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.
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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