Credit ratings for less-than-truckload carrier Yellow Corp. have been lowered further by Moody’s Investors Service.

The credit rating agency on Monday downgraded the carrier’s corporate family rating from B3 to Caa1. “Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk,” Moody’s said.

Downgrades were also made to Yellow’s default probability rating and its speculative grade liquidity rating, the latter of which now sits on the lowest rung of Moody’s scale. The agency did maintain its stable outlook on Yellow.

“The downgrade of Yellow’s ratings reflects Moody’s expectations that delays in implementing the next phase of the company’s ‘One Yellow’ strategic plan and weaker sector fundamentals will slow expected improvements in operating results, limit liquidity and increase uncertainty regarding the company’s ability to successfully address its 2024 debt maturities,” the report said.

The carrier has been executing a multiyear overhaul dubbed “One Yellow,” which includes consolidating its regional operating companies, realigning its management teams and consolidating sales forces onto the same tech and operating platforms.

Last year, it implemented a change of operations (COO) to consolidate YRC Freight and Reddaway terminals in the West. However, the recent COO attempt, which would consolidate brands Holland and New Penn with YRC terminals in the East, Central and South regions, has faced strong opposition from the union.

The two parties have agreed to renegotiate their labor contract a year ahead of schedule, addressing the proposed network changes at the same time. The International Brotherhood of Teamsters recently said it wants “sufficient financial improvements” to the current employee pay structure. Yellow maintains the network overhaul will eliminate redundancy, reduce costs and improve service to its customers, which it asserts is vital to its survival.

Yellow recently reported operating and net losses for the first quarter of 2023. The company posted a 100.8% operating ratio in the period as revenue fell 7% year over year (y/y). Shipments declined 13% in the period, which was partially offset by a 5% increase in revenue per shipment excluding fuel surcharges.

The company has roughly $1.5 billion in debt, nearly $1.3 billion of which matures next year. That number includes more than $700 million in loans with the U.S. Treasury.

On a first-quarter earnings call, Yellow’s management said it would look to refinance its capital structure once it reaches a resolution with the Teamsters and completes its restructuring.

The Moody’s report also pointed to refinancing risk as justification for the downgrades.

“The Caa1 [corporate family rating] reflects Yellow’s significant refinancing risk with 2024 debt maturities, thin operating margins, weak interest coverage, and moderately high financial leverage. The rating also reflects a history of negative free cash flow given the high capital intensity of the business,” Moody’s said.

It issued a stable outlook for Yellow as it expects “a delayed but successful implementation of the company’s ‘One Yellow’ strategy,” which “would result in [an] improved operating margin through more efficient utilization of its network.”

Yellow has one debt covenant — adjusted earnings before interest, taxes, depreciation and amortization of at least $200 million over the last 12 months. It again met that threshold in the first quarter. However, it has generated only $89 million in adjusted EBITDA over the last six months, meaning it has some ground to make up.

The second and third quarters each year typically see much stronger freight demand than in the first quarter. However, seasonality so far in 2023 has been muted.

Total liquidity for Yellow declined 40% y/y in the first quarter to $167.5 million as cash was used to pay down debt.

During the consolidation process Yellow will continue to lower its outstanding debt with the sale of terminals, which Moody’s estimates will reduce its debt-to-EBITDA ratio from 4.8x at the end of the first quarter to 4x by year-end. Using adjusted EBITDA, debt stood at 4.6 times at the end of the first quarter.

According to an April congressional oversight commission report on pandemic loans, Yellow’s risk of default within one year was in Bloomberg’s “riskiest category” and stood at 17.7%.  

Yellow declined to comment on the matter.

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