The acquisition of a majority stake in Pilot Travel Centers by Berkshire Hathaway has led to a significant increase in the company’s debt rating by S&P Global Ratings.
Pilot’s BB+ corporate rating was affirmed in mid-2021, though one debt issue was reduced at that time to a BB+ level. BB+ is not considered investment-grade debt.
But with Berkshire Hathaway now owning 80% of the company, and the Haslam family owning the rest, S&P Ratings (NYSE: SPGI) took Pilot’s rating up three notches to BBB+ in one shot, taking it back into the investment-grade category. That three-step move takes the Pilot debt rating past BBB- and BBB up to the BBB+ grade, an unusually strong move. Most ratings changes tend to be one grade, though a company in sudden crisis might find its debt ratings see a plunge of several steps in one shot.
S&P also has what it calls a stand-alone credit profile (SACP) for Pilot. That remains at BB+.
But it is the rating on the debt that is most important for investors. And S&P, in announcing the change last week, made clear that it is the expected backing of Berkshire Hathaway (NYSE: BRK.B) that led to the upgrade.
“We now incorporate three notches of ratings uplift due to our view that the company would likely receive support from the rest of Berkshire’s group under most foreseeable circumstances,” S&P wrote. “While some factors raise doubts about the extent of such group support, Berkshire’s track record as a long-term investor supports our view.”
Ratings of agencies such as S&P and Moody’s are predicated on whether a company is going to be able to service its debt load. It is not an opinion on the attractiveness of the stock price — if there is one — and is indirectly a verdict on the performance of company management.
While revenue and net income figures were not disclosed in the S&P report, which is standard practice, the report did say it expects Pilot to generate more than $1 billion in free cash flow in 2024. S&P said it expects Pilot’s cash flows will be used for “acquisitions and other investments.”
S&P said it expects Pilot to hold a ratio of debt to earnings before interest, taxes, depreciation and amortization of less than 4X. “We expect the company’s debt levels will remain stable, though there is potential for some downside risk to our forecast if its draws on its revolving credit lines are larger than we expect due to working capital outflows,” the report said.
The S&P report did say Pilot is experiencing pressure on “inside sales,” which would be food and other services inside the truck stop, but that it will have stable earnings this year “because of its consistent fuel margins.”
Based on recent data from Travel Centers of America (NASDAQ: TA), fuel margins at that Pilot competitor are signaling a significant amount of strength.
For that SACP to increase, Pilot would need to take a combination of several steps, including diversification “to offset the volatility in its core fuel business,” S&P said. Reduction of its leverage to less than 2X could also result in an SACP increase.
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