Werner FinCo L.P. Downgraded To 'B-' From 'B' On COVID-19 Issues And Continued Weak Performance; Outlook Negative

  • We expect that Itasca, Ill.-based Werner FinCo L.P.'s revenues and margins are likely to be hurt by the pandemic COVID-19 outbreak and the recessionary macroeconomic environment.
  • Debt to EBITDA remained elevated over 8x at the end of quarter September 2019, due to lower-than-expected revenue growth and EBITDA margins (not publicly disclosed)
  • We expect the adjusted leverage to remain above 8x, while EBITDA interest coverage to be closer to 1.5x, over the next 12 months, levels more in line with the 'B-' rating.
  • Thus, we are lowering our issuer credit rating on Werner FinCo L.P. to 'B-' from 'B'.
  • At the same time, we are lowering our issue-level ratings on its senior secured debt to 'B-' from 'B'; and on its senior unsecured notes to 'CCC' from 'CCC+'.
  • The negative outlook reflects the risk that leverage will be above 8x or possibly worsen depending on the impact of recessionary pressures over the next 12 months.
CENTENNIAL (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions above. The downgrade of Werner to 'B-' is based on its adjusted leverage at 8.7x at the end of third-quarter 2019 (Sept. 30, 2019) and EBITDA interest of 1.7x for the 12 months ended Sept. 30, 2019. Further, we believe the company's sales as well as EBITDA margins would be negatively affected in 2020 by the economic slowdown resulting from the COVID-19 pandemic. Thus, under our base-case scenario, we expect the adjusted leverage to remain above 8x and EBITDA interest coverage to be around 1.5x for the next 12 months, levels that commensurate with the 'B-' rating.
Our negative outlook on Werner reflects its elevated leverage at over 8x and the increased risk that leverage may remain high or deteriorate further over the 12 months, in light of the recessionary macroeconomic conditions. At the same time, we believe its earnings and cash flows will be sufficient to meet its obligations, such that EBITDA interest coverage stays around 1.5x.
We could lower the ratings over the next 12 months, recessionary macroeconomic conditions result in further deterioration in the company's performance. As a result, leverage could rise above 10x and EBITDA interest coverage could begin trending toward 1x, at which point we may view the capital structure as unsustainable. We could also lower the ratings, if Werner's liquidity was severely affected and the covenant headroom tightened, causing us to view the liquidity as less than adequate.
Though unlikely in the current macroeconomic environment, we may take a positive rating action over the next 12 months, if earnings and cash flows materially improve, resulting in leverage in the 5x-6x range and EBITDA interest coverage sustained above 2x.
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