Poised For Acquisition, Transplace Gets Mostly Positive Outlook From Moody's

Just as Transplace is about to disappear as a separate company, to be acquired by Uber Technologies and partner with the Uber Freight division, Moody's Investors Service has opened a window into some of the transportation management company's finances.

The recently released Moody's report did not change the company's B2 long-term debt rating, which is about halfway on the ladder of speculative debt ratings maintained by Moody's. All of the B ratings are defined as "speculative and subject to high credit risk." 

The outlook for the company is "stable," meaning conditions do not merit an upgrade or a downgrade, nor are trends headed in either direction.

But the Credit Opinion issued by Moody's is mostly positive on the outlook for Transplace. 

While the report does not disclose the company's revenue and profitability, it does provide some insights that show a strengthening profile at the company.

Specifically, since Moody's is overwhelmingly concerned with any company's ability to service its debt load, the focus in the report is on debt metrics. In some ways, the report on Transplace's debt is almost moot; as Moody's notes, when Uber UBER acquires Transplace, existing Transplace debt is expected to be repaid.

But the debt level of Transplace would have been a consideration in the final price paid by Uber, $2.25 billion. Closing is expected later this year or early next year.

The financial metrics at Transplace have improved, according to Moody's. The all-important debt to earnings before interest, taxes, depreciation, and amortization ratio was near 4.5X on June 30 of this year, down from 5X for fiscal 2020, Moody's said. That ratio "is expected to fall toward 4X by year-end 2021," it added.

"Free cash flow will again be comfortably positive (at least $20 million) despite higher investment in working capital and capital expenditures to meet strong top-line growth," the report said. It also said Transplace had $39 million in cash at the end of June and expects that level to be maintained. 

Finances have improved at Transplace because of "new contract wins," according to Moody's.

Spelling out other financial details at the company, Moody's said transportation management solutions account for about 65% of net Transplace revenues, with 3PL services accounting for the balance. "The logistics industry is large and highly fragmented, yet Transplace maintains a high customer retention rate (mid-90%) and has demonstrated accelerated growth in new wins over the past couple of years," the ratings agency said.

Transplace has ridden the broader industry surge, with one of its credit strengths listed as "strengthening industry fundamentals supporting revenue and earnings growth."

"Transportation management and the broader 3PL service industry continue to benefit from accelerating customer awareness and focus on reducing supply chain costs and improving logistical efficiencies through the outsourcing of freight management," the report said.

Moody's is positive about the Uber Freight acquisition. "It is expected that Transplace's deep integration with carriers in its managed transportation offerings will complement Uber Freight's growing network of shippers in its brokerage operations," Moody's said. 

What Moody's called Transplace's "external liquidity" is served by a $90 million revolving credit facility that expires in November 2022. So far, it only has been tapped for $10 million. 

The report also notes that Transplace has a $435 million term loan that carries a rating of B1, one level higher than the corporate "family" rating of B2. That is a first lien senior secured credit facility. A second lien term loan of $100 million carries a Caa1 rating, as repayment of that is secondary to the $435 million facility. Caa1 is two notches below the B2 family rating.

What's notable in the report is that although there are several references to Uber Technologies' acquisition, it is written as if Transplace were going to stay owned by TPG Capital, which is selling Transplace to Uber. For example, in reviewing the environmental, social and governance considerations at Transplace, Moody's writes when discussing governance as if TPG ownership will continue.

"Transplace's private equity ownership and concerns around a financial policy that could be detrimental to debt holders is an important consideration," Moody's writes. "We note the risk for a dividend recapitalization or leveraging M&A transactions could weaken the credit profile."

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