The rating downgrades reflect ACBL's elevated financial risk as a result of a high debt burden and prolonged weakness in its liquid and dry cargo markets that have led to lower than expected operating performance, Moody's said. Moody's estimates adjusted debt-to-EBITDA leverage to exceed nine times, well in excess of Moody's expectations and very high for the company's operating profile. Positive demand indicators in the end markets and efficiency gains should support some improvement in operating cash flow and modestly strengthen credit metrics, including leverage falling towards eight times by early 2019, Moody's said. However, a meaningful recovery seems unlikely in the near term amid freight rate pressures that will continue to weigh on earnings from persistent supply-demand imbalances, the company said.
The Caa1 CFR reflects Moody's expectation of high financial leverage and constrained credit metrics at ACBL for some time. Elevated leverage limits its flexibility to withstand shocks from end market weakness or competitive pressures. The rating considers the company's position as one of the largest operators in the domestic dry cargo and liquid barge transportation markets. It also recognizes the leaner structure from ongoing productivity and cost reduction initiatives undertaken in recent years, the full benefits of which also depend on an improvement in business conditions.
Moody's anticipates the liquidity profile will be weak through 2019. About break-even free cash flow and cash generally less than $5 million are insufficient relative to the required term loan amortization of approximately $58 million annually. Therefore, Moody's expects ACBL to continue to rely on its $640 million revolver (over 50% currently drawn), particularly for debt service payments. There is availability under the facility, although there is a fixed charge coverage covenant that springs when availability falls below $64 million. Absent proceeds of asset sales applied to the reduction of revolver borrowings, the cushion relative to the covenant threshold is likely to be diminished and Moody's does not believe the company would be able to meet the covenant test at this time for that last $64 million of availability. Moody's recognizes that the company has historically employed this cash management strategy given its limited internal sources of cash flow.
The negative outlook reflects Moody's expectation of a low likelihood of a near term material recovery in the pricing environment, balanced against expectations that the company will continue managing costs in line with demand conditions to achieve positive, albeit modest, free cash flow generation, which would alleviate liquidity pressure.
The Caa2 senior secured bank facility rating reflects Moody's expectation of recovery in the liability structure and the relative position of the secured bank debt, which ranks behind an asset-based lending revolving credit facility in priority of claim.
Moody's said the ratings could be downgraded if demand for the company's transportation services remains subdued and there is a lack of progress with reducing debt-to-EBITDA towards eight times or expectations of deteriorating liquidity, including sustained negative free cash flow generation. Debt-funded acquisitions or shareholder returns would also pressure the ratings.
The ratings could be upgraded with expectation of sustained improvement in business conditions and realization of operational initiatives, resulting in a stronger liquidity profile including positive free cash flow generation, or debt-to-EBITDA to be sustained below six times, funds from operations (FFO) plus interest to interest above two times or FFO-to-debt above 7.5%.
ACBL is one of the largest integrated marine transportation and services companies in the U.S., providing barge transportation services and construction of barges, towboats and other vessels. The company is owned by affiliates of Platinum Equity LLC. ACBL acquired AEP Resources Inc. and its subsidiary AEP River Operations LLC from American Electric Power Company Inc. in November 2015. ACBL is a fully-integrated river transportation and services company, focusing on the movement of bulk and liquid products. Revenues were $1.05 billion as of the 12 months ended Sept. 30, 2017.
New York-based Moody's Investors Service is a wholly owned credit rating agency subsidiary of Moody’s Corp.