-- 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
-- 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.
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.
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
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
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
-- 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
-- Compliance with financial covenants could survive a 15% drop in
EBITDA, in our view.
-- We believe the company could absorb low-probability, high-impact
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.
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
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
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
Upgraded; Outlook Stable
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