OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and senior unsecured debt of TTX Company (TTX) at 'A-'. The Rating Outlook is Stable. Approximately $3.4 billion of outstanding notes is covered by this rating action. See the full list of rating actions at the end of this release.

KEY RATING DRIVERS
IDR AND SENIOR DEBT

The ratings and the Stable Outlook reflect TTX's unique competitive advantages associated with its ownership structure and regulatory exemption status. The ratings are also supported by the company's consistent operating performance through various cycles, strong liquidity given stable operating cash flow generation, and solid capitalization and leverage. Rating constraints include the cyclicality of the North American railroad industry, the reliance on the regulatory exemption to maximize the business model, and modest profitability relative to peers.

TTX is a privately held corporation that provides a standardized, free-running fleet of railcars for use by North America's largest railroads. TTX's corporate structure is viewed as an important rating consideration by Fitch because all of the major Class I North American railroads represent TTX's ownership group and also account for substantially all of the company's revenues. Fitch believes TTX benefits from the relationship with its highly rated owners, as it provides the firm with enhanced market information and fleet planning, increased efficiency and improved capital markets access, among other things.

The company's flatcar contracts and pooling agreements are approved and authorized on a periodic basis by the Surface Transportation Board (STB) of the U.S. Department of Transportation. The authorization permits TTX to operate as a free-running pool, providing railcars to its ownership group in a more efficient manner than may otherwise be achieved. In October 2014, the STB reauthorized TTX's pool for a 15-year term, and is not subject to an interim review as was the case with prior authorizations. Fitch views positively the authorization by the STB, as it extends the regulatory certainty for another 13.5 years.

Operating performance in 2015 remained consistent, as increased revenues from additional demand for railcars was offset by higher costs associated with a larger fleet. Total revenues in the first nine months of 2015 (9M15) increased 5.8% year over year compared to the same period in 2014. The increase was attributable to modestly higher car hire rates, combined with more railcars in service and increased mileage. The company's average fleet usage was 91.6% as of Sept. 30, 2015, higher than the five-year average of 85.4%. Pretax income was 9.6% lower in 9M15 compared to the year prior, driven by an 8.6% increase in maintenance, 7.8% increase in depreciation, and a 9.1% increase in interest expenses, as TTX increased borrowings to add new fleet capacity. The increase in maintenance expenses resulted from more work at repair shops being expensed in 2015 relative to being capitalized in 2014. Generally, TTX's profitability metrics are modestly lower compared to other finance and leasing companies rated by Fitch, as the firm does not operate to maximize profits. However, this is not viewed as a material rating constraint particularly given that car hire rates are set relative to overall capital expenditures, maintenance expenses, and to internal leverage and fixed charge coverage (FCC) targets. Consequently, Fitch expects operating performance and overall margins to remain stable over the medium- to longer-term.

Recent declines in energy prices have not had a material impact on operating performance, since TTX does not operate a fleet of tank cars or coal hoppers, and the company has minimal direct exposure to the energy and commodity markets. However, low energy prices and the strong dollar could boost consumer spending, which would ultimately drive shipments and increased demand for additional intermodal, boxcar and automotive railcar capacity.

TTX's liquidity profile is strong given stable operating cash flow generation through various economic cycles, and the ability of the company to regulate capital expenditures during times of stress. Fitch views TTX as having sufficient cash on hand, operating cash flow, and contingent liquidity from its $300 million unsecured committed revolver to manage its debt maturities and capital expenditures in the medium term.

The company views its FCC ratio as an important metric to measure its ability to satisfy financing costs. The FCC ratio, defined as operating and other income, divided by interest and amortization of debt expenses and interest on operating leases, amounted to 2.06x, as of Sept. 30, 2015, which compared favorably to the five-year average of 1.96x. Coverage has improved over the last several years due to increased operating income, combined with lower overall funding costs and management of leverage during a time of rapid fleet expansion.

Fitch believes TTX's capital base is of good quality, comprised primarily of retained earnings with no goodwill or intangibles. Fitch views as positive TTX's consistent capital markets access through the issuance of unsecured debt. TTX's debt is not guaranteed by its railroad owners; however, Fitch believes the relationship has historically benefitted the firm's capital markets access. Most recently in January 2016, the company accessed the unsecured debt capital markets with a three-year, $300 million issuance. Fitch views TTX's access to the capital markets at favorable terms and the ability to further narrow the spread premium of its debt issuances relative to those of its railroad owners as positive.

TTX's funding profile compares favorably to other finance and leasing companies. The company has limited interest rate sensitivity given 100% fixed-rate debt with an average duration of approximately 11.2 years, as well as benefiting from a robust pool of unencumbered assets, with unsecured debt representing 98% of total debt as of Sept. 30, 2015. This supports the equalization of TTX's unsecured debt ratings with its IDR and provides the company with additional financial flexibility in times of market stress.

Fitch primarily considers TTX's leverage on a balance sheet basis, given the magnitude of railcar assets on the balance sheet. Total debt-to-tangible equity remains solid compared to other finance and leasing companies rated by Fitch, amounting to 1.85x, as of Sept. 30, 2015, which is relatively consistent with the five-year average of 1.76x. Tangible equity is derived by subtracting TTX's debt issuance costs and deferred tax assets, net of allowance, from shareholders' equity.

Fitch considers cash flow leverage as a secondary metric, on the basis of total debt-to-EBITDAR. Annualized cash flow leverage amounted to 5.42x as of Sept. 30, 2015, which is also relatively consistent with the five-year average of 5.01x. Fitch places less emphasis on this metric given that the business model is not aimed at maximizing profits, specifically TTX's car hire rate-setting relative to overall expenses, which reduces EBITDAR. TTX's cash flow metrics are, consequently, modestly weaker relative to those of other finance and leasing companies.

RATING SENSITIVITIES
IDR AND SENIOR DEBT

Fitch believes upward rating momentum is relatively limited given TTX's monoline business strategy, the cyclicality of the railroad industry, its corporate structure and, consequently, the concentration of its ownership and revenue sources. That said, modest rating upside within the 'A' category over the longer term could be driven by a more permanent regulatory exemption status, further improvements in the diversity of TTX's revenue sources, a sustained increase in North American rail usage/demand, and continued conservative leverage, liquidity and coverage metrics.

Conversely, negative rating momentum could be driven by a material and sustained increase in leverage levels, or failure to maintain ongoing STB authorization, which could severely restrict or eliminate TTX's pooling authority. Given the direct and indirect benefits TTX derives from its ownership group, a decrease in diversity and/or credit quality of its owners could also adversely impact the company's ratings. Finally, a reduction in fleet utilization, and/or an increase in impairments, either of which materially reduces cash flow generation or fixed charge coverage could also generate negative rating momentum.

The ratings of the senior unsecured debt are sensitive to changes in TTX's long-term IDR as well as to the changes in the company's funding profile, including the mix of unsecured versus secured debt, and subsequently the level of unencumbered asset coverage. A material increase in the use of secured debt combined with a decline in the level of unencumbered asset coverage could result in notching between the IDR and unsecured debt.

Founded in 1955, TTX is a privately-held corporation based in Chicago, Illinois. The company is a leading provider of railcars in North America, with a fleet of over 154,000 railcars as of Sept. 30, 2015.

Fitch has affirmed the following ratings:

TTX Company
--Long-term IDR at 'A-';
--Senior unsecured revolving credit facility at 'A-';
--Senior unsecured medium term note program at 'A-';
--Senior unsecured notes at 'A-'.

The Rating Outlook is Stable.