Morningstar DBRS Assigns BBB (high) Credit Rating to EFN’s US$750 million 5.643% Senior Notes due 2027, Trend Positive

DBRS, Inc. (Morningstar DBRS) assigned a credit rating of BBB (high) to the US$750 million 5.643% Senior Unsecured Notes due March 13, 2027 (the Notes) issued by Element Fleet Management Corp. (EFN or the Company). The net proceeds from the Notes will be utilized for the repayment of existing debt. The trend on the Notes is Positive.

CREDIT RATING DRIVERS
Continuation of similar solid performance metrics, as well as sound credit and asset performance despite any potential negative effects from the 2023 UAW work stoppage, while maintaining appropriate balance sheet fundamentals would result in a credit ratings upgrade. Weaker than expected operating performance or a material increase in tangible leverage would result in a return of the credit ratings to a Stable trend. While unlikely given the Positive trend, the credit ratings would be downgraded if the Company were to sustain a material loss that would result in substantially higher tangible leverage.

CREDIT RATING RATIONALE
The Positive trend reflects EFN’s improved earnings generation capacity supported by sound revenue diversification and strengthening return metrics. The Positive trend considers the Company’s progress in diversifying funding, including the introduction of a greater component of unsecured debt. The Positive trend also reflects our view that EFN’s credit fundamentals will remain sound over the near term, despite economic headwinds including elevated inflation and high interest rates.

Overall, the credit ratings confirmation considers EFN's leading commercial fleet management franchise including top market shares in the markets in which EFN operates , as well as the Company’s sound risk profile with very limited credit losses through cycles and a modest degree of residual value exposure. The credit ratings also reflect weaker leverage relative to higher rated sector peers, albeit improved from previously higher levels.

Franchise Building Block (BB) Assessment: Good

Earnings Building Block (BB) Assessment: Good

Risk Building Block (BB) Assessment: Strong / Good

Funding and Liquidity Building Block (BB) Assessment: Good / Moderate

Capitalization Building Block (BB) Assessment: Moderate

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) [https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings].

Notes:
All figures are in Canadian Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions [September 1, 2023] https://www.dbrsmorningstar.com/research/420144/global-methodology-for-rating-non-bank-financial-institutions. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings [https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings] (January 23, 2024) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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