S&P Rates Allied Holdings Corporate Credit BB, Proposed Senior Notes BB-
2 September 1997
S&P Rates Allied Holdings Corporate Credit BB, Proposed Senior Notes BB-
NEW YORK, Sept. 2 -- Standard & Poor's today assigned its
double-'B' corporate credit rating and double-'B'-minus rating to Allied
Holdings Inc.'s proposed $125 million senior unsecured notes.
The outlook is stable.
Ratings for Decatur, Ga.-based Allied Holdings reflect its dependence on
the cyclical North American automotive industry and substantial indebtedness,
mitigated by its large market share (about 65%). The one-notch differential
between the company's corporate credit rating and senior unsecured rating
reflects the subordination of the unsecured notes relative to the company's
secured bank facility, which encumbers all assets and currently has
$60 million outstanding.
Upon completion of the acquisition of Ryder Automotive Carrier Services
Inc. and RC Management Corp., Allied, with 5,300 operated rigs and
121 terminals, will become the largest North American motor carrier
specializing in the transportation of new and used automobiles and light
trucks from factories, ports, and rail ramps to dealerships. Although Allied
has strong market share and services most foreign and domestic manufacturers,
Allied's leverage versus the Big 3 (General Motors, Ford, and Chrysler, which
account for 35%, 26%, and 14% of pro forma 1996 revenues, respectively)
remains weak, as contracts are relatively short-term, competitively bid on a
site-by-site basis, and do not allow for the pass-through of fuel and labor
cost inflation. Competitive pressures in Allied's primary business may
intensify because of the construction of new rail ramps closer to dealers and
the creation of mixing centers operated by railroads, which have the combined
effect of shortening the average length of haul for motor carriers and
increasing the competitiveness of nonunion, local operators. However,
Allied's market position still is relatively strong, as it has a good record
delivering undamaged vehicles (99.6% of shipments are delivered without
claims), has economies of scale lacked by other carriers, and has invested in
electronic data interchange technology. Like other suppliers to the auto
industry, the enlarged Allied should benefit from the automakers' preference
for outsourcing services to a few core providers to capture productivity
benefits.
Allied's financial policies are aggressive, given the company's
cyclicality, negative tangible net worth, and acquisitive growth strategy. At
an expected annual sales rate of 15 million cars and light trucks sold in
North America, and assuming realization of significant cost reduction and
productivity benefits from the Ryder acquisition, credit ratios are expected
to average as follows: annualized pretax return on permanent capital is
expected of 10%, pretax interest coverage of 1.8 times (x), funds from
operations to total debt of 30%, and earnings before interest, taxes,
depreciation, and amortization (EBITDA) interest coverage of about 4.0x.
Credit statistics, however, could be adversely impacted by a downturn in the
automotive cycle, potential rate reductions as contracts are renegotiated, and
rising labor costs. (In the U.S., Allied is party to a national contract
between the auto carriers and the Teamsters union that expires on
May 31, 1999, and has scheduled average annual total compensation increases of
about 3%.) Additionally, trucking mergers can result in significant
integration risks (e.g., unexpected labor cost increases and service
disruption associated with the merging of unionized work forces, unanticipated
service deterioration and loss of customers) that can substantially alter the
timing and magnitude of planned cost savings and revenue gains. Financial
flexibility is adequate because of a fairly discretionary capital spending
budget and approximately $102 million of additional borrowing capacity
available under its new secured credit facility.
OUTLOOK: STABLE
Allied is expected to realize significant cost savings from the Ryder
acquisition on a timely basis. While the Ryder acquisition is expected to be
immediately accretive to earnings, the sustainability of expected gains may be
challenged by industry cyclicality, possible reduced rate pressures as major
contracts are renewed, and renegotiation of the company's labor contract. --
CreditWire
For more information on criteria and subscriptions, see
http://www.ratings.standardpoor.com
SOURCE Standard & Poor's CreditWire