KBRA Affirms Rating for Element Fleet Management Corp.

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 rating reflects Element’s leading position in the automotive fleet management industry, with a large-scale, cost-competitive franchise in its core operating markets. Key to the credit profile is the company’s focus on mission-critical assets and ability to provide a broad range of end-to-end fleet management services that span the total vehicle life-cycle to a wide and diverse, blue-chip customer base. This has supported stable revenue and cash flow generation, as well as solid asset quality metrics, with the company reporting minimal credit losses through various cycles and low residual value risk exposure. The rating is further supported by an improving trend in profitability over recent years following the completion of a two-year transformation strategy in 2020. Element’s operating performance has continued to improve over recent periods as production has normalized, combined with higher penetration rates from existing clients, increasing revenue diversification with ancillary service offerings, and growth in both Mexico and Australia/New Zealand regions. The rating is constrained by Element’s relatively elevated leverage metrics (unadjusted debt-to-tangible common equity was 6.58x as of June 30, 2024), as well as level of secured funding, though we acknowledge notable progress in reducing the proportion of secured debt over the past few years by diversifying funding sources, primarily via unsecured debt issuances. The company continues to focus on strengthening its balance sheet through debt reduction and the use of syndication. While primarily centered on organic growth, in the event of a future acquisition, we would expect any potential transaction to be digestible and in line with management's communicated strategy, including a focus on cultural alignment, though inherent integration risks exist. The rating is also sensitive to general macroeconomic conditions in North America and Pacific regions.

Rating Sensitivities

While a rating upgrade is not expected over the near-term, upward rating momentum could be achieved over time if leverage metrics and funding diversity continue to improve, including a reduction in the level of encumbered assets, combined with 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 material deterioration of leverage, earnings, liquidity and/or asset quality metrics.

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