TEXT-S&P raises the Greenbrier Cos to 'B+', outlook is stable

Tue Dec 4, 2012 10:49am EST

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Overview
     -- U.S.-based railcar manufacturer The Greenbrier Cos. Inc.'s 
credit measures have improved to levels consistent with a higher rating.
     -- We are raising the corporate credit rating on Greenbrier to 'B+' from 
'B'. 
     -- The outlook is stable, reflecting our expectation that the company's 
leverage will continue to fluctuate with industry conditions, but that current 
debt to EBITDA of less than 3.5x will provide some capacity at the rating to 
absorb potentially weaker demand or performance than what we have assumed for 
2013, or a moderate increase in debt. 

Rating Action
On Dec. 4, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on Lake Oswego, Ore.-based Greenbrier Cos. Inc. (Greenbrier) to 
'B+' from 'B'. The outlook is stable. 

Rationale
The upgrade reflects Greenbrier's improved credit measures, "adequate" 
liquidity, and our expectation for relatively steady operating and financial 
performance in 2013 amid mixed demand conditions in the rail manufacturing 
industry and continued slow debt reduction. Based on current backlog, our 
assumptions for modestly lower new industry orders next year, and assuming a 
15%-20% market share, we expect modestly lower revenues and steady margins. 
This should translate into debt to EBITDA remaining between 3x and 3.5x 
(leverage was 3.2x at the end of fiscal 2012) and funds from operations (FFO) 
to total debt about 25%. These ratios would be somewhat stronger than our 
expectations for the rating of 4x-5x and 10%-15%, respectively. We believe 
this provides some flexibility for absorbing potentially weaker-than-expected 
railcar demand. This also recognizes some of the uncertainty about the future 
strategic direction and leverage profile of the company arising from potential 
developments related to activist investor Carl Icahn, who has currently a 
minority ownership position in the company. We view the company's business 
risk profile as "weak" and consider its financial risk profile as 
"aggressive." We view the company's management and governance profile as 
"fair." 

With 2012 revenues of about $1.8 billion (compared with $1.2 billion in fiscal 
2011), Greenbrier manufactures railcars and marine vessels (69% of sales); 
provides wheel services, refurbishment, and parts (about 27%); and provides 
railcar leasing services (4%). It is one of the major railcar manufacturer in 
North America, with an estimated 15%-20% market share, and in Europe with a 
10%-15% market share. In North America the company has a strong position in 
the double-stack intermodal segment, a good position in conventional railcars, 
and expanding tank cars capabilities. Key competitors include, among six main 
players in the North American market, Trinity Industries Inc. (BB+/Stable/--) 
and American Railcar Industries Inc. (B+/Stable/--).

Demand for new freightcars is highly cyclical (tied to railroads, shippers, 
and equipment lessors' capital spending, and to economic conditions), which we 
expect will continue to result in supply-demand imbalances and periods of 
overcapacity. This results in a price competition and large swings in orders, 
revenues, and profitability over the cycle. The company's profitability is 
also somewhat tied to prices for steel, a primary component of railcars and 
barges, which can fluctuate significantly and remain volatile. The company 
derives a significant portion of its revenue and backlog from a few major 
customers, including BNSF Railway Co. (BBB+/Stable/--), General Electric 
Railcar Services Corp. (not rated), and Union Pacific Railroad Co. 
(A-/Stable/--). Such dependence on key customers and the commoditized nature 
of certain railcar types limit Greenbrier's pricing power. 

Geographic diversity is limited, with only about 11% of Greenbrier's revenues 
coming from outside the U.S. Greenbrier benefits from its relatively more 
stable refurbishment and parts business, which it expanded through several 
acquisitions, and from a relatively small lease fleet of about 11,000 railcars 
that helps diversify its operations, as does its management services for 
approximately 219,000 railcars. These also provide higher margins than the 
manufacturing unit, but leasing operations can result in large swings in cash 
flow generation depending on the timing of the build-up and replacement cycle 
of the fleet.

New railcar demand has weakened somewhat in recent quarters, but it remains 
relatively sound entering 2013. Energy-infrastructure continues to provide for 
a robust demand base, especially in the tank car segment, and offset softer 
segments. Nonetheless, we expect overall demand will continue to correlate 
with the prevalent economic conditions in the U.S. We assume industry orders 
of 45,000 to 50,000 units next year, based on our GDP forecasts for continued 
slow growth in the U.S. economy. Greenbrier's backlog as of Aug. 31, 2012, was 
about $1.2 billion. This provides some visibility for revenues in fiscal 2013. 
We expect the stronger pricing of cars in the backlog to largely offset lower 
production volumes. However, manufacturing margins have been and will likely 
remain, in our view, somewhat weaker than peers. 

We characterize Greenbrier's financial risk profile as "aggressive." The 
company's total debt to EBITDA as of Aug. 31, 2012, has improved to about 3.2x 
from more than 5x a year ago and FFO to total debt was about 25%, compared 
with more than 5x and about 15% at year-end 2011. We expect leverage to be 
relatively steady based on sustained operating metrics. We expect free cash 
flow generation will be positive next year, although it could remain 
constrained by lease fleet-related capital spending. These investments are, 
however, more discretionary in nature and may be partially offset by railcar 
asset sales.

Liquidity
We believe Greenbrier has adequate sources of liquidity to cover its needs in 
the near term, even in the event of unforeseen EBITDA declines. Our assessment 
of Greenbrier's liquidity profile incorporates the following expectations and 
assumptions:

     -- We expect the company's sources of liquidity, including cash, to 
exceed its uses by 1.2x or more over the next 12-18 months.
     -- We expect net sources to remain positive, even if EBITDA declines more 
than 15%. 
     -- Compliance with financial covenants could survive a 15% drop in 
EBITDA, in our view. 
     -- We believe the company could absorb low-probability, high-impact 
shocks.

Liquidity sources include our expectation for modestly positive free cash flow 
in 2013, along with almost full availability under a $290 million revolving 
credit facility due June 2016, additional availability under its European and 
Mexican joint venture credit lines, and cash balances of about $50 million as 
of Aug. 31, 2012. We expect the company will maintain adequate cushion against 
financial covenants under the credit facility, which include a consolidated 
interest coverage ratio of more than 2x starting in the first quarter of 2013 
and a consolidated debt to capital ratio of less than 70%. Uses of liquidity 
include our assumption that the company will spend about $90 million in net 
capital expenditures in fiscal 2013. Near-term maturities include $68 million 
convertible notes, which are maturing in 2026 but have a put option in May of 
2013 that we assume noteholders will exercise.

Outlook
The outlook is stable. We expect credit measures to remain broadly steady next 
year. Our rating assumes somewhat lower demand in the freight railcar industry 
in 2013 than in 2012, and that Greenbrier will be able to largely offset the 
impact of fewer freightcar deliveries through higher average selling prices. 
The rating does incorporate some capacity for moderately higher leverage, 
although any substantial increase in debt that happens in connection with a 
new ownership structure or a shift in strategic direction would need to be 
evaluated accordingly. 

We could lower the rating if industry conditions deteriorate unexpectedly--for 
example if total industry orders weaken below 30,000 units or if Greenbrier 
market share weakens meaningfully below 15% without the prospect of subsequent 
improvement, as this would likely cause leverage to deteriorate beyond 5x debt 
to EBITDA. 

We could raise the rating by one notch if manufacturing margins show signs of 
sustainable structural improvement, if the outlook for industry fundamentals 
remains sound, and if we believe that financial policies will be consistent 
with a higher rating.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008



Ratings List
Upgraded; Outlook Stable
                                        To                 From
The Greenbrier Cos. Inc.
 Corporate Credit Rating                B+/Stable/--       B/Positive/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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