New York, February 14, 2014 -- Moody's Investors Service ("Moody's") has upgraded the Corporate Family Rating for YRC Worldwide Inc. ("YRCW") from Caa3 to B3, following the successful closing of its refinancing transactions. In addition, Moody's revises the Probability of Default ("PDR") rating from Caa3-PD to B3-PD/LD ("Limited Default"), as it deems the conversion of $50 million of principal amount of the Series B Convertible Notes that took place as part of YRCW's refinancing transactions, a distressed exchange. Moody's will remove the "/LD" indicator after three business days. Moody's also changed the rating for YRCW's new $700 million first lien term loan to Ba3 from (P)Ba3, and raised YRCW's Speculative Grade Liquidity ("SGL") rating to SGL-3 from SGL-4. The rating outlook is stable.
Yesterday, YRCW announced that it has successfully closed a new $700 million first lien term loan and a new $450 million ABL credit facility. On January 31st, the company also announced that it successfully issued $250 million of common and preferred stock and that approximately $50 million of principal amount of the company's Series B Convertible Notes were exchanged for or converted to common stock. These transactions, together with a new collective bargaining agreement with the International Brotherhood of Teamsters ("IBT"), complete YRCW's planned refinancing of more than $1.0 billion of debt that would have become due in the next 14 months.
The upgrade of the CFR to B3 reflects the improvements to YRCW's capital structure that result from these transactions, while recognizing that YRCW's debt levels remain elevated, despite a debt reduction of approximately $250 million. In calculating YRCW's debt levels, Moody's takes into account its standard adjustments for operating leases and pension liabilities. Moody's estimates that the debt adjustment associated with YRCW's pension liabilities represents almost half of YRCW's total debt. The CFR also takes into consideration YRCW's improved ability to generate cash flows following the refinancing, as the company benefits from materially reduced interest expenses and cost savings from the implementation of the new IBT agreement. Importantly, this would allow the company to increase its capital expenditures, which have been constrained in recent years due its weak financial condition. The improvements in YRCW's liquidity profile derived from extending all material debt maturities and achieving positive free cash flow, further support both the CFR and the upgrade of the SGL rating to SGL-3 from SGL-4.
Despite the beneficial impact of the conversion of the Series B Convertible Notes on YRCW's capital structure, Moody's recognizes a limited default as a result of this transaction: it considers the stock that is delivered to note holders a diminished financial obligation relative to the original obligation of the notes, and the exchange has the effect of allowing the issuer to avoid a payment default.
The rating differential between the Ba3 rating for the new $700 million first lien term loan and YRCW's CFR of B3 is caused by the relatively high proportion of unsecured debt in YRCW's total debt structure, which includes Moody's adjustment for unfunded pension obligations. This tends to affect positively the instrument ratings for secured debt in Moody's Loss Given Default analysis.
The stable outlook reflects Moody's expectation that YRCW will demonstrate material improvements in operating performance over the next 12 to 18 months, driven by moderate revenue growth and substantial margin improvements derived from cost savings under the new IBT agreement and reduced interest expenses. These improvements should result in credit metrics for YRCW that are consistent with the company's CFR of B3.
A rating downgrade or a change in outlook could be considered if the company is not able to restore operating margins to at least 4%, possibly as a result of failing to realize the anticipated cost savings from its new collective bargaining agreement. Rating pressure could also result if Debt to EBITDA were to be in excess of 6.5 times on a sustained basis and EBIT to Interest were to be less than 1.0 time for a prolonged period.
YRCW's ratings or the outlook could be raised if the company were to improve operating margins to such levels that the company can generate sustainably positive free cash flow, while undertaking a capital spending program in excess of 4.0% of revenues. In addition, Debt to EBITDA of less than 5.5 times and EBIT to Interest of more than 1.2 times could also indicate a sustainable improvement in YRCW's credit profile that would merit a higher rating.