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