Fitch Affirms Wheels at 'A/F1' Following Peer Review; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDRs) of Wheels, Inc. (Wheels) at 'A' and 'F1', respectively, following the completion of its fleet leasing peer review. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRS AND COMMERCIAL PAPER

Wheels' IDRs and Stable Rating Outlook are supported by the company's solid franchise and position as a leading provider of fleet leasing and management services in North America, as well as its solid portfolio performance through various economic cycles, sufficient liquidity, and consistent operating cash flow generation over time. These factors are counterbalanced by the inherent cyclicality of the commercial fleet leasing business, Wheels' reliance on secured, wholesale funding sources, and modestly higher tangible balance sheet leverage compared to other leasing companies.

Solid Asset Quality Through Cycles

Asset quality remains a key rating strength for Wheels, as the company has averaged one-basis point of annual net losses over its entire 77 year operating history. The lease portfolio is comprised predominately of open-end leases, which transfer residual value risk of the vehicle to the lessee. The essential business use of the vehicles leased by Wheels' customers also helps to mitigate the frequency and severity of lessee default. As a result, net losses have been minimal over time. Given Wheels' historically low loss experience, Fitch believes that current loss reserves are more than adequate.

The overall portfolio is relatively diversified by lessee and the credit quality of the underlying customer base is solid. The top 10 customers have an average credit rating of 'A-', based on a composite of Nationally Recognized Statistical Rating Organizations' (NRSRO) and Wheels' internal credit ratings. Some industry concentrations exist, but they are largely mitigated by strong underlying lessee credit quality within these industries. Industry concentrations, vehicle composition, and overall customer credit quality have remained relatively consistent over time.

Stable Operating Performance Over Time

Operating performance has remained stable, reflecting continued modest revenue growth and stable earnings over cycles. During the first nine-months of 2016 (9M16), Wheels reported year-over-year increases in revenues and pre-tax earnings of 2.9% and 1.5%, respectively, on fleet growth and signed customer backlog. Pre-tax return on assets has remained relatively in line with the average since 2011. Fitch expects operating performance to remain relatively stable over the medium term, as Wheels continues to grow its customer base, increase product and service penetration, and sign new vehicle backlog amid a low-growth economy.

Sufficient Liquidity and Operating Cash Generation

Fitch views Wheels as having sufficient liquidity given balance sheet cash, operating cash flow generation and available borrowing capacity under its various credit facilities to support vehicle purchases and for operations. While operating cash flow is generally redeployed toward fleet purchases, Fitch believes Wheels has the flexibility to minimize capital expenditures and redirect cash flows toward debt repayment, if necessary, should another market stress occurs. Given the consistent operating cash flow generation over time and sufficient liquidity resources, Wheels has never used this tactic in the past.

More Limited Funding Flexibility Given Secured Funding Structure

The company is debt-funded entirely on a secured, wholesale basis, which has helped Wheels achieve match-funding from a rate and spread perspective, but remains a rating constraint, in Fitch's view. Wheels utilizes commercial paper (CP) and other shorter-term facilities to warehouse a portion of its lease activity, which introduces a degree of refinancing risk. Positively, cash flows from underlying leases are typically matched to debt maturities, which along with committed liquidity facilities associated with CP issuance, limit the potential funding mismatches.

Generally, Fitch views Wheels' flexibility as somewhat limited given its secured funding profile and lack of unencumbered assets. However, this is somewhat mitigated by the diverse mix of funding sources, including bank credit facilities, revolving and term securitizations, private placement debt, and customer financing facilities, which Fitch views as sufficiently mitigating funding concentration risk, should some sources dry up or become cost prohibitive.

Modestly Higher Tangible Balance Sheet Leverage

Wheels' gross debt to tangible equity ratio was 6.75x, as of May 31, 2016, similar to the average of 6.76x since 2011. While tangible balance sheet leverage is modestly higher than that of other leasing companies, Fitch believes that Wheels' minimal loss experience and the open-end lease structure help to minimize the potential for capital erosion.

Fitch recognizes the stability and consistency of Wheels' cash flow generating ability, and thus Fitch also considers the company's gross debt to EBITDA ratio as a secondary leverage metric. On this basis, annualized cash flow leverage was 2.32x in 9M16, which is relatively in line with the average of 2.32x since 2011.

RATING SENSITIVITIES

IDRS AND COMMERCIAL PAPER

Fitch views upward rating momentum as limited given Wheels' current rating levels, as well as the company's monoline business strategy, and secured funding profile. Although not currently expected given Wheels' financial strategy, a material increase in unsecured funding, combined with a meaningful decrease in tangible balance sheet leverage, could lead to a positive rating action.

Conversely, negative rating momentum could be driven by significant customer departures, which would negatively impact lease revenues and ultimately core operating cash flow generation. Loss of competitive position, material increase in losses from customer bankruptcies, and/or a substantial increase in leverage from current levels could also result in a negative rating action.

Based in Des Plaines, IL, Wheels is one of the largest commercial fleet leasing and management companies in North America. Wheels is a private company and 100% owned by Frank Consolidated Enterprises. As of May 31, 2016, the company had approximately 300,000 vehicles under management.

Fitch has affirmed the ratings as follows:

Wheels, Inc.

--Long-Term IDR at 'A';

--Short-Term IDR at 'F1';

--Commercial paper at 'F1'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company's audited financials.

Additional information is available on www.fitchratings.com

Applicable Criteria

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=1012954

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012954

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

Contacts

Fitch Ratings
Primary Analyst
Johann Juan
Director
+1-312-368-3339
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
or
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johann Juan
Director
+1-312-368-3339
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Sean Pattap
Senior Director
+1-212-908-0642
or
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com