C.H. Robinson is back to its long-time debt rating of BBB+ from S&P Global Ratings, after about 15 months at a level one notch below that.
The ratings agency on Wednesday increased the rating of the giant 3PL by one notch to BBB+. It had cut that rating to BBB in May 2024, after the company had held a BBB+ since at least 2018.
But the May reduction came right about the same time that C.H. Robinson (NASDAQ: CHRW) was beginning its turnaround, at least as far as its earnings demonstrated. A strong first quarter 2024 report sent the company’s stock price soaring, and that has been followed by continuing solid financial reports and a rise in its stock price of about 73% since the end of April 2024. The stock is up almost 24% just in the last month.
The S&P Global (NYSE: SPGI) rating is considered one notch above the Moody’s (NYSE: MCO) rating of Baa2 for C.H. Robinson. Moody’s affirmed that rating in late June. Both ratings are in investment-grade territory.
Headcount cuts came faster than expected
Geoffrey Wilson, the San Francisco-based S&P Global analyst who conducted the analysis leading to the C.H. Robinson upgrade, said the relatively quick turnaround in C.H. Robinson’s fortunes owed to several developments. But one stood out.
“One is that they significantly and very quickly rightsized their head count,” Wilson said in an interview with FreightWaves.
Wilson said many 3PLs, during the post-pandemic freight boom of 2022, were facing “rising rates that made for some good times.”
“And what we saw were a lot of companies that wanted to take advantage of the good times and maybe take a disproportionate piece of market share that was growing there,” Wilson said. That push came with adding headcount.
But the problem these companies encountered when the good times slowed is that they were dealing with a new capital structure that was now facing low freight rates and rising interest rates. “The capital structure was completely different from how they foresaw the next two years,” Wilson added.
Wilson alluded to last year’s S&P Global downgrade of C.H. Robinson and its proximity to the evidence of a turnaround. “When we ultimately downgraded them, it was early days of the head count restructuring but we just didn’t see how it could be done quick enough to give them the sources of liquidity needed,” he said.
At C.H. Robinson, Wilson said, executives were saying on earnings calls as early as the fourth quarter of 2022 that cutbacks were likely. “What we’ve seen since then is a very quick headcount restructuring that to this day is still going on,” Wilson said.
The S&P Global report notes that personnel expenses at C.H. Robinson have dropped 19% since a fourth quarter 2022 peak. Average headcount is down 27% since then.
Ultimately, ratings agencies rely on numbers in deciding whether to upgrade, downgrade or hold steady a company’s debt rating. In its release announcing the change, S&P Global said the metric of funds from operations to debt at C.H. Robinson has been above 45% since the fourth quarter of 2024, a key metric.
The ratings agency said it expects C.H. Robinson to sustain that coverage at “well over” 45%,”which comfortably exceeds our previous upside threshold for our rating.” That metric was another key number that led to the upgrade, S&P Global said.
Debt load is reduced
Another development cited by S&P Global was debt redemption by C.H. Robinson. The ratings agency said the 3PL has fully repaid a $141 million balance on its revolving credit facility and reduced its borrowing under an accounts receivable lending facility by $70 million.
Other metrics cited by S&P Global are efficiency-driven. For example, the agency said, shipments per person per day “have grown at a double digit percentage for over two years, supported by automation and digital capabilities.”
The upgrade came with an outlook of stable. A stable outlook means conditions are such that an upgrade or downgrade in the short to medium term is not likely; C.H. Robinson had a negative outlook prior to its 2024 downgrade.
“The stable outlook reflects our view that operational efficiencies gained over the past few years can offset potential industry headwinds arising from trade policy uncertainty,” the report said. It added that S&P Global expects the FFO to debt metric to be in the mid 50% range for this year.
In a prepared statement, C.H. Robinson said the upgrade “reflects the meaningful progress we’ve made in strengthening our financial profile, driven by disciplined capital allocation, sustained market outgrowth, margin expansion and productivity improvements, and a resilient operating model. Despite persistent freight market headwinds, our strong business performance and focus on operational improvement initiatives have enabled us to maintain healthy leverage ratios and consistent cash flow, which S&P recognized as key contributors to our improved credit standing.”
The increase in C.H. Robinson’s debt rating is particularly notable given what has happened to the debt ratings of the small group of other 3PLs that have publicly-traded debt.
RXO (NYSE: RXO) was cut by S&P Global to BB, a non-investment grade rating, in May 2024. Echo Global Logistics has been at B- since October 2023. Odyssey Logistics’ move to a B- rating took place in early June.
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