RXO, a 3PL that was spun off from XPO in 2022, has held an investment-grade rating from Moody’s since its inception. However, Moody’s recently changed its outlook on RXO from stable to negative, citing concerns about the state of the freight market. Despite this negative outlook, Moody’s reaffirmed RXO’s initial investment-grade rating of Baa3.
Moody’s believes that RXO’s credit metrics will remain weak in the coming months due to the prolonged weakness in the freight transportation sector. The ratings agency specifically highlighted the debt to earnings before interest, taxes, depreciation, and amortization ratio, which it expects to remain above 2.5X for the next year.
In order to maintain its investment-grade rating, Moody’s stated that RXO would need to sustain a debt-to-EBITDA ratio below 2.0X. However, if the 2.5X ratio is sustained for an unspecified period, RXO’s rating could be downgraded to non-investment-grade.
Despite these challenges, RXO remains confident in its ability to outperform and deliver rapid earnings growth when the market rebounds. The company’s management is actively addressing its issues and seeking to improve profitability in 2024. However, Moody’s emphasized the importance of RXO demonstrating a longer track record as a standalone entity to potentially achieve an upgrade in its credit rating.
Meanwhile, RXO’s stock has shown mixed performance in the past year, with a recent decline in the last three months. This contrasts with competitor C.H. Robinson, which has also faced challenges in the freight market but maintains an investment-grade rating from S&P Global.
Overall, RXO continues to face macroeconomic challenges beyond its control, but Moody’s acknowledges its efforts to address these issues and improve profitability in the future.
