S&P: XPO Logistics Inc.'s Senior Secured Debt Rated 'BB-' (Recovery Rating: '1'); Existing Debt Ratings Affirmed
At the same time, we assigned our 'B-' issue-level rating and '5' recovery rating to the company's proposed senior unsecured notes due 2023. The '5' recovery rating indicates our expectation for modest (10%-30%; lower half of the range) recovery of principal for debtholders in the event of a payment default.
We also affirmed our 'BB-' issue-level rating on the company's $1.6 billion senior secured term loan B. The '1' recovery rating is unchanged, indicating our expectation for very high (90%-100%) recovery of principal for debtholders in the event of a payment default.
In addition, we affirmed our 'B-' issue-level rating on XPO's senior unsecured notes due 2019, 2021, and 2022. The '5' recovery rating is unchanged, indicating our expectation for modest (10%-30%; lower half of the range) recovery of principal for debtholders in the event of a payment default. We will withdraw the ratings on the 2019 notes upon close of this transaction and full repayment of the notes.
Furthermore, we affirmed our 'CCC+' issue-level rating on the company's senior unsecured notes due 2018 and senior unsecured debenture due 2034. The '6' recovery ratings on both debt are unchanged, indicating our expectation for negligible (0%-10%) recovery of principal for debtholders in the event of a payment default.
XPO will use the proceeds from the incremental term loan and notes issuance to redeem the $900 million notes due 2019.
Our corporate credit rating on XPO reflects the company's highly leveraged capital structure, aggressive growth strategy, and position as one of the largest and most diversified providers in the fragmented U. S. third-party logistics market. XPO has been making concerted efforts to improve its operating efficiency, which has typically been a weak point in the rating, after the company's EBITDA margins declined as a result of its rapid growth path. We assess the company's business risk as fair and its financial risk as highly leveraged. For the 12 months ended June 30, 2016, XPO's credit metrics improved, such that funds from operations (FFO) to debt increased to 10% from 2% year earlier and debt to EBITDA declined to 6.2x and from 21.1x.
Our rating outlook on XPO is stable. We could lower our rating on the company if its FFO to debt is consistently in the mid-single-digit percentage area or lower. We could raise the rating if XPO moderates its growth strategy, generates positive operating cash flow, and improves FFO to debt to the mid-teens percentage area and we believe it will stay there.