Fitch Affirms TTX Company at 'A-'; Outlook Stable

Fitch Ratings has affirmed TTX Company's (TTX) Long-term Issuer Default Rating (IDR) and senior unsecured debt at 'A-'. The Rating Outlook is Stable. Approximately $3.2 billion of outstanding notes are covered by this rating action. A full rating list follows at the end of this release.

KEY RATING DRIVERS - IDR and SENIOR DEBT

The affirmation of the ratings and the Stable Rating Outlook reflect TTX's unique competitive advantages associated with its ownership structure and regulatory exemption status, as well as its consistent operating performance through various cycles, strong liquidity given stable operating cash flow generation, and solid capitalization and balance sheet leverage. These strengths are counterbalanced by the cyclicality of the rail industry, the reliance on the regulatory exemption to maximize the business model, and modest profitability relative to peers.

TTX is a privately held corporation that provides a standardized, free-running fleet of railcars for use by North America's largest railroads. TTX's corporate structure is considered an important rating consideration by Fitch, because all of the major Class I North American railroads represent TTX's ownership group and also account for substantially all of the company's revenues. Fitch views TTX's relationship with its highly rated railroad owners as providing it with various benefits including enhanced market information and planning, increased efficiency and improved capital markets access, among others.

TTX's flatcar contracts and pooling agreements are approved and authorized on a periodic basis by the Surface Transportation Board (STB) of the U.S. Department of Transportation. This authorization permits TTX to operate as a free-running pool, providing railcars to its ownership group in a more efficient manner than may otherwise be achieved. In October 2014, the authorization was approved by the STB for a 15 year term, and is not subject to an interim review as was the case with prior authorizations. In connection with the authorization, the STB indicated that the decision reflected the transportation industry's overall support for TTX's flatcar pool and the substantial railroad operating efficiencies it produces, which results in cost savings to the railroad owners and shippers. Fitch views positively the recent STB authorization, as it extends the regulatory certainty for another 15 years, and reduces the risk that TTX's pooling authority would be materially restricted or effectively dissolved, which could have negative rating implications.

Overall operating performance has benefited from higher demand for equipment by TTX's railcar owners in 2014 due to growth in intermodal and automotive traffic and extreme winter weather conditions, which slowed overall network velocity and increased railcar demand. Total revenues increased 11.3% in 2014, TTX's highest increase since 2005. The company's average fleet usage improved to pre-crisis levels at 93% in 2014 compared to 86.5% in 2013, despite additional railcars being acquired and placed into service. Operating income increased 29.8% in 2014, due primarily to growth in car hire revenues, partially offset by higher depreciation and maintenance expenses, as well as higher interest expenses. Since TTX does not aim to maximize profits, its profitability is modestly weaker than peers. However, this is not viewed by Fitch as a material rating constraint particularly given that car hire rates are set relative to capital expenditures, maintenance expenses and to internal leverage and fixed charge coverage targets. Fitch expects overall revenues and operating expenses will grow in tandem, as rail volumes and overall demand increase in the near- to medium-term.

TTX's liquidity profile is strong given stable operating cash flow generation through various economic cycles and the company's ability to regulate capital expenditures during periods of stress. The company views the fixed charge coverage ratio as an important metric measuring the ability to satisfy financing costs. The fixed charge coverage ratio, defined as operating and other income, divided by interest and amortization of debt expenses and interest on operating leases, was 2.21x as of Dec. 31, 2014 and has averaged 1.96x over the last five-years.

Fitch views positively TTX's consistent capital markets access through the issuance of unsecured notes. TTX's debt is not guaranteed by its highly rated railroad owners however, Fitch believes the relationship has indirectly benefitted TTX's capital markets access.

The company's debt maturity profile is well-laddered, and available cash on hand and cash flow generated from operations are viewed as sufficient to repay upcoming debt maturities. In May 2014, TTX amended and extended the maturity on its committed credit facility from 2016 to 2019. TTX also issued 10- and 30-year notes in June 2014 and November 2014, respectively, at reasonable market terms, which are viewed positively by Fitch. TTX benefits from a robust pool of unencumbered assets, given that substantially all of the company's outstanding debt is unsecured. This supports the equalization of TTX's unsecured debt ratings with its IDR and provides the company with additional financial flexibility in times of market stress, which is viewed favorably.

Fitch views TTX's capital base as being of good quality, comprised primarily of retained earnings with no goodwill or intangibles.

Fitch considers TTX's leverage on both a balance sheet (total debt to tangible equity) and cash flow (debt to EBITDAR) basis, although the agency places more emphasis on balance sheet leverage given the magnitude of railcar assets on TTX's balance sheet. Total debt to tangible equity, remains solid and has been relatively stable over time, averaging 1.8x over the last five years. Tangible equity is calculated by subtracting from shareholders equity, TTX's debt issuance costs and deferred tax assets, net of allowance.

Fitch also considers cash flow leverage, on the basis of debt to EBITDAR, which has averaged 5.01x during the same period. This measure of leverage has modestly trended up over the last several years given the additional capital expenditures TTX has made to meet increased demand. Fitch believes TTX's cash flow leverage metrics are modestly weaker given its business model and namely TTX's car hire rate setting policy, which reduces EBITDA.

RATING SENSITIVITIES - IDR and SENIOR DEBT

Fitch believes positive rating actions are limited given TTX's monoline business strategy, the cyclicality of the railcar industry, its corporate structure, and consequently the concentration of its ownership and revenue sources. That said, modest rating upside over the longer-term could be driven by a more permanent regulatory exemption status, further improvements in the diversity and credit quality of TTX's ownership group, a sustained increase in North American rail usage/demand, and continued conservative leverage, liquidity and coverage metrics.

Conversely, negative rating actions could be driven by a material and sustained increase in leverage levels, or failure to maintain ongoing STB authorization, which could severely restrict or eliminate TTX's pooling authority. Given the direct and indirect benefits TTX derives from its ownership group, a decrease in diversity and/or credit quality of its owners could adversely impact the company's ratings. Lastly, a reduction in fleet utilization and/or an increase in impairments either of which materially reduces cash flow generation or fixed charge coverage could also put negative pressure on TTX's ratings.

The rating of the senior unsecured medium term notes is sensitive to changes in TTX's long-term IDR as well as to changes in the company's funding profile, including the mix of secured versus unsecured debt and the level of unencumbered asset coverage. A material increase in the use of secured debt combined with a decline in the level of unencumbered asset coverage could result in the notching between the IDR and unsecured medium term notes.

Founded in 1955, TTX is a privately-held corporation based in Chicago, Illinois. The company is a leading provider of railcars in North America, with a fleet of over 151,000 railcars as of Dec. 31, 2014.

Fitch has affirmed the following ratings:

TTX Company

--Long-term IDR at 'A-';

--Senior unsecured revolving credit facility at 'A-';

--Senior unsecured medium term note program at 'A-';

--Senior unsecured medium term notes at 'A-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Non-Bank Financial Institutions Rating Criteria' (March 20, 2015);

--'2015 Outlook: Finance and Leasing Companies' (Nov. 11, 2014);

--'Large Equipment Leasing: Rating Attribute Analysis (Comparing Aircraft, Truck, Railcar and Container Leasing Sectors)' (Sept. 30, 2014).

Applicable Criteria and Related Research:

Global Non-Bank Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863584

2015 Outlook: Finance and Leasing Companies (Stable Credit Profiles Amid Sector Headwinds)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=807208

Large Equipment Leasing: Rating Attribute Analysis (Comparing Aircraft, Truck, Railcar and Container Leasing Sectors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752827

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982060

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