June 12, 2018

Trinity leasing unit returns to ABS market

The leasing subsidiary of railcar manufacturer Trinity Industries is returning to the securitisation market for the first time in four years, according to rating agency pre-sale reports.

The $482.5 million Trinity Rail Leasing 2018 is the first Trinity Industries Leasing Co asset-backed portfolio since 2014, with a portfolio of relatively young (5.1 years) railcars with a combined market value of $621.6 million.

Two tranches of 10-year notes with preliminary single-A ratings from Kroll Bond Rating Agency (KBRA) and S&P Global Ratings will be issued in the transaction: $200 million in Class A-1 notes and $282.5 million in Class A-2 notes.

The classes differ in their amortisation schedules: the Class A-1 notes repay interest and principal on a straight-line schedule, while the A-2 notes pay only interest, with principal repaid upon maturity.

The notes are secured by lease receivables on nearly 7,000 tank and non-tank railcars to 104 lessees, with top concentrations from the plastics industry (17% of the contract balances in the portfolio), natural gas liquids (9.4%) and automotive (8.5%).

Most of the leases are the full-service variety (72.7%), for which Trinity bares some added risk from unknown maintenance and service costs (plus taxes) on the long-term agreements of up to 10 years.

Historically shipping and railcar operations companies have leased on shorter terms of four to seven years, but weakened demand earlier this decade allowed lessors to negotiate longer deals, according to S&P.

The railcars leased in the portfolio are newer-vintage cars averaging 5.1 years of age — very early in the average 35-year usable life of a railcar.

Most of the cars are required to meet increased demand in intermodal traffic that began last year, according to the S&P pre-sale report.

One of the potential risks in the deal is more stringent safety regulation from the US Department of Transportation, which requires retrofitting or replacing older tank cars.

S&P notes, however, that this will take years to phase in.

As a result of this requirement, there are no limits on the number of railcars that Trinity can sell and replace over the life of the transaction; that’s in contrast to earlier deals, which had disposition caps.

The lease transaction is the second for the industry in 2018.

In April, USQ Rail I LLC — an issuer for private fund partnership ITE Rail Fund, sponsored a $248.2 million portfolio of leases to break a two-year dry spell of railcar asset-backed securities (ABS).