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Trinity's new $386M deal doubles existing railcar lease ABS assets

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Trinity Industries Leasing Co. is back with a new railcar lease securitization that nearly doubles the number of its cars now serving as collateral for asset-backed bonds.

The $386.5 million Trinity Rail Leasing 2019 LLC 2019-2 will collateralize 13,426 railcars with an aggregate fair market value of $1.17 billion. The assets add to the more than 15,000 railcars that were contributed to Trinity’s two prior deals in the past year that relaunched the company’s use of the lease-backed ABS to finance expansion.

Trinity Rail Leasing returned to securitization last year following parent company Trinity Industries’ spinoff of its infrastructure-related business, in order to concentrate on building its core business lines of railcar manufacturing and leasing.

Trinity’s leasing arm has now issued three series of bonds to date in its securitization efforts since last year. The Fort Worth, Tex.-based company owns more than 102,000 railcars and manages over 125,000 in its overall managed portfolio.

According to presale reports from Kroll Bond Rating Agency and S&P Global Ratings, the 2019-2 Series notes will be backed by a portfolio of 7,110 non-tank railcars with a fair market value of $482.7 million, and 6,316 tank cars with a value of $694.2 million.

The deal’s proceeds will finance Trinity’s acquisition of 5,431 of the railcars into the portfolio, which S&P notes have a young average age of 7.7 years – providing minimal risk of technical obsolescence and support from the equipment’s “long useful life” of 35 years or more.

Trinity is the largest railcar manufacturers in the U.S., and competes with almost one dozen other lessors in providing boxcars, tank cars, refrigerated and other specialty railcars to operators.

Demand for railcars can be cyclical and impacted by sector trends, such as oil & gas supply and demand, or by macro-events such as the current U.S.-China trade tariff wars that have contributed to lower intermodal traffic volume by 3.6% in 2019, according to S&P.

S&P’s report stated that since lease contract terms make it “difficult” for lessees to return railcars early, leasing firms have had stable utilization rates, revenue and cash flow in recent years. Lessors like Trinity have taken advantage of railcar shortages in prior years to secure longer leases of 10 years compared to the typical four- to seven-year deals prior to 2014.

“However, many of these are beginning to come up for renewal, which we expect will be renewed at lower lease rates,” S&P’s report stated.

The transaction will consist of two tranches of notes: a $106.9 million Class A-1 offering and $279.6 million in Class A-2 bonds, each with preliminary A ratings from Kroll and S&P.

The $106.9 million of Class A-1 notes, along with the $906.2 million of Class A notes in the 2019-1 series, represent 77% of Trinity’s portfolio railcar values as of September.

Kroll’s report said deal is structured to pay down the A-1 notes at a rate of about 14.3% annually, with rapid amortization for the A-1 and A-2 notes occurring seven years after the deal’s closing date.

One of the weak points of the transaction, from an investor viewpoint, is that a majority (77%) of the rail cars are currently on full-service leases, according to the presale reports. Trinity is responsible for maintenance costs on the full-service lease, while 17.8% of the portfolio railcars are on net leases in which the lessee takes on expenses like taxes and maintenance.

The remaining 5.6% are for railcars leased on a per diem basis.

Wells Fargo is the sole structuring agent, and is a joint bookrunner with Credit Suisse.

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