TEXT-S&P summary: GATX Corp.
Aug 31 -
Summary analysis -- GATX Corp. ------------------------------------ 31-Aug-2012
CREDIT RATING: BBB/Stable/A-2 Country: United States
Primary SIC: Rental of
Mult. CUSIP6: 361448
Mult. CUSIP6: 361477
Mult. CUSIP6: 3614E2
Mult. CUSIP6: 3614E3
Mult. CUSIP6: 36804P
Mult. CUSIP6: 368907
Credit Rating History:
Local currency Foreign currency
06-Aug-2010 BBB/A-2 BBB/A-2
17-May-2007 BBB+/A-2 BBB+/A-2
The ratings on Chicago-based GATX Corp. reflect its position as a major tank car lessor in North America. Tank car leasing is a business that benefits from relatively consistent tank car lease demand and long-term leases and contracts that produce relatively stable cash flow. However, the ratings also incorporate the company's fairly high debt leverage relative to its peers and the less predictable revenue and earnings in its Portfolio Management and American Steamship Co. (ASC) segments. Standard & Poor's Ratings Services characterizes GATX's business risk profile as "satisfactory," its financial risk profile as "intermediate," and its liquidity as "adequate" under our criteria.
Beginning in late 2010, demand and pricing for railcars began to recover, a trend we expect to persist as long as economic growth continues. In addition, profitability at the company's Portfolio Management and American Steamship Co. (ASC) segments has also improved. These trends have resulted in improved earnings--$118 million for the 12 months ended June 30, 2012, compared with $87 million in the prior-year period--and cash flow. However, we expect the company's credit metrics to remain relatively consistent through 2012 because we expect GATX to continue to add debt to fund capital spending to meet recovering demand.
The GATX Rail segment is a major full-service lessor and manager of specialty railcars, with a fleet of about 130,000 owned railcars in North America and Europe (approximately 60% of which are tank cars). GATX also has an interest in, and manages for third-party owners, about 34,000 railcars in North America and Europe. GATX's other businesses are Portfolio Management, which provides leasing, asset remarketing, and asset management services to the marine and industrial equipment markets, and ASC, which operates a fleet of vessels on the Great Lakes. GATX Rail accounts for about 81% of GATX's $6.5 billion of owned and leased assets, Portfolio Management accounts for 12%, and ASC for 6%.
The tank car leasing industry is highly concentrated, with only a handful of major participants. Demand for the products that tank cars transport (liquid bulk commodities, including chemical, petroleum, and food products) is fairly stable, and the industry benefits from multiyear leases, providing predictable revenue streams. Utilization has continued to improve, to 98.3% as of June 30, 2012, from about 96% in mid-2009, in the depth of the downturn that began in mid-2008. In addition, lease rates and average lease terms continued to improve in 2012. The average lease renewal term increased to 59 months as of June 30, 2012, from 41 months a year earlier, and lease renewal rates increased by 24% over that period, after increasing by 4% the prior year. With ongoing recovering demand and disciplined fleet additions, we expect utilization and pricing to continue to improve modestly into 2013.
We expect the company's credit metrics to remain relatively consistent through 2013 as incremental debt to fund capital spending to meet recovering demand offsets expected improvement in revenues and earnings. GATX's debt to capital--about 80% as of June 30, 2012--is higher than its railcar leasing peers Union Tank Car Co. and TTX Co., neither of which disclose their financial results publicly. With improved earnings, its EBITDA interest coverage has increased to close to 3x for the 12 months ended June 30, 2012, from 2.4x a year earlier, while its funds from operations (FFO) to total debt has increased modestly to about 13% from 11%.
We characterize GATX's liquidity as adequate. As of June 30, 2012, the company had $38 million in unrestricted cash and $530 million available under its $560 million revolving credit facility that matures in May 2015).
In accordance with our methodology and assumptions, the relevant aspects of GATX's liquidity in our view include:
-- Coverage of cash uses by cash sources of approximately 1.2x, the minimum threshold for an adequate designation, for the next year;
-- Our expectation that net sources would be positive, even with a 15% decline in EBITDA, consistent with our criteria standard of 15%;
-- Our expectation that GATX will remain in compliance with its financial covenant requiring a minimum fixed-charge coverage ratio of 1.2x, even if EBITDA were to decline by 15% over the next year;
-- Our belief that GATX would be able to absorb high-impact, low-probability events with limited refinancing is high, as we believe that such events would likely require only limited refinancing activity; and
-- Its prudent financial risk management.
We expect that stand-alone sources of funds will consist of:
-- The company's credit facility,
-- Capital markets financings (both secured and unsecured), and
-- FFO (as reported, not fully adjusted, based on our expectations) of at least $300 million a year in both 2012 and 2013.
Major uses of funds include:
-- Debt maturities of about $450 million in the second half of 2012, and about $490 million in 2013; and
-- Committed capital spending, primarily for railcars, of $276 million in the second half of 2012, and $300 million in 2013.
The outlook is stable. We expect that GATX's credit metrics will remain close to current levels through 2013, with EBITDA interest coverage in the high 2x area, FFO to debt in the low teens percent area, and debt to capital in the high 70% area, based on our expectations of improving demand for GATX's businesses over this period, with incremental debt used to finance capital spending to meet higher demand. We could lower the ratings if demand weakened, leading to a decline in railcar utilization and lease rates, lower shipments of iron ore on the Great Lakes, and lower asset remarketing proceeds, resulting in EBITDA interest coverage declining to below 2x and FFO to debt declining to the high-single-digit percent area on a sustained basis. We could also lower the ratings if the company's financial policy becomes more aggressive (for example, through a substantial share repurchase or major debt-financed acquisition), leading to the credit metrics cited above. An upgrade is not likely until demand recovers more significantly (resulting in EBITDA interest coverage increasing to more than 3x and FFO to debt to the mid-teens percent area on a sustained basis).
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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