Fitch: Timing of Funding a Possible Concern on Trinity Guardrail Judgment

CHICAGO

While the recent guardrail judgment against Trinity Industries Inc. (TRN) could potentially weaken the company’s credit metrics if payment is required in the near term, Fitch Ratings expects TRN’s operating performance will enable it to rebuild metrics quickly in such a scenario.

Fitch believes TRN has the capacity to fund litigation payments of as much as $600 million without borrowing, which is somewhat less than the amount of the $682 million judgment. As a result, leverage would increase modestly if debt is used to help fund the litigation payment. Payment of the judgment would also reduce TRN’s liquidity and increase its sensitivity to its cyclical markets. However, a lengthy litigation process could provide time for TRN to generate FCF and improve its ability to fund the judgment as well as other litigation payments that might arise.

Debt/EBITDA of 0.9x at March 31, 2015 and FFO Adjusted Leverage of 2.0x are at solid levels that support TRN’s current ratings, partly reflecting the company’s rail business that is in a strong part of the cycle. Fitch expects mid-cycle leverage (gross manufacturing debt/manufacturing EBITDA) to be approximately 1.0x – 1.5x which incorporates flexibility to adjust to eventual downturns in TRN’s cyclical end markets and support the company’s leasing business.

In addition to the judgment, litigation risks include related cases involving other states and class action shareholder lawsuits that could lead to additional significant penalties or fines. Some of these cases are in an early stage, but if TRN’s cash is insufficient to fund such liabilities, such litigation payments could result in higher debt and leverage and weaken TRN’s credit profile. Also, TRN has received a subpoena from U.S. Department of Justice for documents related to TRN’s guardrail end-terminal products. Fitch expects TRN will appeal the judgment if post-judgment motions planned by the company do not result in rulings favorable to TRN. TRN expects to obtain an appeal bond on an unsecured basis.

Fitch estimates manufacturing FCF in 2015 will be near $250 million compared to $153 million in 2014. Fitch expects TRN’s operating results will improve due to incremental revenue from Meyer Steel Structures acquired in August 2014 and continued strong railcar sales. FCF excludes cash flow at TRN’s leasing business which Fitch estimates could decline slightly from roughly $100 million in 2014 before considering proceeds from asset sales, primarily railcars.

TRN’s liquidity at March 31, 2015 included $691 million of consolidated cash and short-term marketable securities, most of which is held at the manufacturing businesses. In addition, $336 million was available under a revolving credit facility. In May 2015, TRN replaced the existing $425 million facility scheduled to mature in October 2016 with a $600 million five-year facility. There are no material scheduled long-term debt maturities scheduled prior to 2024 at the manufacturing business. Debt used to fund TILC’s leasing operations totaled approximately $2.7 billion, including partially owned subsidiaries, and nearly all of the debt is non-recourse.

Fitch’s current ratings for TRN are as follows:

Trinity Industries Inc.

–Issuer Default Rating ‘BBB-‘;

–Senior unsecured revolving credit facility ‘BBB-‘;

–Senior unsecured notes ‘BBB-‘

–Subordinated convertible notes ‘BB+’.

The Rating Outlook is Stable.

The ratings affect approximately $850 million of manufacturing debt outstanding at March 31, 2015.

Additional information is available on www.fitchratings.com

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