America Railcar Leasing is preparing its second equipment lease securitization, according to a presale report by Standard and Poor’s. The $325.3 million ARL Second LLC is much bigger than the sponsor's previous deal, completed in 2012, in part because the oil boom in North Dakota and Montana has boosted demand for tank cars.
ARL Second is backed by 5,865 railroad cars, nearly double the 3,020 backing, ARL 2012-1, according to the presale report. Tank cars represent 62% of the total; the other 38% of the pool is covered hoppers.
S&P assigned preliminary rating to two tranches of fixed-rate notes to be issued by the latest deal: the $175 million class A-1 notes and the $150.3 million A-2 notes both received A’ preliminary ratings. The notes have an expected maturity of June 2024.
Subject to certain restrictions, the class A-1 notes can be redeemed in whole or in part on any payment date on and after June 2017. The class A-2 notes can be redeemed in whole or in part on any payment date on and after June 2021.
There were approximately 156 lessees in the pool of collateral as of April 30, 2014. By the closing date, the largest lessee will account for approximately 7.62% of total railcars leased.
S&P noted in its report that the increase in domestic oil production has led to strong demand for tank cars. New drilling techniques allow economic oil production from areas in North Dakota and Montana, for example. This new production appears to be a long-term trend, and S&P expects the U.S. to be the largest oil producer in the world by the end of the decade.
While the railcar leasing business has historically been stable, and there is “minimal” risk that the cars will become technologically obsolete, the transaction has some weaknesses that prevented S&P from assigning its top ratings. The railcars in the portfolio are older: all of the railcars are at least eight years old and the fleet's average age is 15.2 years.
Typically, railcars have a useful lifespan of 30-50 years, depending on the type of car.
Also, the majority of the leases are full service, which S&P said exposes the transaction to uncertain variable expenses, such as maintenance and servicing.
ARL is an affiliate of American Railcar Industries (ARI), the leading manufacturer and designer of hopper and tank railcars in North America. As of March 31, 2014, ARL’s fleet consisted of about 35,574 railcars, 4,892 of which are managed on behalf of ARI.