KBRA Affirms VTG’s BBB Ratings

17 Nov 2023   |   Dublin


KBRA Europe (KBRA) affirms the BBB issuer rating of VTG GmbH (“VTG” or “the Company”), a Germany-headquartered railcar leasing and logistics company, and affirms the BBB ratings of the senior secured private placement notes (“the Notes”) issued by VTG Finance S.A. and guaranteed by VTG. The Outlook for the ratings is Stable.

Key Credit Considerations

The ratings reflect VTG’s leading European market position in freight railcar leasing and logistics (~32% market share), primarily long-term customer contracts, diverse asset and customer mix, highly experienced management team, and consistent historical operating performance through economic cycles underpinned by stable utilization rates (currently above 90%) and long-tenured customers facing high switching costs. The ratings are constrained by potential fluctuations in the demand for certain asset types including intermodal cars on shorter-term leases (~20% of fleet), reliance on secured financing with limited unencumbered assets which may reduce financing flexibility in an economic downturn, higher leverage compared to higher-rated finance companies (approximately 6.5x Debt-to-LTM EBITDA as of June 30, 2023) and exposure to general macroeconomic conditions.

The Notes’ ratings are the same as the issuer rating reflecting a guarantee from VTG and the Notes’ pari-passu rank within the entirely secured funding structure of VTG’s core European business (“the Security Group”) which represents over 80% of the company’s fleet and EBITDA. The Notes have various bullet maturities and are collateralized by the Security Group fleet at a relatively high loan-to-value on a net book value basis but a more moderate loan-to-value on a discounted cash flow appraised value basis. KBRA notes that the high level of asset encumbrance by secured debt leaves limited unencumbered assets to further support potential recovery prospects. In addition, at higher rating levels, KBRA focuses more on probability of default and less on potential loss severity which could be reflected through debt instrument notching.

The Stable Outlook reflects the Company’s stable fleet utilization, lease rates and earnings metrics through economic cycles and during the Covid-19 pandemic. In addition, the Company has adequate liquidity (€66 million of cash and approximately €255 million of undrawn committed credit lines as of June 30, 2023), limited near-term debt maturities and a leverage ratio with adequate cushion to debt covenant levels.

VTG, founded in 1951 and headquartered in Hamburg, Germany is a leading wagon hire and rail logistics company operating Europe’s largest private wagon fleet with around 84,000 wagons. As of June 30, 2023, the company had total assets of €4.6 billion including fleet assets of €3.3 billion on a net book value basis.

Rating Sensitivities

The rating Outlook is Stable, therefore a rating upgrade in the near future is not expected. Over time, continued demonstration of stable earnings metrics, maintenance of lower leverage levels and improved funding and liquidity sources including unsecured debt and increased unencumbered assets, could lead to the consideration of an upgrade. The ratings Outlook could be revised to Negative or the ratings could be downgraded if the company experiences a material increase in leverage, deterioration in earnings, decreased liquidity or reduced financing availability either due to declining fleet utilization and lease rates or other negative economic impacts or market pressures.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

This credit rating is endorsed by Kroll Bond Rating Agency UK Limited for use in the UK. Information on a credit rating’s endorsement status is available on its rating page at KBRA.com.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

The rated entity is, or has a relationship with, one or more of KBRA Europe/KBRA UK shareholders that is required to be disclosed under applicable credit rating agency regulation in the EU and/or the UK. Please review KBRA’s shareholder disclosures, which are updated periodically.

About KBRA Europe

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider. Kroll Bond Rating Agency Europe is located at 6-8 College Green, Dublin 2, Ireland.

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