Oct 16 - Fitch affirms Wheels, Inc.'s (Wheels) Long-term Issuer Default
Rating (IDR) at 'A' and Short-term IDR and commercial paper ratings at 'F1'. The
Rating Outlook is Stable.
The rating affirmations and Stable Outlook reflect Wheels' established market
position within the fleet leasing business, supported by its growing high
quality customer base and increased penetration. Wheels' proven business
strategy has helped generate consistent core operating cash flow through various
economic and capital market cycles, with minimal credit losses.
As customers have reduced or rationalized their fleets during challenging
economic conditions, Wheels has been able to maintain its profitability in 2011
and for the nine-months ended May 31, 2012, as well as invest in new product
development, expand its customer base and increase existing customer penetration
through ancillary product offerings and services. Barring substantial client
exits and/or defaults, Fitch expects profitability will remain strong in the
Historical lessor credit quality and lease performance have been excellent, and
reflect the company's conservative credit extension policy and lease structure.
As a result, the company has experienced no significant credit loss in its
entire operating history, which Fitch views positively. Wheels' corporate client
base is diverse and of good credit quality, without significant obligor or
industry concentrations. The overall portfolio is almost entirely comprised of
open-end leases, which protects Wheels from residual value risk upon vehicle
disposition. Due to its conservative depreciation policies, the company has
historically remarketed its vehicles above book value on average.
Wheels is entirely funded by secured debt, which has helped the company
match-fund against its assets and lower overall cost of funding. However, Fitch
believes flexibility is limited by the lack of unsecured debt in its overall
capital structure as well as the lack of access to public unsecured debt and
equity markets. While the company has demonstrated continued access to funding
through recent disruptions in the global capital markets, Fitch believes Wheels'
ratings are constrained by its reliance on secured funding.
The company's overall liquidity profile is supported by consistent operating
cash flow generation however, most of this cash flow is reinvested to acquire
new fleet assets, invest in new products, as well as to manage leverage. Fitch
believes that Wheels could minimize new vehicle acquisitions and redirect cash
flows to debt reduction, should access to market liquidity be restricted in the
Fitch believes Wheels' capitalization is appropriate for its current rating
category given the high quality of its customer's credit profile, low historical
loss experience and the company's minimal exposure to residual risk. The
company's equity base is of high quality, comprised of paid-in-capital and
retained earnings with no goodwill or other intangibles. Balance sheet leverage,
as measured by total debt to equity is consistent with other 'A' rated peers.
While leverage has historically been as high as 8.5x, management has indicated
that it intends to manage total debt to equity between 7x and 7.5x going
RATING DRIVERS AND SENSITIVITIES
Fitch believes that positive rating momentum is limited given Wheels' current
ratings, secured funding profile and sensitivity to general economic conditions.
Conversely, negative rating actions could result from significant client
departures and/or defaults, which would negatively impact overall lease revenue
that would ultimately hurt cash flow generation. In addition, loss of
competitive position, and/or substantial increase in leverage from current
levels could also put negative pressure on the rating.
Fitch has affirmed the following ratings with a Stable Outlook:
--Long-term IDR at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.