PrefBlog

PerpetualDiscounts now yield 5.96%, equivalent to 7.75% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.77% on 2024-9-20 and since then the closing price of ZLC has changed from 15.51 to 15.48 after going ex-dividend for $0.06 on 9/27, a total return of +0.19%, implying a decrease of yields of 2bp (BMO reports a duration of 12.47, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.75%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 300bp reported September 25.

I forgot to display a rainbow yesterday – sorry! But there’s a picture for today, anyway:

TXPR closed at 619.18, down 0.64% on the day. Volume today was 744,620, third-lowest of the past 21 trading days.

CPD closed at 12.255, down 0.69% on the day. Volume was 97,860, second-highest of the past 21 trading days.

ZPR closed at 10.46, down 0.95% on the day. Volume was 279,740, fourth-highest of the past 21 trading days.

Five-year Canada yields were up to 2.76%.

There was slack Canadian economic news today:

Canada’s gross domestic product expanded at a faster-than-expected 0.2 per cent rate in July, but an advance estimate indicated that growth likely stalled in August, data showed on Friday, bolstering hopes for a supersized interest rate cut next month.
…
The economy grew in July despite the negative impact of wildfires on several industries, with growth driven by services-producing industries, primarily retail trade, public sectors and finance and insurance, Statistics Canada said.

The expected economic weakness in August likely is due to a contraction in manufacturing, transportation and warehousing which would essentially offset growth in oil and gas extraction and the public sector, Statscan said.

The BoC forecast in July that the economy would grow 2.8 per cent in the third quarter, but data released since then have led economists to predict growth of about half that figure.
…
On Tuesday, BoC Governor Tiff Macklem said it was reasonable to expect more rate cuts given the progress made in cooling inflation and reiterated that the central bank wanted to see growth pick up to absorb economic slack.

Economic growth in July was driven by increases in both services, which grew by 0.2 per cent, and goods industries, which rose by 0.1 per cent, Statscan said.

And markets reacted:

Today’s reading on gross domestic product hasn’t settled the debate in money markets and among economists as to whether the Bank of Canada will cut its trend-setting interest rate by 25 or 50 basis points next month.

But for markets, the data were enough to give slightly better odds to the larger of the two possibilities at the Oct. 23 policy meeting. Several economists are also suggesting a 50 basis point cut looms.

The U.S. also released inflation data simultaneously that showed easing price pressures in the world’s largest economy, boosting the chances of an outsized interest rate cut at the Federal Reserve’s November meeting. That’s also providing the Bank of Canada with the room to cut its policy rate further without heightened risks of weakening the Canadian currency.
…
Here’s how implied probabilities of future interest rate moves stand in swaps markets, according to data from LSEG moments after the 830 am ET data were released. The overnight rate now resides at 4.25%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.

Pre-GDP Announcement

Post-GDP Announcement

DBRS has announced:

upgrades the credit ratings of Element Fleet Management Corp. (EFN, or the Company), including the Company’s Long-Term Issuer Rating and Long-Term Senior Debt Rating to A (low) from BBB (high), its Short-Term Issuer Rating to R-1 (low) from R-2 (high), and its Perpetual Preferred Shares Rating to Pfd – 2 (low) from Pfd – 3 (high). At the same time, the trend on all credit ratings were revised to Stable from Positive. The Intrinsic Assessment (IA) for the Company is A (low), while its Support Assessment is SA3. As a result, EFN’s final credit ratings are equalized with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating actions consider EFN’s sustained improved earnings generation capacity which reflects a diverse set of revenue streams, including increasing levels of net financing revenues and net servicing income, along with more moderate revenue contributions from its syndications platform. The credit rating actions also take into account the Company’s sustained progress in diversifying its funding position, including increased levels of unsecured funding. EFN’s credit ratings reflect its leading commercial fleet management franchise in North America and Australia – New Zealand, and its sound risk profile with very modest credit losses through the cycles and moderate residual value exposure. Although acceptable, the Company’s credit ratings do reflect higher tangible leverage relative to its large industry peers. Importantly, it is our view that credit fundamentals will remain sound over the near-term, despite economic uncertainties and still elevated interest rates.

CREDIT RATING DRIVERS
Over the longer term, lower tangible leverage and reduced asset encumbrance as well as sustained stronger earnings generation would result in a credit ratings upgrade. Conversely, a persistent and material decline in the Company’s earnings and/or a significant weakening of its balance sheet fundamentals would result in a credit ratings downgrade. Sustained materially higher tangible leverage outside of the Company’s target range would also result in a credit rating downgrade.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Good
EFN maintains the leading commercial fleet management franchise in its chosen geographical markets. The Company provides a broad array of products and services to a diverse customer base, while utilizing its significant scale of operations to attain preferred pricing on vehicles from OEMs and discounts from various other vendors and suppliers which it passes onto its fleet customers. Founded in 2007, the Company maintains strong institutional and industry knowledge. Positively, the commercial fleet management sector continues to benefit from a secular shift with more companies seeking to outsource their fleet needs.

Earnings Building Block (BB) Assessment: Good
The credit ratings consider EFN’s sustained improved earnings generation capacity, which reflects its diverse and growing revenue streams, including net financing income, net servicing income, and net syndications revenue. Positively, the Company’s earnings performance metrics including its ROE and ROA ratios have tracked upwards since the end of its Transformation program (YE20), reflecting its strong business model and the mission critical nature of the vehicles that it manages and finances.

For the six month period ending June 30, 2024 (1H24), earnings totaled $196.5 million, or an ROE metric of 12.7%, as compared to $168.1 million, or 11.9%, for 1H23. Improved 1H24 earnings, on a year-on-year (YoY) basis, reflected increased levels of net servicing income, net financing revenues, and net syndication revenues, partially offset by higher operating expense. Overall, higher revenues were driven by solid originations, earning asset growth, and improved servicing penetration rates. Reflective of its diverse revenue mix, net servicing revenues represented 53.4% of total net revenues in 1H24, followed by net financing revenues at 42.8%, and net syndication revenues at 3.8%. These results followed full-year 2023 earnings totaling $345.6 million, up from $314.9 million for full-year 2022, reflecting higher levels of net servicing income and net financing revenue.

Risk Building Block (BB) Assessment: Strong/Good
EFN’s sustained sound risk profile reflects its conservative and well-managed credit risk and residual value risk policies, and is supportive of the credit ratings. Levels of net charge-offs (NCOs) remain very modest underpinned by EFN’s significant level of investment grade clients, conservative underwriting, and the mission critical nature of the financed vehicles to the customer. Specifically, NCOs totaled a very low $0.05 million in 1H24, while for full-year 2023, NCOs totaled just $0.75 million. The Company’s allowances for losses are considered sufficient at $5.4 million, or 0.07% of gross finance receivables at June 30, 2024, as compared to $5.5 million, or 0.08%, at December 31, 2023.

Meanwhile, the majority of the Company’s clients’ leases in the U.S. and Canada are open-ended, limiting EFN’s residual value exposure. For open-ended leases, it is the client, not the Company, that is exposed to declines in used vehicle values upon disposition. Lastly, we view operational risk as a relevant risk with the significant amount of client data that EFN holds across its operating platform. We view operational risk to be well-managed.

Funding and Liquidity Building Block (BB) Assessment: Good/Moderate
The Company has made solid progress in diversifying its funding profile, including the periodic issuance of unsecured funding. Indeed, at June 30, 2024, 44.4% of EFN’s total debt was unsecured compared to 22.1% at year-end 2020. We note that the Company’s funding mix is also diverse by lender and investor base. EFN also maintains an established syndication platform that provides liquidity as well as reduces potential client concentrations while providing an additional revenue stream. Overall, funding remains well-aligned with the asset base. Lastly, the Company’s liquidity position is sound, anchored by $5.0 billion committed undrawn liquidity, including $2.05 billion of availability under its senior revolving unsecured credit facilities, $2.87 billion under its vehicle management asset-backed facilities (if collateral is available), and unrestricted cash of $0.08 billion, as of June 30, 2024.

Capitalization Building Block (BB) Assessment: Moderate
EFN has demonstrated sound capital discipline. Although somewhat higher than its large commercial fleet management peers, the Company’s tangible leverage ratio is acceptable at 6.50x, at June 30, 2024, up from 5.99x at year-end 2023. Overall, EFN targets tangible leverage in the 6.25x to 6.75x range. Finally, the Company continues to simplify its capital base by retiring costly preferred shares which now represent just 3.2% of total equity compared to 13.5% in year-end 2020.

EFN.PR.E was issued as a FixedReset, 6.40%+472, that was announced 2014-6-2 but not immediately tracked by HIMIPref™ as it was unrated. Coverage commenced in September, 2015 after the company’s preferreds were rated Pfd-3 by DBRS. The extension was announced 2019-8-27. The issue reset at 5.903% effective 2019-9-30. I recommended against conversion and there was no conversion. The company announced its intention to redeem this issue in November 2023 and the issue has been called for redemption 2024-9-30. The issue is tracked by HIMIPref™ and is assigned to the Scraps – FixedReset – Discount subindex.

PerpetualDiscounts now yield 5.96%, equivalent to 7.75% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.77% on 2024-9-20 and since then the closing price of ZLC is unchanged at 15.51. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 300bp reported September 18.