Fitch Assigns Initial 'BBB-' IDR to Trinity Industries Inc.; Outlook Stable
CHICAGO -- November 25, 2013
Fitch Ratings has assigned an initial Issuer Default Rating (IDR) for Trinity
Industries Inc. (TRN) at 'BBB-'. In addition, Fitch assigns a rating of 'BBB-'
to the senior unsecured revolving credit facility and a 'BB+' rating for TRN's
subordinated convertible notes. The Rating Outlook is Stable. Approximately
$450 million of outstanding debt is covered by these ratings. A full rating
list follows at the end of this release.
Key Rating Drivers
Rating strengths include the company's financial flexibility, solid free cash
flow (FCF), low leverage, and leading industry positions in railcar, inland
barge, structural wind tower, and energy storage container manufacturing. The
ratings also incorporate TRN's disciplined capital deployment, including
funding the majority of acquisitions and share repurchases from cash
Fitch expects TRN to maintain strong credit metrics for the rating in the near
term during normal to strong business cycles. Manufacturing leverage was 1.06x
as of June 30, 2013, but Fitch expects metrics to drop harshly during trough
business cycles. In a downturn, manufacturing leverage (total manufacturing
debt/manufacturing EBITDA) could approach 3.0x; however, this would not
necessarily trigger a negative rating action, given expectations for a
relatively quick recovery, TRN's continued conservative financial policy,
strong market share, and solid performance at Trinity Industries Leasing
The ratings also reflect Fitch's expectation of TRN's continuing conservative
financial strategy and strong market share through business cycles. Current
railcar orders and backlog visibility have provided TRN additional flexibility
unlikely to be available during the next business cycle trough. Fitch expects
TRN to generate solid FCF in 2014 and into 2015 as the manufacturing
visibility from the current backlog stabilizes working capital requirements.
Fitch's key rating concern is the cyclicality of TRN's end markets, especially
in the Rail Group. Large declines in revenues during 2009 and 2010 of 38% and
28%, respectively, provide consecutive drops, unlike other cyclical
industries. Fitch expects TRN to activate specific financial triggers during a
downturn, such as capital expenditures, acquisitions, and share repurchases to
offset decreased profitability and negative free cash flow during the business
TRN's cyclical operating profile provides volatile FCF generation based
largely on working capital requirements and TILC railcar purchases. As of June
30, 2013, LTM manufacturing FCF was $224 million as working capital
requirements were relatively flat and manufacturing capital expenditures were
elevated while operations remained favorable. Fitch expects 2013 manufacturing
FCF to approach $200 million and $250 million-$300 million for 2014 from
strong backlog visibility and increased profitability. Fitch estimates TRN to
generate solid FCF in good/neutral operating environments.
Flexibility of TRN's manufacturing footprint provides versatility between
locations and contributes to positive manufacturing funds from operations and
EBITDA through business cycles. Current backlog levels have provided
visibility in production, minimizing manufacturing floor adjustments and
providing for increased margins. Fitch anticipates full-year 2013
manufacturing margins will approach 16% and similar performance in 2014.
Industry demand for railcars continues to be above replacement levels.
Historically high age of the industry fleet and demand for tank cars remain
drivers. Margins benefit from pricing and product mix from such demand.
Long-term demand from the North American energy market is favorable based on
recent production estimates. Fitch expects TRN to benefit from such demand;
however, overcapacity and improved pipeline infrastructure could affect growth
long term. Trinity's Rail Group backlog as of Sept. 30, 2013 was approximately
$5.1 billion, providing visibility into 2015. Future acquisitions are expected
to be focused on the manufacturing businesses, in particular energy and
The company holds strong-to-leading market share in all of the operating
segments. Trinity railcar shipments for the LTM period ending Sept. 30
accounted for 45% of all North American shipments. Historically, market share
ranges from 29%-46%, pending car mix at that point in the cycle. Trinity is
the leading inland barge (hopper and tank), highway guardrail, specific energy
storage container, and structural wind tower manufacturer. The company is able
to somewhat offset the cyclicality of the end markets with strong market
presence in each product.
Rating concerns include TRN's cyclical operating environment, potential
support provided to TILC, the possible negative impact on liquidity and
leverage from future acquisitions and share repurchases, and integration risk
related to acquisitions. These concerns are mitigated in the near term by
strong demand in TRN's North American energy market that should support tank
car and barge volumes.
The relationship between TRN and TILC is an important rating consideration.
Fitch views TILC as a core part of TRN's railcar business reflecting strong
operational and financial linkages between the two companies. In addition,
TILC helps offset cyclicality in TRN's manufacturing businesses and increases
TRN's presence in the railcar market by providing customers a 'one-stop shop'
for railcar type and purchase options. When TILC purchases leased railcars
from TRN the revenue and profit on the sale are eliminated and the transaction
is accounted for as leasing capital expenditures on the consolidated cash flow
statement, thus negatively affecting manufacturing cash flows at the time of
sale. The negative effect increases during times of higher railcar lease
allocation by customers most common during cycle downturns; however, this is
already reflected in TRN's ratings.
TILC credit strengths include TILC's asset quality and financial performance.
Fitch considers TILC's asset quality to be strong given the relatively high
credit quality of the company's customer base. Operating performance has
recently improved, driven by larger fleet and higher lease rates due to
increased leasing renewal for railcars serving energy markets, offset by lower
profits from external railcar sales. TILC performed well during recent
downturns with low write-offs and the ability to remarket railcars within the
TILC does not benefit from a formal support agreement from TRN, although TRN
made TILC a guarantor on its corporate credit facility, in which TILC may use
borrowing proceeds from the facility. As such, Fitch views TILC funding needs
as an ongoing risk. Such funding may be required due to maturing debt
obligations or poor asset performance.
TILC bears the residual risk on the value of its assets; however, it is offset
by the long economic life railcars achieve. Regulatory risks could adversely
affect TILC's performance. For example, outstanding DOT-111 regulations may
affect TILC's operations; however, Fitch does not expect a material impact at
The manufacturing company has limited debt. Manufacturing debt is comprised of
$450 million subordinated notes and the $425 million corporate revolving
credit facility. The subordinated notes are one notch below the IDR due to
structural subordination to other securities and lower amounts of total debt
and expected funding needs. TILC has substantial debt due to the funding needs
of the leasing company. Nearly all debt at TILC is structured as non-recourse
back to TRN. Legally TRN does not have any obligations to support TILC in an
event of default. However, Fitch expects TRN to support TILC due to the
operational importance between the two companies.
As of Sept. 30, 2013, liquidity totaled $848 million including $496 million of
cash and $352 million of availability on a $425 million revolving credit
facility. These levels have remained consistent through the operating cycle,
providing solid financial flexibility. TRN has no material debt maturities
A positive rating action is unlikely in the near- to medium-term based upon
the cyclicality of TRN's business cycles and possible support provided to
TILC. Increased diversification in the product portfolio leading to consistent
positive manufacturing FCF and improved margins may lead to a positive rating
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Sustained negative manufacturing FCF;
--Loss of market share;
--Manufacturing leverage consistently greater than 3.0x;
--Large debt-funded acquisition and share repurchases;
--Substantial support for TILC due to weakening liquidity.
Fitch assigns TRN's ratings as follows:
Trinity Industries Inc.
--IDR at 'BBB-';
--Senior unsecured revolving credit facility at 'BBB-';
--Subordinated convertible notes at 'BB+'
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage', Aug. 5, 2013;
--'Treatment and Notching of Hybrids in Corporates and REIT Credit Analysis',
Dec. 13, 2012.
--'Finance and Leasing Companies Criteria', Dec. 11, 2012.
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
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