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. Consistently strong cash flows and a focus on debt reduction helped to limit the impact of sharply weaker trucking industry conditions on Ryder’s credit profile in 2009 and supported the ratings. The Company’s well-diversified full-service truck leasing business, which is largely based on medium- to long-term contracts, has added a degree of stability to cash flow generation and helped to reduce the impact of soft freight demand conditions last year.

Ryder’s operating results are expected to continue to gradually improve from the weak bottom-of-the-cycle levels witnessed in 2009. The sharp decline in 2009 sales highlighted the Company’s sensitivity to industry cyclicality, but this has been factored into the ratings. The worst appears to be over from an earnings perspective and DBRS expects modest growth over the near term. Increased usage of existing lease trucks (miles driven) and stabilization in Ryder’s fleet size from new sales and lease renewals, combined with the rebound in its commercial rental business, are the factors mainly responsible for the more favourable outlook. Importantly, cash flow from operations has remained relatively steady despite the challenging freight environment and is expected to remain in the low-$1 billion range, which provides support to Ryder’s financial risk profile.

DBRS expects the Company’s balance sheet to remain generally stable over the near term, assuming there are no material acquisitions made. Ryder generated significant free cash flow in 2009, mainly from sharply lower capex given the focus on preserving liquidity and reduced need for vehicles (in particular commercial rental vehicles) during the weak demand environment. Cash was used mainly to repay debt, which limited the impact of weaker operating results on coverage ratios.

Over the near term, Ryder will likely continue the year-to-date trend of heavily investing in its fleet to more normalized levels versus 2009, mainly in response to stronger commercial rental demand conditions (Ryder expects gross capex to exceed $1 billion in 2010). As such, free cash flow (as calculated by DBRS) is likely to be modestly negative over the near to medium term, which, combined with reasonable share repurchases, should lead to moderately higher debt levels. However, the Company’s core credit metrics are expected to remain acceptable for the ratings (Ryder has remained below its long-term debt-to-equity target of 300% for several years). The stability in cash flow and the highly saleable asset base afford a higher tolerance for leverage at the current ratings.

DBRS notes that Ryder remains acquisitive. The Company has successfully integrated several companies but future acquisitions could lead to weaker credit metrics if financed with debt. That said, Ryder has been judicious with past financing activity to limit the impact on its balance sheet and remains committed to maintaining a credit profile that is acceptable for its 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.