Fitch Affirms Penske's Ratings Following Peer Review; Outlooks Stable
KEY RATING DRIVERS
IDRs AND SENIOR DEBT
The rating affirmation reflects Penske's established market position in the truck leasing business, growing market share in the logistics and supply chain solutions (SCS) business, relatively consistent operating performance through market cycles, adequate leverage, strong liquidity, and a largely unsecured funding profile.
Penske Truck Leasing Canada Inc.'s IDR reflects the shared branding with its parent and its status as a wholly owned subsidiary of Penske. PTL Finance Corporation's IDR reflects its status as a wholly owned subsidiary of Penske and the nature of its operations, which are limited to serving as a pass through issuing entity to access investors otherwise not permitted to invest in a limited partnership such as Penske.
Rating constraints for the truck leasing sector include customer concentration in the SCS segment, cyclicality inherent in used vehicle pricing and the commercial rental business, and potential regulatory impacts on business trends.
The Stable Outlook reflects Fitch's expectation for continued economic access to the capital markets through various market cycles, limited sensitivity to rising interest rates, strong liquidity, stable leverage, and earnings growth over the outlook horizon driven by an increase in full service lease (FSL)/contract revenue and growth in the logistics business.
Operating Performance
Penske reported stronger operating performance in 1H15. The firm's performance was driven by higher lease rates in its contractual business, increased demand in commercial rental, and higher vehicle sales gains, which more than offset higher depreciation expenses.
Fitch expects operating performance to improve further in 2016, supported by organic growth in FSL as more customers are willing to sign long-term contracts given improvements in broader economic conditions. Additionally, Fitch expects growth in the logistics business to continue, which helps to diversify revenue sources, potentially cushioning earnings volatility on the downside and enhancing existing customer relationships. Commercial rental volume is likely to decrease with higher demand for long-term leases, but the firm has shown an aptitude for managing excess fleet, when necessary, and generating vehicle sale gains.
Fitch believes interest rate sensitivity is relatively limited as rental contracts are typically short term and increased funding costs can be immediately passed through to the customer. There is a slight lag on the leasing side given the contracts are typically intermediate term however, Penske seeks to mitigate this by issuing term debt in an attempt to match fund that portion of the business.
Leverage
While Penske does not have an explicit long-term leverage target, it expects to manage leverage, as defined as managed debt-to-equity near 3.0x over the near-term. Managed leverage, which includes the value of minimum lease payments, was 3.6x at June 30, 2015, which was up from 3.4x at YE14 due to growth in the business and the related purchase of revenue-earning equipment, and, to a much lesser extent, the acquisition of Transfreight North America, a third-party logistics provider, from Mitsui & Co. Ltd. That said, total equity did increase 5.5% year over year driven by an increase in earnings. Penske's pension obligation is viewed as less-burdensome on the company's leverage profile as it is a cash-balance plan, which was 95% funded at YE14.
Fitch expects leverage to decline modestly by YE15 due to increased earnings. Fitch's current ratings incorporate the expectation that leverage will be managed at-or-near each company's articulated range.
Liquidity
Fitch considers the firm's liquidity profile to be solid, supported by the substantial cash generating capability of its operating lease portfolio. While free cash flow generation is currently negative, this is because the firm is investing in rental and lease fleet assets which are expected to generate meaningful cash earnings. When lease and/or rental demand declines, the firm has historically quickly managed its fleets down. A reduction in the fleet yields positive free cash flow and an ability to de-lever, as was observed during the financial crisis.
Corporate credit facilities serve as a source of contingent liquidity. Penske has a $1 billion bank revolver, which had approximately $693 million of borrowing capacity at June 30, 2015.
RATING SENSITIVITIES
IDRs AND SENIOR DEBT
Negative rating actions for Penske could be driven by an increase in leverage resulting from a decline in earnings and/or free cash flow beyond Fitch's expectations. Additionally, deterioration in the firms' 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 result in negative rating action.
While Fitch believes a positive rating action is limited in the medium term, positive rating momentum for Penske could develop longer term from demonstrated access to the unsecured markets through a variety of market cycles and a lower leverage target.
PTL Finance Corporation's IDR is linked to the IDR of Penske, and therefore, would be expected to change as a result of any of the aforementioned rating sensitivities with respect to Penske.
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. Penske is a partnership between Penske Corporation 41.1%, GECC 29.9%, Mitsui & Co., Ltd 20.0% and Penske Automotive Group 9.0%.
Fitch has affirmed the following ratings:
Penske Truck Leasing Co., L.P.
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Senior Unsecured Debt at 'BBB+'.
PTL Finance Corporation
--Long-term Issuer Default Rating (IDR) 'BBB+';
--Senior Unsecured Debt 'BBB+'.
Penske Truck Leasing Canada Inc.
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Senior Unsecured Debt at 'BBB+'.
The Rating Outlook is Stable.
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