New York, July 22, 2022 — Moody’s Investors Service, (“Moody’s”) affirmed the ratings of LaserShip, Inc. (“LaserShip), including its B3 corporate family rating (“CFR”), B3-PD probability of default rating, B2 first-lien credit facilities rating and Caa2 second-lien credit facility rating. The outlook has been revised to negative from stable.
Moody’s expects LaserShip to face significant execution risk as it heads into a critical 2022 peak holiday delivery season. LaserShip’s weak credit metrics reflect the company’s disappointing 2021 peak season when its network struggled to handle excess package volume. This led to a temporary loss of customers and volumes for several months. It is not yet certain whether LaserShip’s actions to add significant capacity in its network with new and expanded sorting centers will prove effective. Further, these actions have required substantial capital investments, which have weakened the company’s liquidity.
In Moody’s view, LaserShip will require exceptional operational execution during the 2022 peak season and in 2023 in order to restore credit metrics. By the end of 2023, Moody’s expects LaserShip to improve debt/EBITDA to about 7x from above 8x at the end of 2022. The rating agency also expects LaserShip to generate modestly positive free cash flow in 2023 following significant cash burn in 2022 due to high capex needs related to expanding and improving its network capacity.
The negative outlook reflects the risk that additional operational missteps will further weaken LaserShip’s earnings and its fragile liquidity. In addition, LaserShip faces reputational risk, including a potentially more permanent loss of customers, if it is unable to effectively execute its strategy.
Affirmations:
..Issuer: LaserShip, Inc.
…. Corporate Family Rating, Affirmed B3
…. Probability of Default Rating, Affirmed B3-PD
….Senior Secured 1st Lien Term Loan, Affirmed B2 (LGD3)
….Senior Secured 1st Lien Revolving Credit Facility, Affirmed B2 (LGD3)
….Senior Secured 2nd Lien Term Loan, Affirmed Caa2 (LGD5)
Outlook Actions:
..Issuer: LaserShip, Inc.
….Outlook, Changed To Negative From Stable
RATINGS RATIONALE
LaserShip’s B3 CFR reflects the company’s moderate, yet rapidly growing scale in the highly competitive e-commerce residential delivery space, a relatively limited track record operating at its current scale and very high financial leverage. LaserShip expanded volumes and added new customers rapidly in 2021, but the company ineffectively planned for the increased volumes during the 2021 peak season. LaserShip’s capacity at its primary sorting center was insufficient to handle these excess volumes, which forced the company to temporarily suspend operations and resulted in customers diverting their volumes to more traditional carriers. Moody’s notes that the company has since recently demonstrated recovering volume trends and improving margins through the first half of 2022.
Moody’s views LaserShip’s ability to retain and add new customers in 2022, as well as recover margins, to be encouraging heading into a critical 2022 peak season. New executive management has significantly expanded network capacity and implemented new planning processes to meet expected volumes. However, it still remains to be seen whether the company can service all of its customers at the required service levels and sustain network efficiencies over the long-term as the company continues to scale.
Despite uncertainty regarding consumer spending growth over the next twelve months, Moody’s expects LaserShip’s consolidated pro forma revenue to grow by at least 25% in 2022 and by about 8% in 2023. LaserShip’s position as a lower-cost option to traditional carriers such as UPS and FedEx should allow it to expand its modest market share in the overall parcel delivery space. In addition, the company typically handles smaller, less-expensive packages that consumers may be more inclined to continue to purchase despite higher inflation.
Moody’s views LaserShip’s liquidity to be weak given the sizable cash burn expected in 2022 mainly driven by significant capital investments needed, which Moody’s estimates to be more than double normalized capex levels. To fund this capex and cash burn, the company entered into a new accounts receivable securitization facility, which permits borrowings up to $250 million during the company’s peak season (November through February). Moody’s expects LaserShip to utilize the majority of this facility by late-2022 since cash flows are seasonally weak at that time. Moody’s expects free cash flow to be modestly positive in 2023 as working capital levels reduce and capex spend normalizes. The company’s $125 million revolving credit facility due 2026 is expected to remain undrawn over the next twelve months.
FACTORS THAT COULD LEAD TO A DOWNGRADE OR UPGRADE OF THE RATINGS
The ratings could be downgraded if LaserShip experiences additional execution challenges, particularly during the 2022 peak holiday season, which will further pressure earnings and liquidity. Specifically, sustained lower EBITDA margins, persistently negative free cash flow, or Moody’s expectation that the capital structure has become untenable could result in a downgrade.
Although unlikely over the next twelve months, the ratings could be upgraded if LaserShip demonstrates improving and sustainable operating leverage as delivery volumes increase, such that EBITDA margin is maintained above 15% and debt/EBITDA decreases toward 5x. Maintaining positive free cash flow with free cash flow-to-debt above 5% could also result in an upgrade.
The principal methodology used in these ratings was Surface Transportation and Logistics published in December 2021 and available at https://ratings.moodys.com/api/rmc-documents/360641. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
LaserShip, Inc. is a last mile parcel delivery provider with a focus on business to consumer deliveries for leading e-commerce retailers across apparel, health and beauty, food, and mass merchandise markets. Combined revenue of LaserShip and OnTrac for the twelve months ended March 31, 2022 was approximately $1.9 billion.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Mike Cavanagh
Asst Vice President – Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
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