Debt Ratings Review: Pilot Remains 'Strong Operator'

A review of Pilot Travel Center's debt by the two largest debt rating agencies paint a picture of a company that is stable and in a strong position as the freight market continues to grow.

While Moody's made no changes to Pilot's debt ratings, Standard & Poor's Global Ratings did take one of its ratings down a notch.

The move by S&P Global on some Pilot debt is significant in that by taking the rating on the company's existing senior secured debt down to BB+ from BBB-, the agency has moved that debt from investment grade to speculative grade. BB+ is the highest speculative grade on the S&P scale, while BBB- is the lowest investment grade. The company's issuer credit rating, which is more of a rating on the company overall rather than a specific debt instrument, already was at BB+.

In line with the decrease in the rating of existing debt by one notch, S&P Global Ratings also raised its recovery rating on the existing debt to a 3 from a 1. A rating of 1 is the highest that the company gives out and reflects the ability of the borrower to ultimately repay its debts. 

Moody's kept its rating on Pilot debt at Ba1, which is considered speculative but is at the highest level of the speculative spectrum. 

The debt rating review was undertaken by Moody's and S&P Global because Pilot is refinancing $3.5 billion of previously existing debt, including preferred equity owned by the company's existing shareholders. S&P Global said the recapitalization was "largely leverage neutral." 

Declan Gargan, the rating analyst at S&P Global who led the review, said the company's overall debt level led to the agency reducing the rating on the existing senior secured debt to BB+, putting that debt offering in the speculative category. 

In the release accompanying the ratings announcement, S&P Global noted that various steps Pilot has taken "have reduced its balance sheet capacity to absorb potential performance setbacks."

Gargan, in an interview with FreightWaves, said that "as a result of the company increasing the level of debt in absolute dollars, and based on our recovery approach, it is our view that there is less value to the senior secured credit in the event of a hypothetical default." He added that the chance of that is "very distant."

Regardless of the change, Gargan said, "we still see Pilot as being a strong operator."

Ratings agencies are concerned with one benchmark: a company's ability to pay its debt, primarily out of earnings and free cash flow. Moody's said the credit profile of Pilot has "good debt protection metrics." S&P Global said Pilot has averaged $1 billion in annual free cash flow over the last five years. 

"Pilot benefits from its meaningful scale, geographic reach, good liquidity and its diverse profit stream," Moody's said.

Among the operating statistics that can be gleaned from the two reports, one thing that can't be extracted is the level of profitability at Pilot. It is not a necessary measurement to determine the ability to repay debt. What matters more is free cash flow and debt-to-earnings ratios. 

But among the operating data in the Moody's and S&P Global reports, readers can learn other facts about Pilot:

• Fuel revenue is about 90% of total sales. But what goes on inside at the stores, like restaurants and other sales, makes up about 42% of gross profit. 

• About 80% of that fuel revenue comes through the sale of diesel and diesel exhaust fluid made through direct billing agreements with fleets, "which adds to the predictability of its revenue stream and further reduces earnings volatility," Moody's said.

• Total revenue at Pilot was about $27 billion in the 12 months ended March 31, according to Moody's. By contrast, full-year revenue at publicly traded Travel Centers of America TA was $4.8 billion in pandemic-hit 2020 and $6.1 billion in 2019. 

• Pricing at Pilot is seen as disciplined by S&P Global. "Although we believe industry pricing remains rational, discounting actions initiated by Pilot's competitors could pressure its volume growth," the ratings agency said. "We expect the company's pricing decisions to remain disciplined as it focuses on its profitability instead of chasing volume."

• After the debt restructuring and cash distribution to its limited liability partners, the company is expected to have approximately $290 million in cash. 

Pilot is currently owned 50.1% by the Haslam family, 38.6% by Berkshire Hathaway and 11.3% by FJ Management. But there are plans in place in which Berkshire Hathaway will ultimately control 80% of the company. Moody's expressed concern that as the company's ownership shifts, "financial policies with respect to dividends and acquisitions could become more aggressive."

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