Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Trinity Industries Inc. (Trinity) at 'BB'.

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 North America; diversified fleet portfolio across customers, industries and car types; strong asset quality performance over time; manageable exposure to residual value risk given conservative depreciation policies; consistent cash flow generation from the leasing business; sufficient liquidity; appropriate leverage; and an experienced management team.

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 Dec. 31, 2021, Trinity completed the sale of its highway products business, Trinity Highway Products, LLC, for $375 million, leaving the firm solely focused on the railcar industry, with sizable leasing and manufacturing businesses. Trinity's leasing business (Trinity Industries Leasing Company, or TILC) contributes the majority of the company's consolidated pre-tax earnings, which helps to balance the more pronounced cyclicality of the railcar manufacturing operations. Fitch believes there are meaningful synergies between manufacturing and leasing, as TILC generates substantial railcar orders for Trinity through lease commitments from its customers.

Trinity's leasing portfolio is diversified across railcar types, commodities carried, and customers serviced. In North America, Trinity served over 700 individual customers transporting around 900 different commodities with approximately 270 railcar types, as of March 31, 2022.

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 $1.5 million of credit losses, which represented 0.8% of gross receivables. Asset quality metrics have been relatively steady over time, and Fitch believes the company will maintain low write-offs given its ability to remarket railcars within the fleet.

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 $895 million of dividends and share repurchases made in 2021 following the sale of the highway products division. Fitch believes leverage is appropriate for the current ratings and does not expect metrics will move materially in the medium term.

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 $450 million revolving credit facility and $400 million of unsecured notes. Fitch believes Trinity's secured funding is high relative to more highly rated finance and leasing companies, and would view an increase in unsecured funding favorably, as it would improve the firm's overall funding flexibility.

Fitch believes Trinity's liquidity profile is adequate consisting of $143 million of cash and marketable securities and $574.7 million of borrowing capacity on funding facilities. This is further supplemented by operating cash flow, which amounted to $28.5 million in 1Q22. The next term debt maturity is in September 2024 when $400 million of unsecured notes come due.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

Trinity Industries Inc.

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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