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Trinity's 1st railcar lease ABS in 4 years features newer cars

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The leasing subsidiary of railcar manufacturer Trinity Industries is returning to the securitization market for the first time in four years, according to rating agency presale reports.

The $482.5 million Trinity Rail Leasing 2018 is the first Trinity Industries Leasing Co. asset-backed portfolio since 2014, with a portfolio of relatively young (5.1 years) railcars with a combined market value of $621.6 million.

Two tranches of 10-year notes with preliminary single-A ratings from Kroll Bond Rating Agency and S&P Global Ratings will be issued in the transaction: $200 million in Class A-1 notes and $282.5 million in Class A-2 notes. The classes differ in their amortization schedules: the Class A-1 notes repay interest and principal on a straight-line schedule, while the A-2 notes pay only interest, with principal repaid upon maturity.

The notes are secured by lease receivables on nearly 7,000 tank and non-tank railcars to 104 lessees, with top concentrations from the plastics industry (17% of the contract balances in the portfolio), natural gas liquids (9.4%) and automotive (8.5%).

Most of the leases are the full-service variety (72.7%), for which Trinity bears some added risk from unknown maintenance and service costs (plus taxes) on the long-term agreements of up to 10 years. Historically shipping and railcar operations firms have leased on shorter terms of four to seven years, but weakened demand earlier this decade allowed lessors to negotiate longer deals, according to S&P.

The railcars leased in the portfolio are newer-vintage cars averaging 5.1 years of age – very early in the average 35-year usable life of a railcar.

Most of the cars are needed to meet an increased demand in intermodal traffic that began last year, according to S&P’s presale report.

“Even with weaker demand,” S&P analyst wrote, “the contracts' terms make it difficult to return cars early, which should keep utilization, revenues, and cash flows fairly stable over the next several years.”

One of the potential risks in the deal is more stringent safety regulation from the U.S. Department of Transportation, which requires retrofitting or replacing older tank cars. But S&P says this will take years to phase in. As a result of this requirement, there are no limits on the amount of railcars that Trinity can sell and replace over the life of the transaction; that's in contrast to earlier deals, which had disposition caps.

“To mitigate these items,” Kroll’s report stated, “the transaction documents include concentration limits on industry types to limit pool migration to either potentially weaker industries or a single industry.”

The railcar lease transaction is the second for the industry in 2018. In April, USQ Rail I LLC – an issuer for a private fund partnership ITE Rail Fund, sponsored a $248.2 million portfolio of leases to break a two-year dry spell of railcar ABS.

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