Fitch IBCA Rated Wheels Inc.'s $775 Mil CP Prog `F1'
13 September 1999
Fitch IBCA Rated Wheels Inc.'s $775 Mil CP Prog `F1'
NEW YORK--Sept. 10, 1999--Wheels Inc.'s $775 million 144(a) commercial paper program is rated `F1' by Fitch IBCA.Additionally, Fitch IBCA has assigned the company a counterparty rating of `A'. The commercial paper program will be back-stopped by $775 million of unused committed bank facilities provided by a group of high quality United States, Canadian and European banks.
The ratings reflect Wheels' strong asset quality, high quality revenue stream, significant market position and conservative operating philosophy, in part due to its private ownership. Rating concerns center on the company's modest profitability and internal capital formation, high financial leverage, moderate funding mismatch and limited capital markets access.
Based in Des Plaines, Ill., Wheels is one of the five largest fleet lessors in the United States with approximately 180,000 vehicles under management at Aug. 31, 1999. The company provides leasing and ancillary non-credit services to a selected cadre of primarily Fortune 1,000 companies.
At May 20, 1999, Wheels' top ten customers accounted for 34% of the net lease portfolio. The blended credit rating of these companies was `AA'. Wheels limits individual lessee concentrations to 7% of total net lease outstandings.
Open-end leases account for roughly 98% of Wheels' lease portfolio. Under an open-end lease structure, residual risk at lease termination is taken by the lessee. Wheels has been able to maintain excellent asset quality as a result of its lease structure and its high quality customer base. Management reports that the company has never had an annual credit loss.
Wheels' profitability has weakened over the last 24 months primarily as a result of its ambitious information technology capital expenditure program. Between Aug. 31, 1994 and Aug. 31, 2000, Wheels has and will continue to incur significant IT related expenses, in addition to its yearly maintenance expenditures.
Most of these expenditures will occur in fiscal years 1999 and 2000. While these expenditures include Year 2000 remediation projects, the bulk of the investment will be used for IT projects designed to improve the company's operating efficiency.
During this period, management has expensed all costs associated with these projects thereby causing profitability to be below historic levels. Excluding the non-recurring IT expenditures, profitability has remained within historic ranges. Earnings quality has remained solid as non-credit revenue has remained above 75% of total operating income during this period.
The combination of the company's weak internal capital formation coupled with solid growth in its lease fleet has resulted in a recent increase in leverage. At May 31, 1999, total debt, including off-balance sheet debt, divided by equity and on-balance sheet debt divided by equity stood at ten-year highs, respectively.
Moreover, Wheels' leverage is significantly higher than other leasing companies rated at the same level. However, Fitch IBCA takes significant comfort from Wheels' historic credit/residual experience. Additionally, Fitch IBCA believes that Wheels' profitability will begin to rebound in fiscal 2000 and thereafter as the company's operating efficiency improves as a result of the IT investments. Thus, internal capital formation should improve and leverage decline assuming the vehicle fleet growth does not exceed historic averages. Over the intermediate term, management's intention is to operate Wheels with on-balance sheet leverage that is meaningfully below the company's current level.
With the establishment of the commercial paper program, nearly 40% of Wheels' $2 billion lease portfolio will be funded with commercial paper. As a result, the company continues to be exposed to a funding mismatch with respect to tenor as the leases have an average life of 36 months. Fitch IBCA will monitor this closely in future periods.
Founded in 1939 by Zollie Frank, Wheels is one of the largest privately owned companies in the United States. James Frank, Zollie's son, has maintained majority ownership of Wheels for over 20 years.