Moody’s (NYSE: MCO) also affirmed Echo’s probability of default rating at B3-PD and senior secured bank credit facilities rating at B2, a notch higher than the corporate family rating.
The ratings agency also held the company’s outlook at stable.
Six notches deep
Both the Moody’s B3 rating and an S&P B- rating are six notches into non-investment grade territory.
Echo Global has been in the public debt markets for approximately four years. Moody’s gave it a B2 rating when Echo Global first issued publicly traded debt, and downgraded it to B3 in November 2023, not long after S&P Global had made its downward shift.
Its move into debt markets came after the once publicly-traded company announced its acquisition by The Jordan Co.
While the Moody’s report does not provide any figures on revenue or profitability, which is standard practice, its general comments suggest a 3PL that is holding its own in the current freight market but with only a small chance of an imminent turnaround.
Market position is steady
“Echo has demonstrated modest freight volume growth despite soft economic conditions, particularly in the manufacturing sector where the company derives a good portion of freight activity,” Moody’s said in its report. “Nonetheless, Echo’s credit metrics, including financial leverage and interest coverage, remain weak. Therefore, we believe the company’s financial flexibility is limited until broader freight market conditions improve.”
A summation of Echo Global’s economics said it was a company that had “low profit margin, high leverage, and expectations for modest free cash flow over next 12 months.” But the report also said Moody’s believes Echo Global “will maintain steady earnings and adequate liquidity as it continues to navigate a persistently challenging freight trucking environment.”
EBITDA margin: count on 3%
EBITDA margins at Echo Global are usually 3%-5%, Moody’s said. As a point of comparison, RXO (NYSE: RXO), which is a publicly-traded 3PL, reported a second quarter EBITDA margin of 2.7%, compared to 3% a year earlier.
Moody’s sees that 3% EBITDA margin holding in place “as cost saving actions will help offset any margin pressure tied to soft freight rates. Echo Global’s margin also reflects a mix toward less profitable contracted volumes compared to spot volumes.”
Echo Global, Moody’s said, has a “highly variable cost structure that can be flexed during downturns.”
One of the key measurements a ratings agency looks at is a company’s debt to EBITDA margin.
Moody’s said it expects Echo Global’s debt/EBITDA margin to be “slightly below” 7X at the end of t his year, moving to 6.5X next year. By contrast, when S&P Global raised its debt rating on 3PL C.H. Robinson in August, it said the debt to EBITDA ratio in that company was on its way to the mid-1X range.
“(Echo’s) leverage remains very high at this point of the freight cycle with limited cushion to withstand any earnings decline,” the Moody’s rating affirmation said.
Other comments about the company in the Moody’s report were mostly upbeat. Echo, the agency said, “maintains good scale with longstanding relationships and considerable diversity within its customer base (i.e. shippers) and transportation carriers. These relationships, along with solid technology capabilities, have helped Echo increase transportation volumes despite broader market softness.”
Recent ratings actions on 3PLs in the middle of a freight recession have been mixed.
C.H. Robinson’s debt rating was upgraded by S&P Global to BBB+ in August, eight notches above an equivalent comparison to the Echo Global rating. Odyssey Logistics was cut by Moody’s in September. RXO held its rating a year ago when it plunked down a little more than a billion dollars to acquire Coyote Logistics, though its Baa3 rating from Moody’s is investment grade while the BB rating at S&P Global is not.
An email request for comment to Echo Global had not been responded to by publication time.
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