Fitch Affirms Penske Truck Leasing at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Chicago-21 September 2020: Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Penske Truck Leasing Co., L.P. and its rated subsidiaries at 'BBB+'. The Outlook is Stable. Fitch has also affirmed the senior unsecured debt ratings at 'BBB+'. These rating actions have been taken as part of a periodic peer review of fleet leasing companies, comprising four publicly rated firms. Key Rating Drivers IDRs and SENIOR DEBT The rating affirmations are supported by Penske's established franchise as a full-service truck leasing, truck rental, contract maintenance and logistics provider; strong asset quality; relatively consistent operating performance through various cycles; appropriate leverage; solid liquidity; and a largely unsecured funding profile. The ratings are constrained by Penske's relatively higher leverage appetite compared with more highly rated peers and modest pension obligation risk. Rating constraints applicable to the broader truck leasing sector include customer concentrations in the logistics segment, cyclicality inherent in the commercial rental business, sensitivity to used vehicle pricing and residual value risks, as well as the potential regulatory impact on business trends. Fitch believes that the coronavirus pandemic will have a modest impact on Penske's financial metrics over the medium term, notably asset quality, earnings and profitability. Fitch believes that customer credit risks will remain elevated, and renewed social distancing measures due to continued high positivity rates for new coronavirus cases in the U.S. could pressure Penske's operating cash flow generation. However, the impact of these risks is believed to be manageable, given the diverse customer portfolio, prudent residual value management and limited contracted deferral activity to date. Fitch's 'Global Economic Outlook' published Sept. 7, 2020, forecasts global GDP in 2020 to contract 4.4%; improved from a 4.6% contraction forecast in June, noting that the initial phase of economic recovery from pandemic-related lockdowns has been faster than expected. Even though the pandemic has yet to be contained, Fitch's base case assumption assumes that major advanced economies will avoid renewed national lockdowns, but U.S. economic activity will not fully return to pre-pandemic levels until 4Q21. Penske's asset quality and equipment valuation risks are influenced by the general condition of the domestic economy. Net accounts receivable write-offs as a percentage of total invoicing were 0.4% in 2Q20, up slightly from the four-year average of 0.3% during 2016-2019. The stable asset quality performance reflects a relatively diverse lease portfolio, the essential business-use of the vehicles and the presence of economic stimulus, which have supported client payment rates. Penske has also granted payment deferrals to a limited number of customers, typically for two- to three-month periods in early 2Q20, and payments have subsequently resumed. Fitch believes asset quality metrics could deteriorate modestly given elevated new cases in the U.S., but write-offs are not expected to exceed peak levels of 0.5% experienced in 2009 if Penske's customers remain solvent and continue to make their payments. Gains on used vehicle sales as a percentage of proceeds from all vehicle sales were 11.6% for LTM ended June 30, 2020, lower relative to average reported gains of 16.8% during 2016-2019. Fitch believes used truck gains have and will continue to be negatively impacted by higher vehicle inventory and weaker pricing. The gain percentage is influenced by market conditions, age of fleet and method of disposal - Penske sells its vehicles via both wholesale and retail channels. In an effort to maximize gains, Fitch believes Penske will continue to pursue disposing its vehicles through the retail market, when possible, where pricing is more attractive. Operating revenues decreased 0.7%, yoy during 1H20 compared with the same period in 2019. Operating revenue was lower in 2020, primarily due to a decline in rental operations and logistics, which were partially offset by improvements in full-service leasing, and contract maintenance. Lower revenues and a decline in gains on used vehicle sales contributed to a 29% decline in pretax income. Pretax return on average assets was 2.8% for LTM ended 2Q20, which was below the average of 3.4% in 2016-2019. Fitch expects operating performance to flat in full-year 2020 compared to the year prior, as lower gains from used vehicle sales, reflecting the continued weak heavy-duty tractor environment, will be offset by solid contract sales and a modest recovery in commercial rental and logistics. While Penske does not have an explicit long-term leverage target, it expects to manage leverage, defined as debt/equity, around 3.5x. Managed leverage, which includes the present value of capital lease obligations, amounted to 3.6x at June 30, 2020; consistent with the average of 3.6x from 2016-2019. For leasing companies, Fitch focuses on managed debt/tangible equity in its analysis of leverage. On this basis, Penske's leverage was 5.6x at June 30, 2020, modestly lower than the average of 5.9x in 2016-2019, given lower debt balances and retained earnings generation. Absent material credit deterioration, Fitch expects lower debt balances and retained earnings generation in 2020 will bring Penske's leverage back to Fitch's benchmark range for 'bbb' category finance and leasing companies of 3.0x-5.0x, with an operating environment score in the 'a' category. The company is predominately funded through unsecured debt, which represented 83.3% of total funding at June 30, 2020, which is within Fitch's 'a' category funding, liquidity and coverage benchmark range of 50%-90% for finance and leasing companies, with an operating environment score in the 'a' category. Fitch views this funding profile favorably, as available unencumbered assets improve balance sheet flexibility in times of market stress. In 1H20, Penske issued $500 million of five-year senior unsecured notes, with a semi-annual fixed interest rate of 4.0%. Proceeds from the issuance were used to repay existing debt and for general corporate purposes. Fitch believes Penske will continue to opportunistically access the capital markets to address near-term debt maturities and to optimize pricing. Fitch views Penske's liquidity profile as solid, supported by the substantial cash generating capability of the operating lease portfolio. The company is expected to be FCF positive in 2020 given declines in capex, which should allow Penske to reduce leverage and manage its liquidity in the current economic environment. When lease or rental demand declines, the firm has historically quickly managed its fleet down, resulting in positive FCF and an ability to de-lever, as was observed during the last financial crisis. Corporate credit facilities also serve as a source of contingent liquidity. At June 30, 2020, Penske had a $1.25 billion revolving credit facility and a $1.7 billion asset-backed securitization facility provided by a syndicate of banks, which had approximately $1.1 billion and $329 million of available borrowing capacity as of the same date, respectively. Based on unrestricted cash balances of $48 million and annualized cash flows generated from operations over LTM ended June 30, 2020, Penske would have more than sufficient liquidity to address debt maturities of $650 million over the next 12 months. The Stable Outlook reflects Fitch's expectation that Penske has sufficient headroom at the current rating to withstand a modest degree of asset quality and earnings deterioration, and is expected to retain solid near-term liquidity, maintain appropriate leverage and adequate funding flexibility. The unsecured debt rating is equalized with the Long-Term IDR, reflecting the predominately unsecured funding profile and the presence of unencumbered assets, which suggest average recoveries under a stress scenario. SUBSIDIARY AND AFFILIATED COMPANIES PTL Finance Corporation and Penske Truck Leasing Canada, Inc.'s Long-Term IDRs reflect the entities' status as wholly owned subsidiaries of Penske. As such, the Long-Term IDRs of PTL Finance and Penske Truck Leasing Canada are aligned with that of Penske. RATING SENSITIVITIES IDRs AND SENIOR DEBT Factors that could, individually or collectively, lead to negative rating action/downgrade include an increase in leverage sustained above 6.0x resulting from a decline in earnings, and/or FCF beyond Fitch's expectations. Additionally, deterioration in the firm's competitive positioning, material weakening in 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. Positive rating momentum for Penske is limited at present given the challenging economic backdrop from the coronavirus pandemic and the company's higher leverage appetite relative to more highly rated peers. However, factors that could, individually or collectively, lead to positive rating action/upgrade include the maintenance of lower leverage below 3.5x on a managed debt to tangible equity basis, and demonstrated access to the unsecured markets through a variety of market cycles. The senior unsecured debt rating is equalized with the Long-Term IDR and is expected to move in tandem; however, a material increase in secured funding and/or a material reduction in unencumbered assets could result in a widening of the notching between Penske's Long-Term IDR and unsecured notes. SUBSIDIARY AND AFFILIATE COMPANIES PTL Finance's rating is sensitive to the same factors that might drive a change in Penske's Long-Term IDR due to the aforementioned rating linkages between the two entities. Formed 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. Currently, Penske is owned, directly and indirectly, by Penske Truck Leasing Corporation (41.08%), an indirect subsidiary of Penske Corporation, a privately owned diversified transportation services company; a wholly owned subsidiary of Mitsui & Co., Ltd. (30.00%); and Penske Automotive Group, Inc. (28.92%), a publicly traded international automotive retailer that is an affiliate of Penske Corporation. 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 The highest level of Environmental, Social and Governance (ESG) credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Penske Truck Leasing Co., L.P.; Long Term Issuer Default Rating; Affirmed; BBB+ ----senior unsecured; Long Term Rating; Affirmed; BBB+ PTL Finance Corporation; Long Term Issuer Default Rating; Affirmed; BBB+ ----senior unsecured; Long Term Rating; Affirmed; BBB+ Penske Truck Leasing Canada Inc.; Long Term Issuer Default Rating; Affirmed; BBB+ ----senior unsecured; Long Term Rating; Affirmed; BBB+ Contacts: Primary Rating Analyst Johann Juan, Senior Director +1 312 368 3339 Fitch Ratings, Inc. One North Wacker Drive Chicago 60606 Secondary Rating Analyst David Petu, Director +1 212 908 0280 Committee Chairperson Nathan Flanders, Managing Director +1 212 908 0827 Media Relations: Hannah James, New York, Tel: +1 646 582 4947, Email: hannah.james@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10110170) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10136730) Solicitation Status (https://www.fitchratings.com/site/pr/10136730#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10136730#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10136730#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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