DBRS Confirms Ryder at BBB (high), R-1 (low)

DBRS has today confirmed the long- and short-term ratings for Ryder Truck Rental Canada Ltd. and Ryder System, Inc. (Ryder or the Company) at BBB (high) and R-1 (low), respectively. The trends are Stable. Ryder generated relatively stable operating performance over the past year, with modest improvement in cash flow coverage. The Company’s Fleet Management Solutions (FMS) business, which accounts for the bulk of operating earnings, provides a high degree of earnings and cash flow stability that should help mitigate the impact of the weakening U.S. economy on its financial profile.

DBRS expects Ryder’s earnings and cash flow to moderate over the near term but to remain acceptable for the ratings. The key headwind facing the Company is slowing demand related to the economic downturn, notably in the United States (the largest share of Ryder’s sales). Continuing weak U.S. economic conditions will pressure commercial rental sales, and are likely to constrain the rate of fleet asset sales and earnings from Ryder’s Supply Chain Solutions (SCS) business (which is exposed to automotive industry customers). In addition, the renewal of lease contracts (in its FMS division) in 2009 will likely become more challenging.

Despite the aforementioned challenges, earnings and margins are expected to remain acceptable (albeit below 2008 levels) over the near term. The Company’s FMS business is primarily engaged in full-service leasing, and its revenues and earnings are highly stable. Lease contracts average five to six years in duration, consisting largely of a fixed charge component, and the customer base is well diversified by industry. While a portion of this business is up for renewal each year, renewals in 2009 will account for less than 20%, which reduces downside exposure. In addition, recently announced restructuring initiatives should benefit earnings. Weak commercial rental sales are expected to decline further in 2009, but constitute a modest share of Ryder’s overall business. The outlook for Ryder’s SCS business remains challenging, but further margin weakness is unlikely to have a substantial impact on earnings.

Ryder is expected to continue to generate free cash flow over the near term, which provides financial flexibility. Moderately lower earnings are likely to be offset by a reduction in net capex related mainly to lower investment levels in fleet expansion. Free cash flow is expected to be used toward modest acquisitions, but this is consistent with the Company’s growth strategy and unlikely to be a large use of cash. The suspension of Ryder’s share repurchase program will help it preserve liquidity, and limit further increases in debt. Liquidity is favourable, and the Company does not face significant near-term debt repayment requirements. Its global credit revolver expires in mid-2010, but refinancing is not expected to be an issue. The key risk to Ryder’s ratings, particularly for its commercial paper, is a prolonged deterioration in the economic environment, which could lead to a material decline in earnings and cash flow.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.