KBRA Affirms the A- Issuer Rating for Element Fleet Management Corp.
5 Oct 2023 | New York
KBRA affirms the issuer rating of A- for Element Fleet Management Corp. (TSX: EFN, “Element” or “the Company”), an automotive fleet leasing and management company based in Toronto, Canada. The Outlook for the rating is Stable.
Key Credit Considerations
The A- issuer rating reflects Element’s leading position in the automotive fleet leasing and management industry, high-quality and diverse customer base, stable revenue and cash flow generation, solid asset quality and focus on mission-critical assets of its clients, minimal credit losses through cycles, and low residual value risk exposure. Element enjoys a large-scale, cost-competitive franchise in its core operating markets. The Company benefits from a wide diverse, blue-chip customer base, with the top 25 lessees representing 36% of the total credit exposure. The rating is further supported by the Company’s profitability improvements captured through its previously announced transformation program completed in 2020. Element’s operating performance has continued to improve despite the ongoing Original Equipment Manufacturer (OEM) production delays. As of the last twelve months ending June 30, 2023 (LTM 2Q23), Element reported 7% net revenue growth over the FY2022 level. The Company also originated a quarterly record volume of $2.5 billion in the second quarter of 2023 owing to strong client demand and excess order backlog.
The rating is constrained by Element’s high tangible leverage, reliance on secured wholesale funding, and overall exposure to macroeconomic conditions in North America and Pacific regions. As of June 30, 2023, Element’s unadjusted Debt-to-Tangible-Common-Equity was 5.65x, which improved from the past few years as the Company continues to strengthen its balance sheet through debt reduction and the use of syndication. Element has made progress in diversifying its funding, particularly by issuing senior unsecured notes since 2020.
A rating upgrade or downgrade in the near-term is not expected. Over time, upward rating momentum could be achieved if the Company continues to reduce its leverage significantly, and to improve its funding diversity, including increasing the level of unencumbered assets, while maintaining strong and stable earnings and asset quality metrics. The Outlook could be revised to Negative or the ratings could be downgraded if sustained lower utilization and/or write-downs result in a sustained deterioration of leverage, earnings, liquidity and/or asset quality metrics.
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