Kroll Bond Rating Agency commented on ECN Capital’s announcement of definitive agreements to sell $1.49 billion, or approximately 65%, of its railcar assets to affiliates of ITE Management and Napier Park Global Capital.

The ITE portion of the transaction closed on August 4, 2017 and ECN expects to close the Napier Park transaction during the third quarter of this year.

KBRA views these transactions as credit neutral in the near term with the potential to turn positive over time depending on how ECN ultimately redeploys the freed up capital as well as the performance of the modified portfolio in light of inherent industry risks.

KBRA notes the underlying importance of lower risk assets in the rail business, especially given ECN’s other higher risk sector exposures, considering the associated stable, long-term cash flows of the attached leases, among other benefits. KBRA notes the de-risking of the rail portfolio, as it shifts away from more volatile petroleum exposures and towards lower risk freight, could benefit the company over the medium-term as long as portfolio yields and diversification are not sacrificed. Inherently, the longer-term performance of the modified portfolio is dependent upon the performance of the railcar leasing market, which is still experiencing softness and subject to a number or macroeconomic and regulatory headwinds.

Still, KBRA views the railcar book as reasonably well disbursed by industry, sufficiently performing at present, and further supported by ECN’s alliance with Trinity industries. Moreover, ECN’s liquidity position is further bolstered by the significant amount of liquidity made available for new strategic investments.

KBRA most recently affirmed a BBB issuer rating with a stable outlook for ECN Capital on June 9, 2017. The rating reflects the company’s leading position in North America in the commercial finance industry, veteran management with substantial industry knowledge and deep industry relationships, as well as defined and diversified business segments. These strengths are balanced by ECN’s acquisitive growth posture, overall exposure to economic conditions in Canada and the U.S., particularly small to mid-sized businesses, and dependence on wholesale funding.