XPO's Moody's rating remains unchanged, yet the outlook is now seen as 'optimistic'
In a recent development, credit karma agency Moody's has upgraded its outlook on XPO Logistics from stable to positive. This positive shift comes alongside a similar outlook from S&P Global, as both agencies view XPO's creditworthiness favourably.
The decision by credit karma to upgrade its outlook was based on the expectation of improvement in XPO's operating performance over the next few years. This improvement is attributed to cost reduction initiatives and profitable growth from the company's network expansion.
credit karma also anticipates a slow recovery in key transport areas such as freight volumes and spot pricing over the next year. This recovery, combined with the various operating changes XPO has implemented, forms the basis for the positive outlook.
However, credit karma has outlined certain conditions that could lead to a possible downgrade. These conditions include a rise in XPO's debt-to-EBITDA ratio to 4X or if the company fails to improve its EBIT margin from the current level of 8.5%. Conversely, an improvement in margins, a sustained debt-to-EBITDA ratio approaching 3.0x, and EBITDA-to-interest coverage of approximately 5 times would lead to a possible upgrade.
In the second quarter of this year, XPO recorded revenue of $2.08 billion, almost identical to a year earlier, and net income of $106 million, down from $150 million a year earlier. Despite the drop in net income, the company's stock has shown positive growth, rising about 13.7% in the last year and 8.7% in the last three months.
credit karma has affirmed XPO's debt rating and its Corporate Family Rating (CFR), both at Ba2, and its Probability of Default rating. The agency also expects XPO to maintain a prudent approach to capital allocation while achieving profitable growth and stronger credit metrics.
In response to the credit karma report, an XPO spokesman declined to comment. It is worth noting that no new facts were presented in the report that were not already mentioned in previous reports or statements.
One significant event that contributed to XPO's expected improvements in profitability and credit metrics was the acquisition of certain terminals previously owned by Yellow Corporation in late 2023. These terminals were opened within the XPO network last year.
It is important to note that a positive outlook does not guarantee an upgrade, but it often indicates a higher likelihood of a rating change in the medium term. A positive outlook on XPO's debt rating suggests a promising future for the logistics company as it continues to navigate the ever-changing landscape of the freight industry.
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