LONDON--(BUSINESS WIRE)--Fitch Ratings has affirmed LeasePlan Corporation NV's (LeasePlan) Long-Term Issuer Default Rating (IDR) at 'BBB+' and Viability Rating (VR) at 'bbb+' following the completion of its fleet leasing peer review. Fitch has also affirmed Lincoln Finance Ltd's (LFL) senior secured notes Long-term rating at 'BB-' and their guarantor's, Lincoln Financing Holdings Pte Limited's (LFHPL), Long-Term IDR at 'BB-'. The Rating Outlooks on LeasePlan and LFHPL's Long-Term IDRs are Stable.
A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
LEASEPLAN's IDRS, VR, SENIOR DEBT AND SUPPORT RATING
LeasePlan's IDRs, VR and senior debt ratings are driven by the company's global, market-leading vehicle leasing franchise, strong risk management and sound funding and liquidity profile. The ratings also factor in the company's sizeable - albeit well-managed - exposure to residual value risk, its modestly higher than peers' tangible leverage, and the effects of its acquisition in March 2016 by a consortium of long-term investors.
The change of ownership was partly funded by LFL's issue of EUR1.25 billion and USD0.4 billion senior secured notes, guaranteed by new holding company, LFHPL. None of the acquisition-related debt is LeasePlan's own direct responsibility, but Fitch believes the revised group structure could still somewhat reduce LeasePlan's financial flexibility through the need to upstream dividends to service it, as LFHPL presently has no other source of income. At the same time Fitch recognises that the extent of this potential negative influence on internal capital generation is contained by LeasePlan's status as a regulated bank, as supervisor De Nederlandsche Bank (DNB) can exercise the power to prohibit or restrict upstream dividend distributions.
The Stable Outlook reflects Fitch's expectation that the new ownership will not result in LeasePlan adopting a significantly different strategy in the future, relative to that employed at present.
As the world's largest fleet and vehicle management company, LeasePlan holds leading market positions in most of its 32 countries of operation. This geographic diversification counterbalances the group's monoline business model and renders its performance less susceptible to economic downturn in any individual market. Since 2013, profits have been boosted by gains on used vehicle sales in excess of the longer-term trend, with pre-tax return on average assets reaching 2.8% in 1H16, but the underlying operating performance has also remained strong. Fitch expects used vehicle values to begin to normalize, which will likely create modest but manageable earnings pressure on LeasePlan along with other fleet lessors.
LeasePlan's banking regulatory risk-weighted capital ratios are strong (CET1 ratio of 18.1% at end-June 2016) and improving. However, its debt-to-tangible equity leverage (6.0x at end-June 2016) is modestly higher than broader leasing peers'. The group has a significant exposure to residual value risk via the large proportion of closed-end operating leases in its portfolio. While residual value risk cannot be entirely eliminated, as it depends on external factors such as second-hand car prices, efficient risk management has historically allowed the group to avoid material losses. This, together with the short-term nature of LeasePlan's assets and hence strong cash flow generation capability, partly mitigates the risk of higher balance sheet leverage.
LeasePlan's banking status is unusual among leasing companies and gives it potential access to European Central Bank (ECB) refinancing operations, if needed. It has also allowed the company to achieve a more diversified funding profile than peers through the gathering of retail savings in the Netherlands and, since 2015, in Germany (in total 28% of end-June 2016 non-equity liabilities). Most of these deposits are eligible for the Dutch deposit guarantee scheme, which supports the deposits' stability. Wholesale funding is mostly unsecured through a range of instruments, but LeasePlan also maintains access to the securitisation market. Liquidity and refinancing risk are prudently managed.
LeasePlan's Support Rating of '5' indicates Fitch's view that institutional support from its shareholders, if ever required, may be possible but cannot be relied upon.
In light of LeasePlan's banking status and deposit taking activities Fitch used 'Global Bank Rating Criteria' dated July 15, 2016 to help inform its assessment of certain aspects of LeasePlan's standalone profile, such as operating environment (and in particular, the regulatory framework), company profile, capitalisation and leverage, and funding and liquidity.
LFHPL's IDR AND LFL's SENIOR SECURED NOTES
LeasePlan represents LFHPL's only significant asset, and neither LFHPL nor LFL will have material sources of income other than dividends from LeasePlan, while LeasePlan's regulator could prohibit or restrict upstream dividend distributions. There are no cross-guarantees of debt between LFL and LeasePlan. In Fitch's view, debt issued by LFL is sufficiently isolated from LeasePlan so that failure to service it, all else being equal, may have limited implications for the creditworthiness of LeasePlan. Consequently, the instrument rating is based on the standalone profile of LFL and the guarantor.
LFHPL commenced ownership of LeasePlan with an interest reserve account containing cash covering 2.6 years of LFL's coupon payments on the senior secured notes, and an interest coverage account covering an additional 1.8 years. This eases LFL's initial debt service pressure and potential upstream dividend demands placed up LeasePlan. LFHPL is also covenanted to maintain at least this same level of cash coverage in the interest reserve account thereafter. However, replenishment of this cash will be dependent both on LeasePlan's ongoing ability to generate profits and on DNB approval for their distribution in dividend form.
RATING SENSITIVITIES
LEASEPLAN's IDRS, VIABILITY RATING AND SENIOR DEBT
Negative rating pressure could develop from a material deterioration of the group's capitalisation or leverage, which could result from a higher than expected use of LeasePlan in servicing the acquisition debt or from a less effective management of residual value risk amid a fall in used vehicle prices. Adoption of a riskier strategy or a less conservative approach towards liquidity would also be negative for the ratings.
Ratings could benefit in the medium term from improving leverage, without evidence of increased pressure from the new owners for upward dividend flow. A significant reduction of acquisition-related debt either as a result of partial repayment or from a build-up and retention of a dedicated cash cushion at the LFHPL level would be credit positive.
Fitch currently does not expect changes to LeasePlan's Support Rating.
LFHPL's IDR AND LFL's SENIOR SECURED NOTES
Both the IDR of LFHPL and the rating of LFL's notes are correlated with the ratings of LeasePlan. The ratings would also be negatively affected by significant depletion of liquidity within LFHPL which affects its ability to service its debt obligations. This would most likely be prompted by a material fall in earnings within LeasePlan restricting its capacity to pay dividends.
Positive rating action would likely stem from an accumulation of significant additional cash within LFHPL, accompanied by expectation of its retention there, as this would reduce the dependence of ongoing debt service on future LeasePlan dividends.
The ratings could also be sensitive to the addition of new liabilities or assets within LFHPL, but the impact would depend on the balance struck between increasing LFHPL's debt service obligations and diversifying its income away from reliance on LeasePlan dividends.
Fitch has affirmed the following ratings:
LeasePlan
--Long-term IDR at 'BBB+', Outlook Stable;
--Short-term IDR at 'F2';
--Viability Rating at 'bbb+';
--Support Rating at '5';
--Senior unsecured debt Long-term rating at 'BBB+';
--Senior unsecured debt and commercial paper short-term rating at 'F2'.
LFHPL
--Long-term IDR at 'BB-', Outlook Stable.
LFL
--Senior secured notes long-term rating at 'BB-'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884128
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012951
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012951
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.