DBRS Confirms Ryder System, Inc. and Ryder Truck Rental Canada Ltd. at BBB (high) and R-1 (low), Stable Trends

DBRS has today confirmed the Senior Unsecured Debt rating and the Commercial Paper rating of Ryder System, Inc. and Ryder Truck Rental Canada Ltd. (collectively, Ryder or the Company) at BBB (high) and R-1 (low), respectively. The trends are Stable. Ryder (along with Penske Corporation) is one of the two leading nationwide full-service truck leasing companies, providing a wide range of transportation solutions in North America. The Company’s Fleet Management Solutions division provides full-service truck leasing, rental and maintenance services and its Supply Chain Solutions division offers solutions in distribution, transportation and supply chain management, contributing about 68% and 23% of revenue, respectively. A smaller Dedicated Contract Carriage division, which provides drivers and routing services in addition to leasing, generates the remaining revenue.

Although Ryder operates in the cyclical and competitive trucking industry, the Company’s leading market position, consistently strong cash flows and demonstrated ability to manage its fleet capacity during down cycles have helped limit the impact on its credit profile during the recent severe down cycle in 2009. The Company’s market position is supported by its extensive network coverage throughout North America and its ability to offer more value-adding logistic and turnkey solutions, performance and delivery records and relatively lower cost of capital.

Cash flow stability is also supported by contracted revenue in its full-service truck leasing business (accounting for about 35% of total revenue), the Company’s ability to pass through fuel costs to its customers and its ability to generate additional cash flow through the sale of used vehicles.

Ryder’s operating results have rebounded moderately from the bottom-of-the-cycle levels witnessed in 2009, largely as a result of improved demand for rental and leases, improved fleet utilization and recovery in used-vehicle markets. The recovery, together with contributions from companies acquired during 2010 and 2011, resulted in an 18% revenue growth on a year-over-year basis for the nine-month period ended September 30, 2011, and pre-tax margins improved to 4.9% from 3.7%. Assuming a gradual economic recovery, DBRS expects the moderate revenue growth to continue and profit margins to improve as the Company’s fleet maintenance costs decline as it rejuvenates its fleet.

DBRS also notes that Ryder has increased its capital expenditures and made five acquisitions since the beginning of 2010 to support its growth, and that the Company has publicly stated that its long-term debt-to-equity target is 275% (up from the current level of 220%). As a result, cash flow-to-debt for the 12-month period ended September 30, 2011, weakened to 35% from 43% in 2009, and debt-to-EBITDA increased to 2.7 times (x) from 2.2x despite improved operating performances. We believe that these capital expenditures could enhance Ryder’s medium-term competitiveness by expanding its geographic coverage (in the western United States and in the United Kingdom) and rejuvenating its fleet. However, such debt-financed expansion could result in further weakening of Ryder’s financial metrics. Since Ryder’s core leasing and rental businesses generate annuity-like cash flows, DBRS has a higher tolerance of Ryder’s financial ratios for its BBB (high) ratings, compared with those of similarly rated industrial or manufacturing companies.

DBRS notes that its R-1 (low) Commercial Paper rating typically corresponds to an issuer long-term rating of A (low), a notch higher than Ryder’s BBB (high) rating. This has been justified based on our expectation of the Company’s better-than-average liquidity and ability to generate steady operating cash flow through the cycle by swiftly adjusting its capital expenditures to market demand. This was demonstrated during the cyclical trough in 2009. However, as Ryder increases its leverage toward its stated target, this could put pressure on its short-term Commercial Paper ratings. The Company’s continued strong liquidity level and ability to conserve cash in a down cycle would be crucial to its ability to maintain the current Commercial Paper rating level.

The Stable trend reflects that the ratings could be constrained by industry cyclicality, the Company’s growth appetite and our expectation of a weaker financial profile in the medium term. It also reflects our expectation that Ryder would adhere to its leverage target and proactively scale down its fleet capacity in the event of another market downturn, as it did in 2009.

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

The applicable methodology is Rating Companies in the North American Trucking Industry, which can be found on our website under Methodologies.