GXO Logistics’ Long-Term Issuer Default Rating downgraded by Fitch

Investing.com -- Fitch Ratings has downgraded GXO Logistics, Inc’s Long-Term Issuer Default Rating (LT IDR) and senior unsecured debt to ’BBB-’ from ’BBB’ on 25 Feb 2025. The rating agency has also declared a stable outlook for the company.

The downgrade is a result of GXO’s underperformance relative to Fitch’s prior expectations, mainly due to increased customer attrition, challenges in integrating the Wincanton acquisition, and slowing growth trends. GXO also recently announced a new $500 million share repurchase program, signifying an unforeseen shift in capital allocation priorities.

Fitch predicts that GXO’s EBITDA leverage will remain around the mid-2.0x range, in line with ’BBB-’ rating tolerances. This projection does not account for any debt-funded acquisitions or share repurchases.

Several factors have led to this downgrade. Fitch anticipates that GXO’s profit and cash flow growth will be positive but more moderate than previously expected. This slowdown will reduce GXO’s ability to reduce debt after acquiring Wincanton. Fitch forecasts EBITDA of approximately $840 million in 2025 and $925 million in 2026, assuming cost synergies and mid-single digit organic growth.

The forecast also takes into account higher-than-usual customer attrition as supply chains realign, challenges in integrating Wincanton, and moderating volume growth. If GXO meets its 2027 goals, it could exceed Fitch’s forecast.

Furthermore, Fitch believes that GXO’s recent announcement of a share repurchase program indicates a reduced intention to lower debt levels to those consistent with a ’BBB’ rating. Previously, Fitch had expected the company to focus on reducing gross leverage while integrating the Wincanton acquisition.

Despite these challenges, GXO’s customer contracts provide some stability against market cyclicality. About half of GXO’s revenue comes from hybrid closed-book contracts. The company also has a flexible cost structure, with labor as the largest component. GXO can quickly scale up or down to meet demand through the use of temporary agency labor.

However, the competitive market and limited differentiation limit GXO’s pricing and margin opportunities. With an EBITDA margin at 7% and capital intensity around 3%, profitability is relatively slim for the rating level.

As of 31 Dec 2024, GXO had a solid liquidity position, composed of $413 million of cash and an undrawn $800 million revolving credit facility. Fitch expects liquidity to be supported by consistently positive Free Cash Flow (FCF) generation.

GXO Logistics, Inc. is one of the largest global providers of contract logistics, including goods management, order fulfillment, reverse logistics, and supply chain design. It operates over 200 million square feet of warehouse space in Europe and North America.

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