Fitch Ratings has affirmed Trinity Industries Inc.'s (Trinity) 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 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 weak operating performance historically 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 the 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 2023.

Asset quality remains strong with negligible residual value losses given the company's conservative depreciation policy and the long economic life of its assets. In 2023, Trinity recognized $3.1 million of credit losses, which represented 0.9% 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 as well as minimal credit losses within the receivables portfolio.

Operating performance in 2023 benefited from higher railcar external deliveries in the manufacturing business and improved lease rates and portfolio growth in the leasing business, partially offset by lower lease portfolio sales volume, the impact of foreign currency fluctuations on the manufacturing business, and higher related operating costs across the enterprise. Consolidated pre-tax return on average assets (ROAA) were 1.7% in 2023, up from 1.5% a year ago, and well-above the four-year average of negative 0.5% from 2020-2023. Fitch expects manufacturing cost improvements and lease fleet optimization will improve segment margins, which should support enhanced profitability metrics in 2024. Failure to develop a stronger and more consistent earnings profile could yield negative rating momentum.

Consolidated leverage (gross debt-to-tangible equity) was 5.5x at YE23, up modestly from 5.2x a year ago, which is consistent with Fitch's 'bb' category benchmark range of 4x to 7x for balance sheet intensive finance and leasing companies with a sector risk operating environment score in the 'bbb' category. Leverage is expected to remain below 6.0x, which Fitch believes is appropriate relative to the cyclicality of the manufacturing business.

Secured funding represented 86% of total funding at YE23 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 $600 million committed revolving credit facility (RCF) and $800 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 $106 million in cash and marketable securities and $583 million of availability under the RCF, as adequate. This is further supplemented by operating cash flow, which averaged $387 million annually over the last four years. The next debt maturity is in October 2024 when $400 million of senior unsecured notes come due. Fitch expects the notes to be refinanced with an unsecured issuance or with some combination of operating cash flows, balance sheet cash or RCF.

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 Outlook also reflects the expectation for continued improvement in the level and consistency of operating performance in line management's execution of strategic initiatives to enhance operating leverage.

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

Operating performance in 2023 benefited from higher manufacturing and leasing portfolio sales, partially offset by higher input costs in the manufacturing operations, higher fleet operating expenses and increased depreciation in the leasing business. Consolidated pre-tax return on average assets (ROAA), were 1.7% in 2023, well above the four-year average of negative 0.5% from 2020-2023. This is consistent with Fitch's 'ccc and below' category earnings and profitability benchmark range of less than 0% for balance sheet intensive finance and leasing companies with an operating environment score in the 'bbb' category, but the score is notched up to reflect Fitch's belief that this is not representative of current and future performance.

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 2024. Failure to develop a stronger and more consistent earnings profile could yield negative rating momentum.

Consolidated leverage (gross debt-to-tangible equity) was 5.5x at YE23: up from 5.2x a year ago, which is consistent with the 'bb' category benchmark range of 4x to 7x 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 profit, which were 12% and 88%, respectively averaged over the prior four years (2020-2023), leverage would have been 3.5x on a blended basis at YE23. Fitch believes leverage will remain elevated in 2024 given increased debt balances to support portfolio growth.

Secured funding represented 86% of total funding at YE23 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 $600 million committed revolving credit facility (RCF) and $800 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 $106 million in cash and marketable securities and $583 million of availability under the RCF, as adequate. This is further supplemented by operating cash flow, which averaged $387 million over the last four years. The next debt maturity is in October 2024 when $400 million of senior unsecured notes come due. Fitch expects the notes to be refinanced with an unsecured issuance or with some combination of operating cash flows, balance sheet cash or RCF.

RATING SENSITIVITIES

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

Failure to improve the level and consistency of operating earnings;

A material and sustained increase in leverage approaching 6.0x;

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

Enhanced earnings consistency and ROAA sustained above 2.5%;

A reduction in consolidated leverage approaching 4.0x; and

An increase in unsecured funding approaching 25% of total debt.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

Trinity's unsecured debt rating is equalized with the Long-Term IDR, reflecting expectations for average recovery prospects under a stress scenario.

The unsecured debt rating is equalized to Trinity's Long-Term IDR and is expected to move in tandem. However, unsecured funding below 10% and/or material reduction in unencumbered assets could result in the widening of the notching between Trinity's Long-term IDR and unsecured notes.

ADJUSTMENTS

The Standalone Credit Profile has been assigned below the implied Standalone Credit Profile due to the following adjustment reason(s): Weakest Link - Earnings & Profitability (negative).

The Sector Risk Operating Environment score has been assigned below the implied score due to the following adjustment reason(s): Regional, industry or sub-sector focus (negative).

The Business Profile score has been assigned below the implied score due to the following adjustment reason(s): Business model (negative).

The Earnings & Profitability score has been assigned above the implied score due to the following adjustment reason(s): Historical and future metrics (positive).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Historical and future metrics (negative).

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.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visithttps://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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