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Rating Action: Moody's affirms United Rental's ratings (Ba2 CFR, Baa3 sr sec 1st lien, Ba1 sr sec 2nd lien, and Ba3 sr unsec); Outlook positive
Global Credit Research - 15 Dec 2020
Approximately $8.025 billion of rated debt affected
New York, December 15, 2020 -- Moody's Investors Service ("Moody's") affirmed United Rentals (North America), Inc.'s (URNA) Ba2 corporate family rating, Ba2-PD probability of default rating, Baa3 senior secured first lien rating, Ba1 senior secured second lien rating, and Ba3 senior unsecured rating. Moody's also changed the company's speculative grade liquidity rating to SGL-1 from SGL-2. The outlook has also been changed to positive from stable.
The positive outlook reflects Moody's view that URNA will continue to perform well despite the challenging economic environment, as the company has recently generated solid free cash flow and profitability despite a year-over-year revenue decline in the mid-teens. Moody's expects that leverage could improve somewhat more since levering up for the acquisitions of BakerCorp and BlueLine in 2018, such that debt-to-EBITDA improves to below 2.5 times in 2021. Moody's also expects URNA to generate over $2 billion of free cash flow in 2020, in large part from a significant decline in fleet investment since the onset of the recession, and further anticipates more than $1.5 billion of free cash flow generation in 2021, all of which will be available for debt repayment.
"There is considerable uncertainty around the 2021 outlook for non-residential construction activity, which accounts for almost half of United Rental's revenue," said Brian Silver, a Moody's Vice-President and lead analyst for United Rentals.
"However, the bulk of its remaining revenue comes from a very broad base of industrial customers and if United Rentals is able to sustain its low leverage and solid cash flow as visibility improves in 2021, the ratings could be upgraded," continued Silver.
URNA's Ba2 rating reflects the company's considerable scale from its leading position in the North American equipment rental industry, as well as its moderate debt-to-EBITDA of 2.6 times for the twelve months ended September 30, 2020 (all ratios are Moody's adjusted unless otherwise stated). Further deleveraging is possible absent a sharp increase in market demand that could require meaningful investment in equipment. Notably, all of the large participants in the equipment rental industry operate with relatively modest levels of financial leverage, recognizing the sharp turns in the industry.
URNA had been acquisitive prior to the onset of the pandemic, but the ratings incorporate URNA's track record of quickly integrating acquisitions and subsequently deleveraging to restore its credit metrics. While the event risk around another large acquisition remains, there are not many sizable gen-rent acquisition candidates in the US. As a result, Moody's believes URNA is more likely to pursue specialty equipment rental companies to broaden its product line-up, while also focusing on managing expenses and capital spending.
The equipment rental industry is susceptible to a high degree of cyclicality and is a very competitive and fragmented space, with local companies competing against the few national scale participants such as URNA. Staying competitive requires access to considerable capital to grow the equipment fleet. The potential always exists for rapid changes and significant fluctuations in the demand for rental equipment. Moody's also continues to expect to improve its product mix while broadening and diversifying its equipment offerings. There is also uncertainty around the ability to continue to dispose of equipment at reasonable prices and Moody's believes there is potential for increased share buyback activity or the potential initiation of a dividend over time.
Moody's views the company's environmental risk to be low, but URNA adheres to a number of regulations around the disposal of hazardous waste and wastewater from equipment washing. Moody's also views social risk to be low, but URNA does have union-represented employees, and must abide by regulations around worker safety and training. Governance risk is also viewed to be relatively low, as the company halted shareholder returns through its share repurchase program, but the company does have a history of engaging in relatively large, debt-funded acquisitions. The board of directors is comprised of a majority of independent directors, but has the potential to change abruptly since they are elected annually.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded with sustained debt-to-EBITDA of about 2.5 times and EBITDA-to-interest of better than 7 times and strong margins, preserving financial flexibility to fund what may be large capital investment in an expanding market after sometime of lower than replacement level spending, along with better visibility of medium term rental volumes and secondary market for used equipment.
The ratings could be downgraded if debt-to-EBITDA is likely to be sustained above 3 times or free cash flow (cash from operations less capex less dividends, plus proceeds from equipment sales) is below $1 billion or, if overly aggressive market expansion is likely to stress margins, there is a loss of market share during an expanding market, an inability to promptly delever following debt-funded acquisitions or weakening liquidity.
..Issuer: United Rentals (North America), Inc.
.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2
..Issuer: United Rentals (North America), Inc.
.... Corporate Family Rating, Affirmed Ba2
.... Probability of Default Rating, Affirmed Ba2-PD
....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)
....Senior Secured Regular Bond/Debenture, Affirmed Ba1 (LGD3)
....Senior Unsecured Regular Bond/Debenture. Affirmed Ba3 (LGD5)
..Issuer: United Rentals (North America), Inc.
....Outlook, Changed To Positive From Stable
The principal methodology used in these rating was Equipment and Transportation Rental Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061773. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
United Rentals (North America), Inc., headquartered in Stamford, CT, is the largest US equipment rental company estimated to have a market share of roughly 13% in 2019 and a rental fleet of approximately 635,000 units. Investment in rental equipment approximates $14.1 billion across the company's 1,170 rental locations across North America (and 11 branches in Europe). The company has two reportable segments: General Rentals and Trench, Power and Pumps. While the primary source of revenue is from renting equipment, the company also sells new and used equipment and related parts and services. United Rentals reported $8.7 billion of revenue for twelve month period ending September 30, 2020.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Brian Silver, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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