Yellow Gets 1-Notch Upgrade From Moody's

Yellow Corp. has achieved a significant milestone with an upgrade of its debt rating from Moody's Investors Service.

The ratings agency last week increased Yellow's corporate family rating to B3 from Caa1. Both ratings are in the non-investment grade category, colloquially known as "junk."

But the move upward is not just a step up by one notch. It takes Yellow's YELL debt from a rating that is considered low enough that a default is possible to one still said to be carrying significant risks but not on the level of Caa1. It is in an entirely different category of speculative grade debt, according to various charts of Moody's list of debt ratings.

The move by Moody's also increased the company's probability of default rating to B3-PD from Caa1-PD. The senior secured rating of B1 was affirmed with no changes.

Moody's also issues a liquidity rating. The rating at Yellow was SGL-3, which Moody's describes as "adequate," and was unchanged.

Although the move is positive, the statement Moody's released along with the rating announcement signals the LTL carrier has a long way to go. 

It noted that Yellow has negative free cash flow and still has extensive capital expenditure requirements but already has undertaken some of those spending requirements.

"The B3 CFR is constrained by Yellow's thin operating margins, moderately high financial leverage and negative free cash flow," the statement said. "The rating also reflects the capital intensity of the company's business, which has resulted in unusually high capex spending in 2021."

Yellow is expected to have a slower level of capital spending in 2022 but one that will still be above 2021 numbers, according to Moody's. In the third quarter, Yellow's capex was $96.7 million. A year earlier, it was just over $17 million. 

Yellow was the beneficiary of a package of $700 million in assistance through the pandemic-directed CARES Act, approved in the summer of 2020. The Moody's report said $400 million was designated for capital spending and an upgrade of the company's fleet, which "expedited the replacement of aging tractors, yielding considerable cost savings through better fuel economy and lower maintenance and repair expenses." 

The LTL carrier had a strong third quarter, producing its best operating ratio since 2018. Moody's had praise for the changes in day-to-day activities at the company. "The upgrade of the CFR reflects improved operating performance as Yellow has sharpened its focus on yield management and eliminated unprofitable volume from its freight network," the report said. 

Despite the improved debt rating, Yellow's debt at the end of the third quarter was actually more than at the close of 2020's second quarter. It stood at $1.614 billion at the end of 2021, compared to $1.156 billion at the end of September 2020.

Through nine months of 2021, Yellow posted an adjusted EBITDA of $190.5 million, according to the company's earnings report for the third quarter. In its announcement, Moody's said Yellow could be upgraded further if it can sustain a debt/EBITDA ratio below 5 times. Its full-year EBITDA for 2021 is not on track to be less than that 5X figure.

The Moody's report also noted that a downgrade was possible for several reasons, one of which would be that available cash declined more than $100 million. However, at the end of the third quarter, Yellow reported $358.1 million in cash on its balance sheet, though that was down from $439.3 million a year earlier. 

Moody's also noted positively the five-year contract that Yellow — then called YRC — signed with the Teamsters in 2019. "Earnings growth will also be supported by greater operational flexibility under the company's latest labor contract with the International Brotherhood of Teamsters," Moody's said. It added that the earnings growth also will benefit from Yellow's "ongoing network optimization strategy," which has involved more integration of its regional carriers  New Penn, Holland, and Reddaway with the broader activities of Yellow, including technology integration.

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