XPO Receives Credit Rating Downgrade, Impact of the Freight Market’s Weakness

Overview of XPO’s Credit Downgrade

The credit rating of XPO has recently been downgraded by S&P Global Ratings amidst persistent weakness in the freight market, with expectations that these conditions will linger over the next year.

Key Insights

• S&P Global decreased XPO’s credit rating from BB+ to BB as ongoing poor freight market dynamics predominate.
• The downgrade is attributed mainly to XPO’s acquisition of Yellow Corp.’s terminals, which has led to excess capacity and increased leverage.
• Despite the downgrade, S&P acknowledges XPO’s relative strength in the LTL (Less Than Truckload) sector and projects potential long-term benefits from the Yellow acquisition when market conditions normalize.
• The outlook for XPO has shifted from negative to stable based on these factors.

Understanding the Rating Change

S&P’s downgrade reflects a belief that the freight market is unlikely to see material improvement in the short term. The new issuer credit rating stands at BB, reflecting a downgrade from BB+ and marking 18 months of negative outlook history from S&P.

This is significant as a negative outlook typically foreshadows a downgrade. However, S&P’s recent adjustment offers a glimmer of hope, marking the outlook as stable following a prolonged period of inactivity.

Comparison with Other Ratings

Following S&P’s action, XPO’s rating is now aligned with that of Moody’s, which also rates the company at Ba2, two notches below the line differentiating investment grade from non-investment grade status. Interestingly, just weeks prior, Fitch Ratings had reaffirmed a higher rating of BB+ for XPO.

Impact of the Yellow Acquisition

The acquisition of 28 terminals from bankrupt Yellow Corp. for $870 million is a pivotal issue in this context. S&P’s rationale for the downgrade pointed to elevated leverage stemming from this acquisition. Initially, there were expectations that the freight market would improve following this transaction. However, that optimism has been dampened as actual market conditions have not reflected anticipated recovery, indicating a disconnect between projections and actual performance.

The acquisition has resulted in an excess capacity of about 30% as shipment volumes remain restrained. This situation underscores the challenges currently faced within the industry.

The Freight Market’s Dismal Outlook

The bleak outlook for the freight market is reiterated throughout S&P’s report. It suggests tonnage growth may not return until 2026, with the projected pace insufficient to maintain XPO’s prior rating. Additional uncertainties, like trade policy fluctuations, complicate the forecast and could dampen overall economic growth.

Financial Metrics Impacting the Downgrade

It’s essential to consider several financial indicators that have contributed to this rating adjustment. S&P has noted that XPO’s ratio of Funds From Operations (FFO) to debt might hover in the high 20% range by 2025 but will likely surpass 30% by 2027. This performance metric was notably lower at about 23% during the Yellow acquisition, posing an ongoing concern.

In an analysis of debt levels, XPO’s reported net debt leverage has improved to 2.5X at the end of Q1, down from 2.9X the previous year. The target range stipulated by management remains between 1X to 2X, reflecting a continued struggle to meet these strategic financial thresholds.

XPO’s Competitive Edge

Strikingly, despite the downgrading backdrop, S&P’s report showcases some positive attributes about XPO. The LTL sector is noted for its strong performance and yield growth in the mid-to-high single-digit percentile range over recent years.

With XPO’s stock seeing a notable increase of 23.4% within the past year—notably outperforming peers like Old Dominion Freight Lines—it’s clear that the company retains a competitive edge. Besides, S&P highlights revenue growth from value-added services, indicating that XPO is successful in optimizing its operational model.

Revenue Developments

In Q1 2025, XPO’s purchased transportation costs fell by 8.9% compared to the previous year, despite an overall revenue decrease of just 3.2%. This decrease indicates an efficiency in operations relevant to the logistics process. Even though many newly acquired Yellow terminals are now considered surplus, S&P believes these acquisitions will yield cost benefits in linehaul, pickup, delivery, and dock operations as the market rejuvenates.

Заключение

The ebb and flow of the freight market has been neither favorable nor forgiving for companies like XPO. Even amidst setbacks, S&P recognizes the potential long-term gains from strategic acquisitions as conditions fluctuate.

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