XPO rating cut by S&P, agency cites continuing weak freight market

With the move, the company rating on XPO at S&P Global (NYSE: SPGI) and Moody’s (NYSE: MCO) are now equivalent. Moody’s has a Ba2 rating on XPO, which is considered on the same level as a BB rating at S&P Global. Both grades are two notches below the cutoff for investment grade versus non-investment grade debt ratings.

S&P’s move comes more than two weeks after Fitch Ratings affirmed its rating on XPO at BB+. That is one notch above the ratings for Moody’s and S&P Global, but also is not investment grade. 

Yellow acquisition led to negative outlook

When XPO was put on a negative outlook by S&P at the end of 2023, a key spur to that action was XPO’s acquisition of 28 terminals from bankrupt Yellow Corp. for $870 million. 

That acquisition resulted in “elevated leverage projected over the near term,” S&P said in its rationale for why it made the change on XPO Thursday. “At the time, we believed the freight market was nearing an inflection after operating at trough levels since mid-2023; however, market conditions have yet to show meaningful improvement, and we no longer anticipate conditions will improve over the next 12 months.”

A recap of the conditions facing trucking and the LTL sector is familiar to those in the industry: “tonnage has continued to decline…through both decreasing shipment per day and weight per shipment, a meaningful departure from our previous expectation for tonnage growth inflecting positive back in 2024.”

In discussing the terminals that led to the negative outlook, S&P said the doors the company bought “left XPO with excess capacity of 30% as volumes remain muted.”

Little optimism for the freight market

The bearish outlook for the freight market pops up numerous times in the S&P Global ratings report. Tonnage “could return to growth in 2026,” the agency said, but it would not be at a pace that would have led XPO to keep its BB+ rating. “Ongoing uncertainty around trade policies and potential effects on economic growth further clouds visibility into macroeconomic conditions that could weigh on demand,” S&P Global said. 

Among the financial metrics cited by S&P Global that led to the downgrade, beyond its macroeconomic view of the freight market, the ratings agency said XPO’s ratio of Funds From Operations (FFO) to debt will be in the high 20% level by the end of 2025 and reach above 30% by the end of 2027. That ratio was about 23% when it did the Yellow deal, S&P said. The 27% level “remains below our 30% downside trigger.”

XPO’s net debt leverage at the end of the first quarter was 2.5X, which S&P Global said was an improvement from a year earlier, when it was 2.9X. The target for the company is 1X to 2X, the agency said. “Leverage has consistently been above management’s target,” S&P Global said.

Positive on the company’s performance

Parts of the S&P report are an endorsement of the company’s position relative to its peers. It said the LTL carrier “continues to outperform the industry with quarterly yield growth consistently in the mid- to high-single-digit percent area of the past years.” 

XPO’s stock is up 23.4% in the last year and 14.9% in the last month. By comparison, Old Dominion Freight Lines (NASDAQ: ODFL) is up 4.9% in the last month and down 6% in the last year. 

S&P Global’s praise of XPO It cites new revenue from “value-added services,” and increasing the level of insourcing of linehaul miles. As a result, its level of purchased transportation is “now approaching a steady state,” S&P Global said.

In the first quarter of 2025, XPO’s purchased transportation of $399 million was down 8.9% from the $438 million a year earlier as the company’s revenue was down just 3.2%.

Even with a significant percentage of the Yellow terminals now seen as surplus capacity, S&P Global did not criticize the acquisition. Even as tonnage remains weak, the agency said, “we expect the acquired terminals to provide some cost benefit in terms of linehaul, pickup and delivery, and dock operations. Over the longer term, we continue to believe they will be incrementally margin accretive when the market inevitably recovers.”

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