Fitch Affirms Penske's IDR at 'BBB+' Following Peer Review; Outlook Stable
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Penske Truck Leasing Co. L.P. (Penske) at 'BBB+', following the completion of its fleet leasing peer review. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
IDRs AND SENIOR DEBT
The ratings are supported by Penske's established market position in the truck leasing and rental business, and growing market share in the logistics business, good asset quality, relatively consistent operating performance through various cycles, appropriate leverage, solid liquidity, and a largely unsecured funding profile.
Rating constraints specific to Penske include a higher leverage appetite relative 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 and potential regulatory impact 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, appropriate leverage, and continued earnings growth over the outlook horizon, driven by growth in full service lease and contract revenue, as well as increased penetration in the logistics business.
Asset Quality Mean Reversion Expected
Penske's asset quality and equipment valuation metrics are strongly influenced by the general condition of the domestic economy. Net accounts receivables write-offs were 2.54% in the first-half of 2016 (1H16), which is relatively consistent with average of 2.87% since 2011, which Fitch believes remains relatively low. Mean reversion is expected in the medium-term, as Fitch views asset quality performance at current historical lows as unsustainable. However, write-offs are not expected to approach peak levels experienced in 2009.
The company reported average gains on the sale of trucks, tractors, and trailers of 23.92% between 2011 and 2015. Gains on sales of equipment have been elevated in recent years given strong demand by buyers to purchase pre-2010 engines. Sales gains of 22.3% in 1H16 were notably weaker year-over-year compared to 1H15, reflecting lower used vehicle pricing, and lower sales volume. Fitch expects gains on sale will continue to moderate in the medium- to longer-term given normalization of used vehicle pricing from historical highs.
Relatively Consistent Operating Performance
Penske reported nearly 6% year-over-year revenue growth, and 7% operating revenue growth in 1H16, reflecting higher revenue in full-service lease and growth in the logistics business combined with the incremental revenue contribution from the acquisition of Transfreight North America, a provider of third-party logistics and supply chain solutions with operations in the U.S., Canada, and Mexico, from Mitsui & Co., Ltd. in 2015. Pre-tax income decreased nearly 14% due to a 40% reduction in gains on used vehicle sales, reflecting softening of used tractor prices.
This translated to annualized pre-tax return on assets of 2.9%, which is relatively consistent with the five-year average of 3.5%. Fitch expects operating performance to remain relatively consistent in 2H16, supported by growth in full-service leasing, tight management of fleet inventories, and controlling costs amid a weaker environment for rentals and lower used vehicle prices.
Fitch believes interest rate sensitivity is relatively limited for Penske as rental contracts are typically short term and increased funding costs can be passed through to the full service lease customers. However, there is a slight lag on the leasing side given that 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.
While Penske does not have an explicit long-term leverage target, it expects to manage leverage defined as managed debt to equity around 3.5x over the near term. Managed leverage, which includes the present value of capital lease obligations, amounted to 3.6x, as of June 30, 2016, well below the average of 4.0x since 2011. For leasing companies, Fitch focuses on managed debt to tangible equity in its analysis of leverage. On this basis, leverage amounted to 6.0x as of June 30, 2016, which is well below with the average of 21.0x since 2011. Tangible managed leverage is higher, driven by the impact of Penske's acquisition activity over the years, which generated substantial goodwill on the balance sheet, although tangible common equity has improved in more recent years as a result of retained earnings growth.
Penske's pension obligation is viewed as less-burdensome on the company's leverage profile as it is a cash-balance plan, which was 85% funded as of end-2015. Fitch expects leverage to decline modestly by end-2016, driven by retained earnings generation and lower capital expenditures. Fitch believes Penske's leverage metrics are appropriate at its current ratings, and incorporate the expectation that leverage will be managed at-or-near the company's articulated range.
Solid Liquidity Profile
Fitch views Penske's liquidity as solid, supported by the substantial cash generating capability of the operating lease portfolio. While free cash flow generation was negative for the six-months-ended 2016, this is attributable to the firm investing in rental and fleet assets that are expected to generate meaningful cash earnings. When lease and/or rental demand declines, the firm has historically quickly managed its fleet down, resulting in positive free cash flow and an ability to de-lever, as was observed during the recent financial crisis.
In addition, corporate credit facilities serve as a source of contingent liquidity. Penske has a $1.1 billion, revolving credit facility provided by a syndicate of banks, which had approximately $672 million of borrowing capacity, as of June 30, 2016. Based on unrestricted cash balances of $72 million, and estimated annualized operating cash flow of $1.7 billion, Penske would have sufficient liquidity to address near-term debt maturities of $875 million in the next 12 months.
Continued Funding Flexibility
Penske is predominately funded through unsecured debt, which represented around 85% of total funding as of June 30, 2016. This is viewed positively by Fitch, as available unencumbered assets improve balance sheet flexibility in times of market stress.
In 2015, Penske issued $2.3 billion in five, five-and-a-half and seven-year senior unsecured notes in the U.S. and Canadian markets, with semi-annual fixed rates of interest between 2.95% and 3.375%. 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.
Penske Truck Leasing Canada Inc.'s IDR reflects the shared branding with its parent, a guarantee provided by Penske, 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 is limited to serving as a pass-through issuing entity to access investors otherwise not permitted to invest in a limited partnership such as Penske. As such, the IDRs are aligned with those of Penske.
In July 2016, GE Capital sold 14.4% of its limited partner interest to Penske Automotive Group, Inc. (Penske Automotive) consistent with the broader strategy to exit investments not linked to GE's industrial businesses. Fitch views the sale of GE's partner interest as neutral to Penske's overall ratings.
IDRs 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 free cash flow 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.
Penske Truck Leasing Canada Inc. and PTL Finance Corporation's ratings are sensitive to the same factors that might drive a change in Penske's IDR due to the aforementioned ratings linkages between the subsidiaries and 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 Truck Leasing Corporation 41.08%, Penske Automotive 23.42%, Mitsui & Co., Ltd 20.0%, and GE Capital 15.5%.
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 Outlook is Stable.
Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company's audited financials.
Additional information is available on www.fitchratings.com.
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
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