Moody's, Fitch Downgrade Forward Air Debt; Stock Decline Now Above 90%

Moody's Ratings last week downgraded the ratings of ClueOpCo, a wholly owned subsidiary of Forward Air FWRD that was created following the so-far-disastrous acquisition of Omni Logistics last year. The Moody's MCO action took down the corporate family rating of ClueOpCo to B2 from Ba3. That is a decline of two steps in one action, when a one-step increase or decline tends to be the norm.

The Moody's action also downgraded the ratings of Forward Air's senior secured first lien term loan, which as of early last week was trading at an equivalent of an 11.5% yield though its face value is a 9.5% yield. The rating on that loan was also cut to B2 from Ba3.

But the outlook for the Forward Air debt at Moody's was changed to negative from stable. A more common scenario is that a company that had been on a negative outlook and sees its rating downgraded will then see its outlook changed to stable, with the idea that the new lower rating more accurately reflects the company's prospects for servicing its debts. Dropping a company two ratings and then moving it to negative from stable is a sign of deep uncertainty on the part of Moody's.

The B2 rating at Moody's and a Fitch rating downgrade, also last week, are considered less than the B1 rating that S&P Global Ratings placed on Forward in February. That move by S&P SPGI also was a two-notch decline, down from BB-. But the S&P rating — issued soon after Forward Air and Omni Logistics settled their legal battle over the Omni acquisition in Delaware Chancery Court — also came with a stable outlook, in contrast to the negative outlook that Forward Air is now sporting at Moody's.

At the time, S&P said the stable outlook "reflects our expectation that the company is likely to achieve [funds from operations] to debt in line with the rating over the next 12 months despite the current freight recession."

Fitch Ratings downgraded the default ratings for Forward Air and ClueOpCo to B from BB-. A B rating on the Fitch scale is considered equivalent to the Moody's B2 rating. But its outlook for Forward Air was labeled stable. Fitch had moved its outlook in February to negative at approximately the same time as S&P's downgrade. Its outlook is now stable. 

There is little positive in the Moody's commentary connected to its downgrade: "The ratings downgrade and negative outlook reflect Moody's view that Forward Air's credit metrics will remain weaker than previously expected through 2025. The higher than anticipated leverage is due to a combination of the significant increase in debt related to the acquisition of Omni and the sustained softness in the freight transportation industry."

At the end of last year, Moody's said Forward Air's ratio of debt to prior 12 months' earnings before interest, taxes, depreciation and amortization was about 6.7X. It expects that level to remain above 5X for the next 18 months.

"Moody's does not expect a significant uplift in the industry until the latter half of 2024 and any further delay in the transportation market's recovery will constrain the company's capacity to withstand adverse developments at the current rating" the report said.

Governance a "significant factor"

The litigation that ended in January, in which Forward Air tried to kill the Omni deal following equity markets' huge rejection of it, was a rationale for the Moody's downgrade. 

"Moody's considers governance a significant factor in the rating action given management's attempt to terminate the acquisition resulting in subsequent litigation and deterioration in credit metrics" the report said. "Further, the developments have resulted in a change in management that will have to implement and execute on significant restructuring initiatives in order to realize expected synergies and improve operating results."

Last week, the company announced the departure of Rebecca Garbrick as CFO, to be replaced on an interim basis by Jamie Pierson. Garbrick had been CFO since 2020.

Thomas Schmitt, the CEO who engineered the Omni acquisition, left soon after the agreement with Omni was announced. Shawn Stewart, an ex-CEVA Logistics executive, was named CEO of Forward Air in late April. J.J. Schickel, the CEO of Omni, also left the combined company.

The Fitch commentary was more positive than Moody's. It said Forward Air is expected to improve "operating execution" and have "modest sequential improvement in operating earnings" in the legacy Forward business as well as Omni, plus "moderating of one-time costs."

Debt loads are expected to be reduced through "prioritization of deleveraging-focused capital allocation" as well as elimination of dividends. Forward suspended its dividend in the first quarter.

Divestitures are a possibility, Fitch said, but were not assumed in setting the rating.

Forward Air's 52-week-high stock price was $121.38 on July 27, 2023. The acquisition of Omni was announced Aug. 10, when the stock opened at $113.36 and closed at $104.02. It got as low as $61.56 on Aug. 27 before rallying somewhat, and then resumed its slide to bring it to its current level, with a 52-week low set last week at $11.21, a decline of 90.7% from that late-July high.

The Moody's estimate of a 6.5X debt-to-EBITDA ratio stands in stark contrast to what the companies said at the time of the merger. Total leverage at the time was expected to rise to 3.5X and fall to 2X within two years of the closing, a performance that clearly is not going to occur.

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