OREANDA-NEWS. S&P Global Ratings said today that it has raised its corporate credit rating on Lake Oswego, Ore.-based The Greenbrier Cos. Inc. to 'BB' from 'BB-'. The outlook is stable.

"The upgrade reflects our expectation that Greenbrier will maintain appropriate credit measures through the current downturn in the railcar market, including an adjusted debt-to-EBITDA metric of less than 3x," said S&P Global credit analyst Dan Picciotto. "We believe that the company has ample leverage capacity to absorb the ongoing downturn in its industry while maintaining its low leverage levels (debt-to-EBITDA of less than 1x as of May 2016) and that the company will maintain a disciplined approach to acquisitions and shareholder rewards." We anticipate that the weakness in the railcar industry will persist through 2018, though we have improved confidence in Greenbrier's ability to manage its business through the cycle. Greenbrier recently improved, and has maintained, the profitability of its manufacturing segment despite the conditions, benefitting from the repositioning of some of its manufacturing footprint to Mexico. In addition, the company has demonstrated a track record of maintaining a more conservative financial policy after weathering the prior industry downturn (2009-2010) with a significant amount of net debt. Therefore, we have revised our financial policy modifier on the company to neutral from negative.

The stable outlook on Greenbrier reflects our belief that the company's reasonably conservative financial policies combined with improvements in the profitability of its manufacturing segment and a more stable performance from its leasing, servicing, and maintenance activities will allow it to maintain leverage of well below 3x despite the current downturn in its industry. Greenbrier's low leverage also provides it with some cushion should the conditions in its industry weaken over the next year or two, as we expect.

We could lower our ratings on Greenbrier over the next 12 months if the company's financial policy becomes more aggressive or it experiences meaningful deterioration in its profitability that materially weakens its credit measures. Specifically, if we expect that Greenbrier's debt-to-EBITDA will increase to more than 3x for a sustained period, we could lower the ratings. This could occur if, for instance, the number of railcar deliveries declines well below 40,000 units and the company's revenue falls below $2 billion, its EBITDA margin declines to less than 10%, and its net adjusted debt more than doubles to about $500 million.

It is unlikely that we will upgrade Greenbrier over the next 12 months given that the company's business is still concentrated in highly cyclical end markets, which causes use to assess the company's business risk profile at the lower end of the fair category. For an upgrade, we would expect Greenbrier to improve its scale and diversity, in order to reduce the cyclicality of its revenue, and demonstrate an ability to maintain debt-to-EBITDA of well below 3x through the operating cycle.