Moody's Downgrades LaserShip - Treya Partners

In a report published March 2nd, the debt rating agency Moody’s Investor Services has downgraded the ratings of Lasership, Inc., the corporate parent of regional parcel carrier LaserShip-OnTrac. According to Moody’s, the company has “very high financial leverage, week liquidity and moderate scale in the competitive e-commerce residential delivery market.” The Moody’s corporate rating was lowered to Caa1 from B3 and the probability of default rating to Caa1-PD from B3-PD.

Companies rated Caa are judged to be of poor standing and subject to very high credit risk. Moody’s numerical modifiers 1, 2 and 3 are generic rating classifications. The modifier 1 indicates “that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.”

The next rating level below Caa is Ca. Ca is defined as “… speculative and are likely in, or very near, default, with some prospect of recovery in the principal and interest.”

What is behind the headwinds in the regional small parcel market that, in the very recent past, was executing successfully on organic and non-organic growth strategies?

• Demand:  Package delivery volumes were lower than expected in the second half of 2022.  Overall consumer spending is not forecasted to increase in 2023 which will further impact earnings in 2023 for regional carriers. 
• Cost of Debt:  Higher interest rates limit the carriers from improving the operating margin and free cash flow for carriers that took on additional debt to support M&A activity and organic growth during a time of higher demand.  The financial pressure created by servicing the debt places additional operational pressure on the organization by reducing the available investments in operational improvements. 
• Cost of Labor: The pre-softening labor market resulted in sign-on bonuses, above market wages, and investments in the recruiting process that will carry over into 2023 financial.
• National Carrier Competition:  As network utilization flattens or decreases at UPS & FedEx with the drop in demand, UPS & FedEx may target business that they lost to regional carriers during times of capacity constraints and target net new business currently with regional carriers.

For transportation and logistics team making carrier decisions, 2023 will be an interesting year. Coming out of Covid-19 and historical shipment volumes, the capacity issues are in the rearview mirror, but each carrier has their own challenges to overcome.

FedEx’s pilot union is considering a strike authorization vote. Negotiations have been ongoing since May 2021 with reasonable progress reported through December of 2022. Since December, FedEx and the union have not been able to come to agreement on pilot compensation. Delta, Hawaiian and other airline executive teams have signed agreements with their pilots to improve compensation placing additional pressure on FedEx.

UPS’ union contract with their drivers expires in July 2023 and we can expect the next several months to be full of intense negotiations. UPS appears to be committed to good faith negotiations. UPS recently published information regarding the negotiations. Click here to read more about the UPS / Teamsters Union negotiations.

Sources:

• www.ups.com
• Freightwave – Mood’s downgrades LaserShip’s debt rating by Mark Solomon