Fitch Ratings has affirmed Trinity Industries Inc.'s Long-Term Issuer Default Rating (IDR), senior unsecured notes and revolving credit facility at 'BB'.

The Rating Outlook is Stable.

Key Rating Drivers

The rating affirmations reflect Trinity's solid franchise as a leading provider of railcar products and services in North America. The ratings also reflect the company's diversified fleet portfolio across customers, industries and car types, strong asset quality performance over time, manageable exposure to residual value risk given conservative depreciation policies, consistent cash flow generation from the leasing business, adequate liquidity and experienced management team.

Trinity's ratings are constrained by historically weak operating performance given the high level of cyclicality of the railcar manufacturing and railcar leasing businesses, meaningful reliance on secured, short-term, wholesale funding sources, and modestly elevated leverage. Rating constraints applicable to the broader railcar leasing industry include a competitive operating environment and the potential impact from federal, state, local, and foreign environmental regulations on railcars, particularly tank cars, which can heighten residual value risk and maintenance expenses.

Trinity's leasing business (Trinity Industries Leasing Company, or TILC) contributes the majority of the company's consolidated pre-tax earnings, which helps to balance the more pronounced cyclicality of the railcar manufacturing operations. Fitch believes there are meaningful synergies between manufacturing and leasing, as TILC generates substantial railcar orders for Trinity as it obtains lease commitments from its customers. Trinity's leasing portfolio is diversified across railcar types, commodities carried, and customers serviced. In North America, Trinity served over 700 customers transporting around 900 different commodities with approximately 270 railcar types in 2022.

Asset quality remains strong with negligible write-offs given the company's conservative depreciation policy and the long economic life of its assets. In 1Q23, Trinity recognized $0.2 million of credit losses, which represented 0.6% of gross receivables. Asset quality metrics have been relatively stable over time and Fitch believes the company will maintain low write-offs given its ability to remarket railcars within the fleet.

Operating performance as of 1Q23 benefited from higher lease portfolio sales, partially offset by higher input costs in the manufacturing operations, higher fleet operating expenses, increased interest expenses and increased depreciation in the leasing business. Consolidated pre-tax return on average assets (ROAA) were 0.25% in 1Q23 annualized, well above the four-year average of negative 0.43% from 2019-2022. This is consistent with Fitch's 'b and below' category earnings and profitability benchmark range of less than 1% for balance sheet intensive finance and leasing companies with an operating environment score in the 'bbb' category.

Fitch expects orders and deliveries to strengthen in line with a recovery in the railcar sector, in addition to improved operating leverage, which should support improved profitability metrics in 2023. Failure to develop a stronger and more consistent earnings profile could yield negative rating momentum.

Consolidated leverage (gross debt-to-tangible equity) was 5.6x at 1Q23, up from 4.6x a year ago, which is consistent with the 'bb' category benchmark range of 4.0x to 7.0x for balance sheet intensive finance and leasing companies with an operating environment score in the 'bbb' category. Based on the manufacturing and leasing businesses' contribution to operating income, which were 14% and 86%, respectively. Averaged over the last four-years, leverage would have been 4.0x on a blended basis at 1Q23. Fitch believes leverage will remain elevated in 2023 given increased debt balances to support portfolio growth.

Secured funding represented 88% of total funding at 1Q23 and is primarily comprised of non-recourse warehouse facilities, secured term loans, and equipment notes secured by railcars issued by the leasing operations. Trinity's unsecured funding consisted of a $450 million committed, revolving credit facility (RCF) and $400 million of unsecured notes. Fitch believes Trinity's secured funding is high relative to more highly rated finance and leasing companies. Fitch would view an increase in unsecured funding favorably as it would improve the firm's overall funding flexibility.

Fitch believes Trinity's liquidity, which included $82 million in cash and marketable securities and $278 million of availability under the RCF, as adequate. This is further supplemented by operating cash flow, which averaged $411.1 million over the last four-years. The next debt maturity is in October 2024 when $400 million of senior unsecured notes come due.

The Stable Outlook reflects Fitch's expectation for the maintenance of strong asset quality performance, adequate liquidity and consistent access to the capital markets. The Rating Outlook also reflects the expectation for continued improvement in operating performance in line with the recovery in the railcar sector.

Trinity's senior debt ratings are equalized with its Long-Term IDR, reflecting sufficient unencumbered assets to support unsecured noteholders and suggest average recovery prospects under a stress scenario.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A material and sustained increase in leverage approaching 6.0x, failure to improve the level and consistency of operating earnings, a reduction in the diversity and/or credit quality of its customers, a material and persistent reduction in fleet utilization, an increase in impairments, and/or weakening of the liquidity profile would be negative for ratings.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A reduction in consolidated leverage approaching 4x, enhanced earnings consistency and ROAA sustained above 2.5%, and an increase in unsecured funding approaching 25% of total debt could lead to positive rating momentum.

The unsecured debt rating is linked to Trinity's IDR and is expected to move in tandem.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Trinity has an GHG Emissions & Air Quality, Energy Management, Water & Wastewater Management, and Waste &Hazardous Materials Management; Ecological Impacts scores of '3', '3', '2', and '3', which differs from broader financial institution peer scores of '2', '2', '1' and '1', respectively. This reflects Trinity's differentiated exposure to environmental impacts in its manufacturing business, but does not have a material impact on its rating.

Trinity also has a Labor Relations & Practices score of '3', which differ from the broader financial institution peer scores of '2', reflecting product safety and the impact of labor on its manufacturing business, but does not have a material impact on its rating.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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