October 10, 2017 / 6:36 PM / a year ago

Fitch Affirms Penske's IDR at 'BBB+' Following Peer Review; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 10 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and unsecured debt rating of Penske Truck Leasing Co., L.P. and its subsidiaries (collectively, Penske) at 'BBB+', following the completion of its fleet leasing peer review, which includes four publicly rated firms. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDR AND SENIOR DEBT The rating affirmations are supported by Penske's established market position in the truck leasing and rental business, and growing market share in the logistics business; strong asset quality; relatively consistent operating performance through various cycles; appropriate leverage; solid liquidity; and a largely unsecured funding profile. Penske's ratings are constrained by the company's relatively higher leverage appetite compared to more highly rated peers; lack of demonstrated access to the unsecured markets through a variety of market cycles; and modest pension obligation risk. Rating constraints applicable to the broader truck leasing sector include customer concentrations in the logistics segment; cyclicality inherent in used vehicle pricing and the commercial rental business; as well as the potential regulatory impact on business trends. Penske's asset quality and equipment valuation metrics are strongly influenced by the general condition of the domestic economy. Net accounts receivables write-offs as a percentage of total invoicing was 0.3% in the first-half of 2017 (1H17), which is consistent with the long-run (2011-2016) average. Fitch believes loss metrics could increase modestly in a less supportive economic environment, but write-offs are not expected to approach peak levels of 0.5% experienced in 2009. Gain on used vehicle sales as a percentage of proceeds from vehicle sales was 17.8% on an annualized basis in 1H17. This compares to average reported gains of 23.8% in 2011-2016. Gains in 1H17 were modestly weaker year over year (yoy), driven by higher book values and softer tractor demand, which affected gains per unit. The percentage of gains fluctuates depending on market conditions, age of fleet, and method of disposal. PTL sells its vehicles via both wholesale and retail channels. In an effort to maximize gains, Fitch believes PTL will continue to pursue disposing of its vehicles through the retail market, when possible. Penske reported operating revenue growth yoy of 7.9% in 1H17, reflecting continued expansion of full-service leases from existing and new customers, contract maintenance, and logistics segments. Pre-tax income increased 5.5%, yoy in 1H17, reflecting improved operating performance in the lease and rental operations, partially offset by a 21% decrease in gains on sale of revenue-earning vehicles due to lower proceeds per unit and fewer vehicles sold, primarily related to lower market demand for used tractors. This translated to annualized pre-tax return on average assets of 2.9% in 1H17, which is in line with 2.9% from the year-prior. Fitch expects operating performance to remain relatively consistent in 2H17, supported by continued growth in full-service leasing, active management of fleet inventories, and an expected modest recovery in rental demand. While Penske does not have an explicit long-term leverage target, it expects to manage leverage, defined as managed debt-to-equity, at around 3.5x. Managed leverage, which includes the present value of capital lease obligations, amounted to 3.5x, as of June 30, 2017, well below the long-run (2011-2016) average of 4.0x. For leasing companies, Fitch focuses on managed debt-to-tangible equity in its analysis of leverage. On this basis, leverage amounted to 5.6x as of June 30, 2017, which is modestly above Fitch's benchmark leverage range for 'BBB' category finance and leasing companies of 3x-5x. Penske's pension obligation is viewed as less burdensome on the company's leverage profile as it is a cash-balance plan, which was 79% funded as of end-2016. Fitch expects leverage to remain the same at end-2017 compared to end-2016. Fitch believes Penske's leverage metrics will be managed at or near the company's articulated range. The company is predominately funded through unsecured debt, which represented 87% of total funding as of June 30, 2017, which is within Fitch's 'A' funding benchmark range of 50%-90% for finance and leasing companies. We view this positively, as available unencumbered assets improve balance sheet flexibility in times of market stress. In 2017, Penske issued in aggregate $1.1 billion of five-and-a-half and 10-year, senior unsecured notes in the U.S. market, with semi-annual fixed rates of interest between 2.7% and 4.2%. The proceeds from the issuances were used to repay maturing debt and for general corporate purposes. Fitch believes Penske will continue to opportunistically access the capital markets to maintain funding diversity and optimize pricing. Fitch views Penske's liquidity profile as solid, supported by the substantial cash generating capability of the operating lease portfolio. FCF returned to positive in 2016 but is expected to be negative in 2017, as the company grows its portfolio through capital expenditures. When lease and/or rental demand declines, the firm has historically quickly managed its fleet down, resulting in positive FCF and an ability to de-lever, as was observed during the last financial crisis. In addition, corporate credit facilities serve as a source of contingent liquidity. Penske had a $1.1 billion revolving credit facility provided by a syndicate of banks, which had approximately $565 million of borrowing capacity as of June 30, 2017. Based on unrestricted cash balances of $47 million, and estimated annualized operating cash flow of $1.8 billion, Penske would have sufficient liquidity to address near-term debt maturities of $789 million in the next 12 months. On Sept. 7, 2017, General Electric Co. (GE) announced that it sold its remaining 15.5% of limited partnership interests to Penske Automotive Group, Inc. and a subsidiary of Mitsui & Co., Ltd. for $674 million. GE's exit has long been expected by the market as part of GE's strategy to exit investments not linked to its industrial businesses. Fitch views the sale of its remaining limited partnership interests in Penske as neutral to the overall ratings. The Stable Outlook reflects Fitch's expectation for Penske's stable operating performance; economic access to the capital markets through various market cycles; limited sensitivity to rising interest rates; maintenance of strong liquidity; and appropriate leverage. The unsecured debt rating is equalized with the long-term IDR, reflecting the predominantly unsecured funding profile and the presence of unencumbered assets, which suggest average recoveries. SUBSIDIARY AND AFFILIATED COMPANIES PTL Finance Corporation and Penske Truck Leasing Canada, Inc.'s Long-Term IDRs reflect the entities' status as wholly-owned subsidiaries of Penske Truck Leasing Co., L.P. and the nature of their operations, which are limited to serving as pass-through issuing entities to access investors not otherwise permitted to invest in a limited partnership such as Penske. As such, the Long-Term IDRs of PTL Finance Corporation and Penske Truck Leasing Canada, Inc. are aligned with that of Penske Truck Leasing Co., L.P. RATING SENSITIVITIES IDR AND SENIOR DEBT Fitch believes positive rating actions for Penske are limited over the medium term. However, positive rating momentum could develop in the longer term from demonstrated access to the unsecured markets through a variety of market cycles, and a lower leverage target. Conversely, negative rating actions for Penske could be driven by an increase in leverage resulting from a decline in earnings, and/or FCF beyond Fitch's expectations. Additionally, deterioration in the firm's competitive positioning, weakening asset quality, an inability to realize residual values on used vehicles, a material increase in non-earning vehicles, and/or a decline in liquidity could also result in negative rating action. The rating assigned to the senior unsecured debt is equalized with the Long-Term IDR, and therefore would be expected to change as a result of a change to Penske's Long-Term IDR. In addition, a material increase in secured funding and/or a material reduction in unencumbered assets could result in notching between Penske's Long-Term IDR and unsecured notes. SUBSIDIARY AND AFFILIATED COMPANIES PTL Finance Corporation and Penske Truck Leasing Canada, Inc.'s ratings are sensitive to the same factors that might drive a change in Penske Truck Leasing Co., L.P.'s long-term IDR due to the aforementioned rating linkages between the three entities. Established in 1988 and headquartered in Reading, PA, Penske is a leading provider of full-service truck leasing, truck rental, and contract maintenance and logistics services. Currently, Penske is owned, directly and indirectly, 41.08% by Penske Truck Leasing Corporation, an indirect subsidiary of Penske Corporation, a privately owned diversified transportation services company; 30.00% by a wholly owned subsidiary of Mitsui & Co., Ltd.; and 28.92% by Penske Automotive Group, Inc., a publicly-traded international automotive retailer that is an affiliate of Penske Corporation. Fitch has affirmed the following ratings: Penske Truck Leasing Co., L.P. --Long-term IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'. PTL Finance Corporation --Long-term IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'. Penske Truck Leasing Canada, Inc. --Long-term IDR at 'BBB+'; --Senior unsecured debt at 'BBB+'. The Rating Outlooks are Stable. 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