Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
The Rating Outlook is Stable. Fitch has also affirmed the senior unsecured notes and unsecured revolving credit facility rating at 'BB'.
Key Rating Drivers
IDR AND SENIOR DEBT
The rating affirmation reflects Trinity's solid franchise as a leading provider of railcar products and services in
Trinity's ratings are constrained by relatively weak and inconsistent operating performance historically and a meaningful reliance on secured, short-term, wholesale funding sources. Rating constraints applicable to the broader railcar industry include the cyclicality of the manufacturing and leasing businesses; competitive operating environment due to an ongoing market oversupply of railcars; and the potential impact from federal, state, local, and foreign environmental regulations on railcars, particularly tank cars, which can heighten residual value risk and maintenance expenses.
On
Trinity's leasing portfolio is diversified across railcar types, commodities carried, and customers serviced. In
Asset quality remains strong with negligible write-offs given the company's conservative depreciation policy and the long economic life of its assets. In 1Q22, Trinity recognized
Operating performance, as measured by pre-tax return on average assets (ROAA), remains relatively weak, largely driven by rising input costs and supply chain issues in the manufacturing operations. Consolidated pre-tax ROAA was 0.62% for annualized 1Q22 and averaged negative 0.33% from 2018-2021, which is consistent with Fitch's 'b and below' category earnings and profitability benchmark range of below 1% for balance sheet intensive finance and leasing companies with a 'bbb' category operating environment score. Performance in 2020 was negatively impacted by impairment charges related to small cube covered hoppers. Fitch expects orders and deliveries to strengthen in line with a recovery for the railcar sector, which should support improved profitability metrics in 2022. Failure to develop a stronger and more consistent earnings profile could yield negative rating momentum.
Leverage (gross debt-to-tangible equity) was 4.6x at 1Q22, which is within Fitch's 'bb' capitalization and leverage benchmark for balance sheet intensive finance and leasing companies with a 'bbb' category operating environment score. Leverage increased from an average of 2.8x from 2018-2021 given
Secured funding as a percentage of total funding was 91% at 1Q22 and is primarily comprised of non-recourse warehouse facilities, secured term loans and equipment notes secured by railcars issued by the leasing operations. Trinity's unsecured funding consists of a
Fitch believes Trinity's liquidity profile is adequate consisting of
The Stable Outlook reflects Fitch's expectation for the maintenance of strong asset quality performance, appropriate leverage, sufficient liquidity, and consistent access to the capital markets to fund growth. The Outlook also reflects the expectation for a modest improvement in operating performance in line with the recovery in the railcar sector.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Factors that could, individually or collectively, lead to negative rating action/downgrade include failure to improve the level and consistency of operating performance, a reduction in the diversity and/or credit quality of its customers, a material and persistent reduction in fleet utilization, and/or an increase in impairments, a material and sustained increase in leverage approaching 5.0x, and/or weakening of the liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Factors that could, individually or collectively, lead to positive rating action/upgrade include enhanced earnings consistency and ROAA sustained above 2.5% while maintaining strong asset quality, an increase in unsecured funding approaching 25%, and a sustained reduction in leverage below 4.0x.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
Trinity's senior unsecured debt ratings are equalized with its Long-Term IDR, reflecting Fitch's expectations for average recovery prospects under a stress scenario.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The unsecured debt rating is linked to Trinity's Long-Term IDR and is expected to move in tandem.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Trinity has 'GHG Emissions & Air Quality', 'Water & Wastewater Management', and 'Waste &Hazardous Materials Management; Ecological Impacts' scores of '3', '2', and '3', which differs from the financial institution scores of '2', '1' and '1', respectively. This reflects Trinity's exposure to environmental impacts in its manufacturing business, but does not impact its rating. Trinity also has 'Customer Welfare', and 'Labor Relations & Practices' scores of '3', which differs from the financial institution score of '2', reflecting product safety and impact of labor in its manufacturing business, but does not impact its rating.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
BB
Affirmed
BB
senior unsecured
LT
BB
Affirmed
BB
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
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