S&P Lowers Outlook on Quality Distribution (QLTY) to Negative; Ratings Affirmed

Highlights:

• Tampa-based transportation and logistics provider Quality Distribution Inc.'s operating performance has been weaker than we previously expected.
• We believe that the difficult operating environment, particularly in the company's energy end markets, may make it harder for Quality to improve its profitability and cash flow.
• Therefore, we are revising our outlook on Quality Distribution Inc. to negative from stable and are affirming our 'B-' corporate credit rating on the company.
• At the same time, we are affirming our 'B-' issue-level rating on the company's $415 million first-lien term loan and our 'CCC' issue-level rating on its $120 million second-lien term loan.
• The negative outlook reflects our expectation that the company's end markets will remain weak over the next 12 months. We expect Quality Distribution's funds from operations (FFO)-to-total adjusted debt ratio to be below 5% and its total debt-to-EBITDA metric to be around 10x by year-end 2016.

S&P Global Ratings said that it has revised its outlook on Quality Distribution Inc. (Nasdaq: QLTY) to negative from stable and affirmed its 'B-' corporate credit rating on the company.

At the same time, we affirmed our 'B-' issue-level rating on Quality Distribution's $415 million first-lien term loan due 2022. The '3' recovery rating remains unchanged, indicating our expectation for meaningful recovery (50-70%; lower end of the range) in the event of a payment default.

Additionally, we affirmed our 'CCC' issue-level rating on the company's $120 million second-lien term loan due 2023. The '6' recovery rating remains unchanged, indicating our expectation for negligible recovery (0-10%) in the event of a payment default.

"The negative outlook reflects Quality Distribution's underperformance relative to our expectations over the past year and its elevated debt leverage," said S&P Global credit analyst Michael Durand. The company's energy logistics business--a segment that it entered through acquisitions in 2012--has been particularly weak and is experiencing operating losses due to low oil prices. Additionally, Quality Distribution's largest segment, chemical logistics, has experienced some softness as the buildout of the U.S. chemical industry's capacity has been slower than anticipated.

The negative outlook on Quality Distribution reflects the company's underperformance relative to our expectations over the past year and our belief that its end markets will remain weak over the next 12 months. We expect the company to maintain a FFO-to-total adjusted debt ratio of less than 5% and a total debt-to-EBITDA metric of around 10x.

We could lower our ratings on Quality Distribution over the next 12 months if its liquidity becomes constrained or if further earnings deterioration causes us to conclude that the company's capital structure is no longer sustainable over the long term.

We could revise our outlook on Quality Distribution to stable over the next 12 months if its liquidity remains adequate and the company's operating performance improves, potentially due to strengthening conditions in the chemical markets or a rebound in its energy segment, causing its debt-to-EBITDA metric to fall below 8x for a sustained period.

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