Fitch Affirms Truck Lessors' Ratings Following Peer Review; Outlooks Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of Penske Truck Leasing Co. L.P. (PTL) at 'BBB+' and Ryder System, Inc. (Ryder) at 'A-/F2' following the completion of its fleet leasing peer review. The Rating Outlooks are Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The rating affirmations reflect PTL and Ryder's established market positions in the truck leasing business, growing market shares in the logistics and supply chain solutions (SCS) business, operating consistency, and strong liquidity and funding profiles. The one notch differential in the long-term Issuer Default Ratings (IDRs) reflects Ryder's lower leverage, more diverse funding profile, and history of consistent access to the unsecured markets through various market cycles.

Rating constraints for both issuers include cyclicality inherent in used vehicle pricing and the commercial rental business, customer concentration in the SCS and logistics segments, and the potential regulatory impacts on business trends.

The Stable Outlooks for both entities reflect Fitch's expectation for continued economically favourable access to the capital markets through various market cycles, limited sensitivity to rising interest rates, strong liquidity, and operating consistency in 2014 driven by an increase in full service lease (FSL)/contract revenue, and growth in the logistics and SCS businesses.

Operating Performance

PTL and Ryder's operating performance improved in 2013. PTL's performance was driven by higher lease rates in its contractual business, increased demand in commercial rental, and new business in logistics, which offset lower vehicle sales gains and higher depreciation expense. Ryder's operating performance reflected an increase in FSL activity, strong commercial rental demand, and new business and higher volumes in SCS, which offset higher depreciation and lease, rental and services expenses.

Fitch expects operating performance for both entities to grow in 2014 supported by organic growth in FSL as more customers become willing to sign long-term contracts given improvements in broader economic conditions. Additionally, Fitch expects both companies to experience growth in their logistics and SCS businesses and post lower maintenance costs due to younger fleets. The logistics and SCS businesses help to diversify revenue sources, potentially cushioning earnings volatility on the downside and enhancing existing customer relationships.

Fitch believes interest rate sensitivity is relatively limited for PTL and Ryder as rental contracts are typically short term and increased funding costs can be passed through to the customer. There is a slight lag on the leasing side given the contracts are typically intermediate term, but both companies issue term debt in an attempt to match fund that portion of the business.

Leverage

While PTL does not have an explicit long-term leverage target, it expects to manage leverage, as defined by managed debt-to-equity near 3.0x in the near term. Managed leverage, which includes the value of minimum lease payments, declined to 3.3x in 2013 from 3.7x in 2012 due to an increase in equity. Total equity increased 14.1% in 2013 as a result of strong earnings generation as well as favourable pension adjustments. PTL's pension obligation is viewed as less-burdensome on the company's operating business since it is a cash-balance plan and the plan was over 100% funded at year-end 2013.

Ryder's managed leverage declined to 2.3x in 2013 from 2.7x in 2012, as increased debt outstanding was offset by higher equity. Total equity increased 29.2% from 2012 due to an increase in earnings, a temporary pause in its anti-dilutive share repurchase program, and a decline in the pension equity charge. The pension equity charge declined 26.5% during 2013 due to the impact of a higher discount rate and higher than expected asset returns. Excluding the impact of the cumulative pension charge, managed leverage was 1.81x at year-end 2013 versus 1.88x at year-end 2012.

Fitch favourably views the reversal of Ryder's pension equity charge but notes that potential future charges will be largely dependent on broader economic and market conditions. Ryder has tools at its disposal, such as pausing its anti-dilutive share repurchase program, to manage leverage within its long-term target of 2.25x-2.75x.

Fitch expects leverage to decline at PTL during 2014 due to increased earnings and capital expenditures similar to 2013. Fitch expects leverage to remain relatively stable at Ryder due to increased earnings and a decline in capital expenditures, partially offset by an increase in total debt outstanding. Fitch's current ratings incorporate the expectation that leverage will be managed at-or-near each company's articulated target, with debt funding organic growth.

Liquidity

Fitch considers both issuers' liquidity profile to be solid, supported by the substantial cash generating capability of their operating lease portfolios. PTL and Ryder generated average annual depreciation of approximately $1 billion and $897 million, over the past five years, respectively, which reduces net income, but contributes to the amount of free cash flow available for liquidity purposes. Aside from the cash flow generated from the lease portfolio and working capital management, both companies have corporate credit facilities which are also important sources of contingent liquidity. PTL has a $1 billion bank revolver, while Ryder had $402 million of borrowing capacity on its $900 million bank facility at Dec. 31, 2013.

RATING SENSITIVITIES

Negative rating action for either entity 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 firms' 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 result in negative rating action.

While Fitch believes positive rating action for both entities is limited in the medium term, positive rating momentum for PTL over the longer term could result from demonstrated access to the unsecured markets through market cycles, increased funding diversity, and reduced leverage. Positive rating momentum for Ryder could develop over time from greater revenue diversification, particularly from less balance sheet intensive activities such as SCS, and lower leverage.

Established in 1988 and headquartered in Reading, PA, PTL is a leading provider of full service truck leasing, truck rental, and contract maintenance and logistics services. PTL is a partnership between GECC (49.9%), Penske Corporation (41.1%) and Penske Automotive Group (9%).

Established in 1933 and headquartered in Miami, FL, Ryder is one of the world's largest providers of highway transportation services. Ryder's stock is listed on the NYSE under the ticker 'R'.

Fitch has affirmed the following ratings:

Penske Truck Leasing Co., L.P.

--Long-term Issuer Default Rating (IDR) at 'BBB+';

--Senior unsecured debt at 'BBB+'.

Ryder System, Inc.

--Long-term IDR at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2';

--Senior unsecured debt at 'A-'.

The Rating Outlooks are Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827229

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Contacts

Fitch Ratings
Primary Analyst
Katherine Hughes, +1 312-368-3123
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA, +1 212-908-9121
Senior Director
or
Committee Chairperson
Julie Solar, +1 312-368-5472
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Katherine Hughes, +1 312-368-3123
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA, +1 212-908-9121
Senior Director
or
Committee Chairperson
Julie Solar, +1 312-368-5472
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com