Echo Going to Debt Market; Highly Speculative Ratings Issued

Echo Global Logistics may be about to be acquired by The Jordan Co., but it is going to be Echo's name on a pair of newly rated debt instruments to be issued as part of the acquisition.

Echo ECHO and the new debt offering as part of the merger were given what amounts to a pair of mirror-image ratings by Moody's Investors Service and Standard & Poor's Global Ratings earlier this week. 

The ratings in both cases are at a level described as highly speculative. They are not investment-grade ratings; a more colloquial definition puts them in the category known as "junk." 

Moody's gave Echo Global a first-time corporate family rating of B2. A first-time rating means Moody's would not have had an existing rating on Echo so there is no comparison to an earlier level.

Meanwhile, S&P Global Ratings gave Echo an issuer credit rating — similar in definition to the Moody's corporate family rating — of B. Moody's B2 and S&P B ratings are considered roughly equivalent. 

Moody's also gave Echo Global a B1 rating to the credit instruments that are going to be used to finance the acquisition by Jordan. That rating will be given to the $100 million revolving credit facility and a $550 million term loan being issued. The B1 rating is one notch higher on the scale than the B2 Corporate Family rating.

The ratings given by S&P Global on the specific debt instruments paralleled those of Moody's. A rating of B+ was given by S&P; B+ is considered on par with Moody's B1 rating. 

S&P gave a recovery rating to the new Echo debt of 2. It is the third-highest rating in the company's seven-step recovery rating scale. S&P Global defines a 2 as representing "an expectation of substantial (i.e., 70-90%) recovery in the event of default."

The revolving credit facility expires in 2026. The senior secured first lien term is due 2028. Financing from those two instruments, along with what Moody's said was $743 million of cash equity, will be used to finance the Jordan acquisition. 

Echo's market capitalization as of Thursday was $1.28 billion, according to Barchart. The announced deal in September was for Jordan to acquire Echo for $48.25 per share. Echo stock closed Thursday at $48.12. 

In its brief commentary on its action, Moody's said the rating of B2 is "constrained by Moody's expectation for aggressive financial policies and high financial leverage over the next 12-18 months."

Under the Jordan ownership, Moody's said, Echo would be expected to "complement its historically organic growth strategy with acquisitions to add capabilities given the very fragmented nature of the third-party logistics market."

Ratings agencies are primarily concerned with EBITDA and the ratio between it and debt. At the end of June, according to Moody's, Echo's debt/EBITDA was about 6.9 times (meaning the EBITDA could cover the debt 6.9 times). But Moody's said it expects that ratio will "moderate" to about 5.5 by the close of next year. 

Echo's current EBITDA margin, Moody's said, is below 4%, which the ratings agency described as "low" and "further constrained … [by] ongoing investment required in its technology platform which connects the company to both [shippers] and [carriers]."

S&P said it expects Echo's credit metrics "to improve modestly over our forecast." Total debt will increase after the acquisition by Jordan, S&P said, with debt to EBITDA increasing to "the 6X area in 2021," though the Moody's analysis put that ratio at closer to 7 at midyear. But the S&P analysis also said it expects the ratio to drop down to the mid-5X area next year, in line with what Moody's also concluded.

Both analyses were bullish on the freight market, where Echo does business. S&P Global Ratings, which also gave a "stable" rating on the company's debt — meaning the rating is not likely to be upgraded or downgraded anytime soon — said it was bestowed with that designation because of the expectation "that it will benefit from strong demand for freight transportation and the increased use of its proprietary software for efficiency gains."

The ratings agency also said it expects freight prices to remain "elevated" into 2022. "That said, we believe freight prices will begin to moderate later in 2022 as supply headwinds ease and consumer spending trends normalize," the analysis said. 

Moody's said it expects Echo Global's revenue to be near $3.7 billion by the end of next year. After nine months of 2021, it stood at $2.7 billion, just about $1 billion more than where it was after nine months of 2020.

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