negative. The confirmation of the long-term ratings reflects on one hand that the ratings are limited by industry cyclicality and Ryder’s weaker financial metrics in recent years, while recognizing the stability provided by its contracted revenue and strong market position. We also expect that the Company will adhere to its leverage target and proactively scale down its fleet capacity in the event of another market downturn, as it did in 2009.

While confirming the CP rating, the trend change reflects that Ryder’s financial metrics have weakened in recent years. While DBRS does allow exceptions in the short-term and long-term rating mapping (see “DBRS Rating Policies: Rating Scales – Short-Term and Long-Term Rating Relationships” for further detail) for issuers considered strong for their current issuer rating and for those with exceptional liquidity, the Negative trend is largely a function of the stringent criteria DBRS currently has for rating mapping exception. The Company is now at risk of no longer meriting the current exception of assigning its R-1 (low) CP rating typically corresponding to a long-term rating of A (low), although these credit metrics are still consistent with its BBB (high) Issuer Rating. DBRS notes that Ryder’s adjusted cash flow-to-debt has weakened steadily to 31% for the last 12 months (LTM) ended September 30, 2013, from 43% in 2009, while adjusted debt-to-EBITDA weakened to 2.9 times (x) from 2.2x during the same period. DBRS no longer expects steady improvement before 2015 as capital expenditure will likely remain elevated to support its full-service lease business. Should DBRS conclude that Ryder no longer warrants an exception, the likely outcome would be a one-notch downgrade to R-2 (high), assuming there are no other changes to DBRS’s view on the long-term Issuer Rating.

Ryder (along with Penske Corporation) is one of the two leading truck leasing companies in North America, providing full-service leases and a wide range of transportation and supply chain solutions. The Company’s Fleet Management Solutions division provides full-service leases (FSL), rental, maintenance and fuel supply services, while its Supply Chain Solutions (SCS) division offers distribution, transportation and supply chain management, contributing about 66% and 34% of total revenue, respectively, in 2012 and the first nine months of 2013. Since 2012, Ryder has merged its smaller Dedicated Contract Carriage business into the SCS division.

Although the truck leasing, transportation and logistics solution businesses are driven by demand for freight transportation and other factors affecting the cyclical and competitive trucking industry, DBRS considers that Ryder’s businesses are relatively more stable, as they are supported by long-term leasing and maintenance contracts, which contributed about 37% of total revenue in 2012. Also providing stability is the Company’s leading market position, which is supported by its extensive network coverage throughout North America and, to a lesser extent, the United Kingdom, as well as its ability to offer more value-added logistic solutions and its relatively lower cost of capital.

DBRS believes that Ryder’s business risk profile is materially stronger than that of the trucking industry and supports its long-term ratings for a number of reasons. First, the truck leasing industry in North America is dominated by two continent-wide market leaders, with a handful of other players focusing on smaller trucks; hence, competition has been rational and pricing has been disciplined. Second, Ryder’s geographic coverage and SCS services enable the Company to serve its large customers’ nationwide transportation needs. Third, the high proportion of contractual revenue (typically for periods of three years to seven years with trucks and tractors and of ten years with trailers) provides some revenue stability. Finally, recent acquisitions from 2010 to 2012 enhance the Company’s geographic coverage in the western U.S and the U.K., reducing its exposure to the more volatile automotive and high-tech industries. DBRS understands that business integration with these acquired companies has effectively been completed within expectations and with no material disruption.

Ryder’s revenue and EBITDA have both recovered from the substantial 19% decline in 2009 and by the LTM period ended September 30, 2013, both have returned to their pre-recession levels. Despite the correction in 2009, the Company was able to generate steady annual operating cash flows exceeding $1.0 billion since 2006. Given the capital intensity of Ryder’s truck leasing business, depreciation expenses (a non-cash expense item) consistently provides substantial cash flow support and makes up 70% to 80% of operating cash flow. In addition, Ryder’s demonstrated ability to manage its fleet capacity during down cycles through capital expenditure curtailment and disposal of inactive vehicles through the used vehicle markets enabled the Company to generate strong free cash flow during the 2009 recession. Since 2010, operating cash flows have steadily increased to $1.27 billion by LTM September 30, 2013, partly due to the acquisitions made and partly due to steady, albeit gradual, improvement in profit margins.

Despite sizeable operating cash flows, Ryder has reported negative free cash flow since 2010 as a result of (1) a number of acquisitions in 2010 to 2011, (2) increased capital expenditure in 2011 and 2012 related to its rental fleet renewal program (suspended in 2009) to rejuvenate the fleet and lower maintenance costs and (3) increased truck purchases to support lease replacements and organic growth of the FSL businesses. In 2013, although the rental fleet renewal program was substantially reduced and the Company has made no material acquisition, its success in entering into more FSL contracts will necessitate net capital expenditure similar to its 2012 level. As a result, the Company’s leverage and financial metrics have weakened steadily since 2009 as the Company increased its debt level to finance the shortfall, with adjusted cash flow-to-adjusted debt at 31% and adjusted debt-to-EBITDA at 2.9x for LTM September 30, 2013. The increased debt and reduced equity, due to charges against pension-related liabilities, also resulted in a steadily weakened debt-to-equity ratio from 183% to the peak of 284% (as of June 30, 2012). The ratio has since retreated back to 251% as at September 30, 2013, which falls within the Company’s long-term target of 225% to 275%. DBRS understands that Ryder would normally order its vehicle purchase for its FSL business only after revenue from customers are contracted and expects the Company to maintain such prudent purchasing practice.

Although the deterioration in financial metrics has reduced its cushion against unexpected challenges at this rating level, DBRS considers Ryder’s financial metrics still consistent with its BBB (high) ratings. DBRS’s opinion is supported by (1) a debt-to-equity range (225% to 275%) consistent with the capital structure of similarly rated leasing companies, (2) a younger rental fleet and enlarged FLS fleet that will provide cash flow benefits throughout the assets’ lives and (3) the counter-cyclical nature of cash flow generation, as demonstrated in 2009.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Trucking Industry (August 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Ryder Truck Rental Canada Ltd.’s Commercial Paper and Senior Unsecured Debt are guaranteed by Ryder System, Inc.