Markets & Finance

S&P Assigns Triple-'B' to Roadway Debt


On Oct. 8, Standard & Poor's assigned its triple-'B' corporate credit rating to Roadway Corp. Roadway's $325 million bank facility and proposed $225 million senior notes due 2008 were also assigned a triple-'B' rating. The outlook is stable.

The ratings reflect Roadway's strong competitive position in the national less than truckload (LTL) market, satisfactory operating history, and solid financial profile. Its pending debt-financed acquisition of regional next-day LTL operator Arnold Industries for $566 million improves Roadway's business position modestly, but the cyclical and competitive nature of the LTL trucking market is a concern.

The bank facility consists of a $150 million five-year revolving credit facility and a five-year $175 million term loan both guaranteed by Roadway's major subsidiaries and secured by the stock of these subsidiaries. The proposed $225 million senior notes will also be guaranteed by Roadway's operating subsidiaries and will be secured by the stock of these subsidiaries as well. The revolver will initially be undrawn. The $325 million bank facility was not rated higher than the corporate credit rating on the company because it is secured by the stock of the operating subsidiaries and not by the tangible assets of the subsidiaries.

Akron, Ohio-based Roadway Corp. is the holding company for Roadway Express, one of four large national LTL carriers. The pending acquisition of Arnold Industries, scheduled to close by year-end, will add the highly profitable but modest-size New Penn Motor Express, a unionized regional next-day LTL carrier in the Northeast, and Arnold Transportation Service (ATS), a truckload carrier based in Florida. The Arnold Logistics division is expected to be sold to Edward Arnold, the CEO of Arnold Industries, for $105 million concurrent with the closing of the merger. The estimated $75 million after tax proceeds from the sale will be used to repay bank debt. New Penn and ATS will be operated as independent subsidiaries of Roadway, limiting integration risks.

Roadway Express operates mostly two-day and longer LTL service in the U.S., Canada, and Mexico from a network of 388 terminals. It also provides truckload, regional LTL, and specialized trucking services. Roadway Express improved operating performance through 2000 but the weak economy and higher costs have led to reduced operating margins of around 2% through the first three quarters of 2001. The acquisition of New Penn ($236 million in 2000 revenue compared with over $3 billion for Roadway Express) is Roadway's entry into the higher margin next-day market. New Penn is the most efficient LTL operator in the industry, with an operating ratio (operating expenses divided by operating revenue) of 79.1% in 2000, compared with 96.8% for Roadway.

New Penn has been very successful in the operationally challenging Northeast due to its focus on the high margin next-day segment of the market and heavy lane density due to its strict regional focus. Regional operators like New Penn have experienced faster growth and higher profits than the national LTL carriers due to the smaller terminal network required, growth in regional shipments, greater direct shipments, and more regular routes.

Prior to the acquisition, Roadway's financial measures were strong due to minimal use of debt. The acquisition will increase Roadway's lease adjusted debt to capital ratio to around 60% from just over 25% in 2000. However, Roadway plans, but is not required, to pay down the debt rapidly; lease-adjusted debt to capital ratio could be around 50% by the end of 2002. Despite New Penn's size, the acquisition of Arnold will likely have a positive impact on Roadway's profitability. Operating margins could improve due to the acquisition of Arnold and cost reductions at Roadway. Although Roadway's debt will be significantly greater, cash flows should be more than adequate to cover interest and permit some early debt reduction. EBITDA interest coverage of over 5 times is likely in 2002. Funds from operations to debt should be over 35% in 2002. Financial flexibility is solid due to revolver availability (about $94 million at closing), modest near-term debt payments, and about $75 million in cash. Roadway has cut back on capital expenditures in 2001 and can continue to restrain capital expenditures through a short downturn. Maintenance capital expenditures in a prolonged downturn could be reduced below the projected $75 million per year level.

The weak economic environment, made worse by the tragic events of Sept. 11, 2001, will likely challenge plans for improved profitability. However, both companies have solid records of successful operations. The ratings and outlook incorporate the sale of Arnold Logistics and debt reduction with the net proceeds. From Standard & Poor's CreditWire


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