Kroll Bond Rating Agency released a comment on the Q4/17 results of Element Fleet Management, which included a significant charge related to the company’s 49.99% interest in 19th Capital, a joint venture involved in leasing highway tractors and trucks in the U.S.
On October 3, 2017, KBRA affirmed the issuer rating of A- with a stable outlook for Element Fleet Management and also noted Element’s exposure to 19th Capital as a key credit constraint. While the impact of the results of the JV on Element Fleet are considered credit negative, KBRA noted that the JV is considered a part of non-core operations and the company’s overall exposure to non-core assets is relatively low (6%) in the context of its balance sheet. Moreover, the much larger core asset base is comprised of significantly lower risk fleet assets.
The JV was established in an attempt to safeguard certain assets that were funded by legacy Element Financial and, subsequently, acquired by Element Fleet given its fleet-like nature. Over recent quarters, Element Fleet has been working to right-size the portfolio and reduce its overall exposure to the JV, which it intends to ultimately exit. However, 19th Capital represents a sizable risk to Element Fleet and prolonged, substantial losses or other noteworthy risk factors arising from the JV that negatively impact the company’s financial condition could trigger a review.
The rating of Element Fleet reflects the company’s franchise strength in North America and increasing market position with strong growth prospects, supported by a seasoned management team. The rating is also supported by a clear business focus on low risk fleet assets. The rating is constrained by Element Fleet’s historically rapid growth, overall exposure to economic conditions in the U.S. and Canada, leverage metrics, exposure to 19th Capital, and dependence on wholesale funding.
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