DBRS Confirms Ryder System at BBB (high) and 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). The trends are Stable. Ryder’s financial and business risk profiles remain consistent with the above ratings, with relatively steady credit metrics over the past year despite materially weaker freight industry conditions. The confirmation of the Commercial Paper ratings primarily reflects the stability in cash flow coverage, which remains favourable at current levels. The Company is a global leader in transportation and supply chain management solutions, with a large and diversified contract-based full-service leasing and maintenance business that adds stability to cash flow. However, Ryder is also exposed to cyclical fluctuations in demand for its services, and faces risks associated with its growth-via-acquisition strategy.

The sharp downturn in freight industry conditions over the 12 months to September 30, 2009, led to a material decline in operating earnings in each of Ryder’s business divisions. Slowing demand related to the U.S. economic recession contributed to a reduction in units in service (i.e., trucks, tractors, trailers) and miles driven as customers downsized their fleets and the number of lease renewals declined. Notable weakness was experienced at the Company’s highly cyclical commercial rental business (included in its Fleet Management Solutions division) and Supply Chain Solutions division, which is exposed to the challenges faced by the domestic automotive original equipment manufacturers. DBRS expects that earnings will remain low over the near term and well below 2008 levels, but a sharp decline from currently weak levels is viewed as unlikely. While DBRS expects freight volumes and customer activity levels to remain subdued, modest signs of stabilization in economic conditions and in the Company’s business (i.e., reduced rate of mileage declines and fleet reductions, sequentially) reduce the risk of further significant downside, in DBRS’s view.

Despite the deterioration in earnings, Ryder’s cash flow generation has remained solid and its core credit metrics modestly improved over the past year. The medium/long-term nature of the Company’s full service lease business (with contracts averaging roughly six years) and high levels of depreciation provides a degree of stability to cash flow from operations. Depreciation has increased due to fleet additions during the previous years of strong growth in demand. Over the past year, Ryder has significantly cut capex for new vehicle purchases (while continuing vehicle sales) in light of the prevailing market softness, which led to sharply higher free cash flow generation. Free cash flow enabled the Company to materially reduce debt, which included a $100 million public tender offer in Q3 2009, and drove the improvement in its credit profile. Adjusted debt-to-capital declined to below 65% (from 69% at end-2008) and debt-to-EBITDA remained near 2.0 times, levels which are acceptable for the ratings, particularly during bottom-of-the-cycle conditions. (Ryder is afforded a higher level of leverage given the nature of its business, which is backed by significant saleable assets and historically stable cash flows.)

Over the near term, DBRS expects Ryder’s financial profile to remain relatively stable and acceptable for the ratings. Significant debt repayment is not expected, as the Company is well below its long-term targeted debt-to-equity range of 250% to 300%. In addition, while net capex has significantly declined, an increase in vehicle purchases would be expected to replenish a portion of its fleet in 2010, which would reduce free cash flow generation. In addition, Ryder recently resumed its share repurchase program due to the increase in its free cash flow. While buybacks are viewed negatively in the current environment, they are likely to be modest. The ratings are expected to remain stable, but a prolonged weak demand environment or return to negative economic growth could add pressure to the ratings.

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.