EFN Receives Pfd-3 Rating From DBRS; Issues Will Be Added To HIMIPref™

Element Financial Corporation has announced:

that it has received an initial issuer rating of BBB from DBRS Limited (DBRS). The Company also was awarded a rating of R-2 (middle) on its short-term instruments and a rating of Pfd-3 on its perpetual preferred shares. All three ratings were issued with a stable outlook. Notwithstanding the R-2 rating, granted by DBRS, Element does not plan to access the short-term debt market for its funding requirements.

On August 24, 2015, Element entered into a Credit Agreement (the “Facility”) with a syndicate of 24 lenders that provides the Company with an expanded US$8.5 billion senior secured three-year credit facility. Concurrent with the receipt of this initial issuer rating from DBRS, the interest rate applicable to the Facility will be reduced by 35 basis points on top of the 20 basis point reduction that came into effect when the Company closed the US portion of the acquisition of GE Capital’s fleet management business on August 31, 2015

Following the August 31, 2015 closing of the Company’s acquisition of the US operations of GE Capital’s fleet management business, Element’s committed funding facilities amounted to C$21.9 billion inclusive of the above referenced US$8.5 billion senior secured three-year credit facility. These facilities are supplemented with funding from the asset-backed securitization market which the Company has accessed to fund earning assets and revenue activities in its various business activities together with funding from its various private securitization conduits.

The DBRS Press Release states:

DBRS, Inc. (DBRS) has today assigned an Issuer Rating of BBB to Element Financial Corporation (Element or the Company). Concurrently, DBRS has assigned a Short-Term Instruments rating of R-2 (middle) and a rating of Pfd-3 to the Company’s Perpetual Preferred Shares. The trend on all ratings is Stable.

The ratings reflect the Company’s strengthening franchise, which is anchored by Element’s leading position in North American fleet management and a growing presence in railcar leasing. The Company’s better than average credit risk profile, and developing and strengthening earnings profile are also considered in the ratings. These factors are offset by the Company’s reliance on secured funding sources, its appetite for growth through acquisitions, and the integration and execution risks present in the recent acquisition of GE Capital’s fleet management business (GE Fleet).

The Stable trend reflects DBRS’s expectations that Element will successfully integrate the GE Fleet business, while strengthening its earnings profile as earnings assets grow and the Company improves its penetration rate within its fleet customers. While near-term upward ratings migration is unlikely, over the medium-term, ratings could be positively impacted by further earnings expansion while credit costs remain within historical levels and operating efficiency improves. A more balanced funding profile and leverage maintained at or below industry peers would be viewed favorably. Conversely, a noteworthy increase in leverage, sustained deterioration in operating performance, or indications of mis-steps in the GE Fleet integration evidenced by loss of key customers or operational-related charges could result in negative ratings pressure. Ratings could also be pressured by a material acquisition that DBRS views as outside of Element’s core verticals and capabilities.

DBRS considers Element’s funding and liquidity profile as appropriately managed and aligned with the asset base. However, DBRS views the reliance on secured forms of wholesale funding as limiting financial flexibility and a constraint on the ratings. While Element has made some progress in diversifying funding by issuing convertible corporate debt and preferred shares, 91% of total funding is from secured forms funding. As a result, at June 30, 2015, 73% of Element’s adjusted assets (total assets excluding cash held in escrow for acquisition, investment funds, intangible assets and goodwill) were encumbered. Over the longer-term, DBRS expects that Element will look to improve its financial flexibility by introducing senior unsecured corporate debt into its funding mix. Liquidity is largely comprised of unrestricted cash and capacity under its bank facilities. At June 30, 2015, available liquidity totaled $3.2 billion, which DBRS believes is more than sufficient to fund expected originations over the next year.

From DBRS’s perspective, Element’s balance sheet management is acceptable given the risk profile inherent in the balance sheet. Tangible leverage is in line with industry peers at 5.3x, pro-forma to the GE Fleet acquisition, and within maximum covenant limits of 6.0x.

The company has four series of preferred shares outstanding:

These issues will be added to the HIMIPref™ database over the weekend.

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