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David Bell

Uber Technologies is one of the rare companies in the leveraged finance universe that has become a verb. Now it’s aiming to join another rarified group — junk-rated companies that graduate to investment-grade.

“We continue to march towards investment grade [and] we have positive momentum with the ratings agencies,” said Uber’s CFO Nelson Chai during a lender call held on Wednesday to discuss a new loan that will refinance its existing TLB due 2025.

Led by Morgan Stanley, the seven-year $1.433bn TLB is talked at SOFR+300bp-325bp (0% floor) with a 10bp CSA and a 99-99.5 OID. Commitments have now been accelerated to 27 February at 5pm ET, versus the original timeline of 1 March at noon ET.

During the call, Chai also reiterated the company's plan to deliver $5bn of adjusted EBITDA in 2024. This target was previously laid out during Uber’s 2022 investor day.

“We’re a year into this target,” he said. “We also talked about delivering 7% incremental margins from 2021 to 2024 and we’re in the low-double digits right now. So I think we have a lot of confidence and ability to drive that possibility.”

Uber’s decision to issue a loan came as a surprise to some investors, who thought the company would opt for unsecured bonds as many other borrowers have in recent weeks.

“We did have internal talks about issuing different things, but we’re not looking to increase any incremental overall debt for the company,” said Chai. “It's really just about extending [maturities].”

Indeed, issuing a seven-year loan now could buy the company sufficient time to attain IG status. And that may well give it access to cheaper refinancing options closer to the new loan’s 2030 maturity date.

“Depending on your view, it might be better for them to issue a loan now and refinance with a cheaper unsecured IG-grade bond in the future,” said a credit analyst following the deal.

The deal is part of a flurry of primary activity in the leveraged loan market as issuers take advantage of solid market conditions to get deals done.

This month, Uber’s corporate rating was upgraded to Ba3 from B1 by Moody’s and B+ from B by S&P, making it one of the better-rated borrowers in the market right now.

For a company that was rated B2/B- just four years ago, achieving an IG rating might seem like a lofty goal (some of the 9fin editorial team are old enough to remember how unprofitable it was during its 2018 bond-market debt, back when cash bonfires were all the rage).

But investors we spoke with this week said that reaching the sunlit uplands of the high-grade market now seems like an achievable goal:

“Uber has reached a point in the competitive landscape where they’ve acquired loyal customers and that translates really well into free cash flow and EBITDA growth,” said a buysider. “Like Netflix, this is one of the few names where I can actually see a potential path to investment grade.”

Last year wasn’t Netflix’s best, but that belies the fact that it was upgraded to IG status by S&P in 2021 on stronger cash flow and reduced leverage; its Moody’s rating remains just one notch below, at Ba1. 

As a side note, Netflix is also a verb (kind of).

Although Uber is best known for its ride-hailing services, the company has three main segments: mobility, delivery and freight.

While ride activity declined during the Covid lockdown era, demand for food deliveries soared. This is one of the main factors that has helped Uber distinguish itself from competitors such as Lyft and Via Transportation.

“The pandemic compressed what would have been a three-to-five-year shift into just a few months,” said Uber CEO Dara Khosrowshahi during the company’s investor day in February 2022. “Our delivery business now is bigger than mobility was at its pre-pandemic peak.”

“Relative to other players that only have one line of business, our platform is giving us an advantage that's compounding over time, and is getting bigger and bigger,” he added.

Buoyed by the growing popularity of its delivery service and a rebound in ride activity as social activity came back after the pandemic, the company became EBITDA-positive in 2021 and turned free cash flow-positive in 2022.

“Last year was a major inflection point for Uber,” said the credit analyst. “With operating leverage and economies of scale kicking in, they generated $1.7bn of adjusted EBITDA and almost $400m of free cash flow in 2022.”

Current cap table (not pro forma) via 9fin

Uber’s path to IG greatly hinges on its ability to meet its $5bn EBITDA target. S&P analysts said in a February report that the company’s rating “will likely be multiple notches higher” if it achieves its 2024 goals.

“This is achievable beyond 2024 if the company reaches its 2024 goals,” said S&P analysts.

In order to stay on track, Uber told investors it will not be pursuing large M&A acquisitions in the near term.

“I don’t anticipate us doing anything of a scaled nature yet,” said Chai said on the lender call. “I think that many of our competitors are trying to follow our lead in improving the cash flow generation nature of their business models so I’m not sure prices have totally settled yet.”

“It’s no different from trying to buy an apartment in Manhattan right now, where you’re expecting prices to come down but it hasn’t,” he said.

Nevertheless: while Uber’s management team is confident the company can hit its EBITDA target, some sources are still taking a conservative approach with their projections.

“Management is targeting $5bn EBITDA in 2024 , but I see them closer to mid-$4bn,” the credit analyst said. “But this is a rapidly improving credit story, so if you look two years ahead the price talk is attractive for where I think the ratings will be.”

Morgan Stanley declined to comment, and a spokesperson for Uber did not respond to a request for comment.

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