Odyssey Logistics has had its debt rating upgraded by Moody’s Investors Service, with its commentary offering a small window into the current market for 3PLs.
There are few publicly traded 3PL companies; C.H. Robinson (NASDAQ: CHRW) is easily the largest. And there aren’t many 3PLs with publicly traded debt that receive ratings from the main ratings agencies such as Moody’s.
Conditions are good enough for Odyssey, which is owned by private equity firm The Jordan Co., that it led Moody’s to increase its rating for the company to B2 from B3, while its probability of default rating rose to B2-PD from B3-PD.
On specific debt issues, Odyssey’s first lien senior secured debt was upgraded to B1 from B2 and second lien senior secured debt increased to Caa1 from Caa2.
Odyssey’s outlook for its debt rating was listed as stable, which means conditions are not in place for either another increase or downgrade in its rating.
At a family rating of B2, Odyssey debt is still deep into non-investment or “junk” territory. It is now five notches into non-investment territory. By contrast, C.H. Robinson’s debt rating was affirmed earlier this year at Baa2, which is investment grade and six notches more than the latest Odyssey rating.
Odyssey, which specializes in brokering chemicals, metals and bulk liquids, has received three actions from Moody’s in the last three years. In late August 2021, Moody’s changed the outlook on Odyssey to stable from negative. A year earlier, Odyssey had its B3 rating affirmed by Moody’s.
In its review from late August, Moody’s said Odyssey’s debt-to-EBITDA ratio had “improved materially” from a 7x ratio at the start of 2021 to a ratio of 4.3x in June. “Higher volumes and freight rates over the last 12 months have supported Odyssey’s significant revenue and earnings growth,” the analysis said.
That growth in revenue is expected to slow “considerably” to about 3% next year, “as overall freight market conditions normalize compared to the past two years.” About half of Odyssey’s revenue is based on industrial activity, the report said, citing the chemicals and metals field. “Moody’s expects demand in these end markets to remain solid through 2022, but notes these markets are more susceptible to lower volumes and earnings pressure during economic downturns.”
And if those markets do slow, Moody’s said, “operating efficiencies and cost-saving actions the company is taking during 2022 will maintain its EBITDA margin above 11%.” EBITDA margin is defined as a company’s operating profit as a percentage of revenue.
Ratings agencies’ concerns are driven strictly by a company’s ability to service its debts. Moody’s said the “event risk” at Odyssey is high, given that the 3PL might “increase leverage to pursue acquisitions,” or conversely, take on new leverage to make distributions to its shareholders, including Jordan. Most of Odyssey’s debt matures in two years, Moody’s said. And “while not a concern at this time, refinancing risk will become more prevalent in the back half of 2023.”
Moody’s said Odyssey has “adequate liquidity” through next year, with cash on hand of about $30 million and full access to a $60 million revolving line of credit. The agency said a line of credit that size is “modest” for the company’s revenue base.
In its report last year changing the outlook to stable, Moody’s said Odyssey’s revenue for the 12 months ended March 21, 2021, was about $880 million. It did not give a figure in the report accompanying the upgrade, but the frequent references to how strong a year it had suggests revenue was significantly higher.
Another measure of a company’s ability to service its debt is its free cash flow relative to debt. Moody’s said it expects Odyssey to generate “at least” 5% FCF this year and next, “which is meaningfully higher than historical levels.”
An Odyssey spokeswoman declined comment on the report.