Odyssey Logistics has had its debt rating upgraded by Moody’s Investors Service, with its commentary providing a small window into the current 3PL market.
There are few publicly traded 3PL companies; CH Robinson (NASDAQ: CHRW) is by far the biggest. And there aren’t many 3PLs with publicly traded debt that receive ratings from major rating agencies like Moody’s.
Conditions are good enough for Odyssey, which is owned by private equity firm The Jordan Co., that it led Moody’s to raise its rating for the company from B2 to B3, while its default rating probability is changed from B2-PD to B3-PD .
On specific debt issues, Odyssey’s senior secured debt was upgraded from B1 to B2 and second-tier senior secured debt was upgraded from Caa1 to Caa2.
Odyssey’s outlook for its debt rating has been listed as stable, meaning conditions are not in place for a further upgrade or downgrade to its rating.
With a family rating of B2, Odyssey’s debt is still deep in non-investment or “trash” territory. It is now five notches in non-investment territory. In contrast, CH Robinson’s debt rating was confirmed earlier this year at Baa2, which is investment grade and six notches higher than the last Odyssey rating.
Odyssey, which specializes in the brokerage of chemicals, metals and bulk liquids, has received three Moody’s shares in the past three years. In late August 2021, Moody’s changed Odyssey’s outlook from stable to negative. A year earlier, Odyssey had its B3 rating confirmed by Moody’s.
In its late August review, Moody’s said Odyssey’s debt-to-EBITDA ratio had “significantly improved” from a 7x ratio at the start of 2021 to a 4.3x ratio in June. “Higher volumes and freight rates over the past 12 months have supported Odyssey’s significant revenue and earnings growth,” the analysis said.
That revenue growth is expected to slow “significantly” to around 3% next year, “as general freight market conditions normalize from the past two years.” About half of Odyssey’s revenue is based on industrial activity, the report said, citing the chemicals and metals business. “Moody’s expects demand in these end markets to remain strong through 2022, but notes that these markets are more susceptible to lower volumes and earnings pressure during an economic downturn.”
And if those markets slow down, Moody’s said, “the operational efficiencies and cost reduction actions the company will take in 2022 will keep its EBITDA margin above 11%.” EBITDA margin is defined as a company’s operating profit as a percentage of revenue.
Rating agencies’ concerns are strictly driven by a company’s ability to service its debts. Moody’s said “event risk” at Odyssey is high, given that the 3PL could “increase leverage to pursue acquisitions,” or conversely take on new leverage to make distributions to its shareholders, including Jordan. Most of Odyssey’s debt matures in two years, Moody’s said. And “although not a concern at this time, rollover risk will become more prevalent in the second half of 2023.”
Moody’s said Odyssey has “adequate liquidity” through next year, with cash on hand of about $30 million and full access to a $60 million revolving line of credit. The agency said a line of credit of this size is “modest” for the company’s revenue base.
In its report last year changing the outlook to stable, Moody’s said Odyssey’s revenue for the 12 months ended March 21, 2021 was about $880 million. He didn’t give a figure in the report accompanying the upgrade, but frequent references to year strength suggest revenue was significantly higher.
Another measure of a company’s ability to service its debt is its free cash flow to debt. Moody’s said it expects Odyssey to generate “at least” 5% FCF this year and next, “which is significantly above historical levels.”
A spokeswoman for Odyssey declined to comment on the report.
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