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Rating Action: Moody's upgrades United Rental's CFR to Ba1; Outlook stableGlobal Credit Research - 12 Apr 2021Approximately $8.025 billion of rated debt affectedNew York, April 12, 2021 -- Moody's Investors Service ("Moody's") upgraded United Rentals (North America), Inc.'s (URNA) corporate family rating (CFR) to Ba1 from Ba2, probability of default rating to Ba1-PD from Ba2-PD, senior secured second lien rating to Baa3 from Ba1, and senior unsecured rating to Ba2 from Ba3. Moody's affirmed the senior secured first lien rating at Baa3 and left the speculative grade liquidity rating unchanged at SGL-1. The outlook is stable.The upgrades reflect Moody's view that URNA will maintain relatively low financial leverage, recognizing the risk characteristics of its business, with debt-to-EBITDA expected to be below 2.5 times by the end of 2021(all ratios are after Moody's standard adjustments, unless otherwise stated), and sustain solid free cash flow and very strong liquidity. However, Moody's also expects URNA to become more shareholder-friendly and acquisitive. Acquisition size could be larger than recent investments and, if funded with debt, Moody's would expect rapid deleveraging towards the current level."Visibility for non-residential construction activity is cloudy, but Moody's expects United Rentals' 2021 revenue will be in-line with pre-pandemic 2019 levels of over $9 billion, while carrying $2.5 billion less debt, which benefits cash flow and strengthens credit metrics," said Brian Silver, a Moody's Vice-President and lead analyst for United Rentals.RATINGS RATIONALEURNA's ratings, including the Ba1 CFR, reflect the company's considerable scale from its position as North America's largest equipment rental company, supported by its broad array of equipment offerings, solid end market and customer diversification, and low financial leverage and consistent profits. Notably, all of the large equipment rental competitors operate with relatively low financial leverage, recognizing the sharp turns in the industry. Acquisitions are likely, and URNA has a record of quickly integrating acquisitions and deleveraging to restore its credit metrics.Improvement in leverage in the near term will largely be from organic topline growth in the low single digits, growing profit dollars as the economy recovers from the recession. Moody's also believes that profit margin expansion in 2021 will be difficult because certain operating expenses will return that were not incurred in 2020, at the same time that competitive pricing pressure will linger in certain regions from lower, albeit improving, industry-wide equipment utilization rates.In addition, URNA's free cash flow will be solid but down in 2021 relative to 2020 as an increase in capital expenditures and working capital more than offsets the increased funds flow from rebounding profitability (free cash flow includes proceeds from equipment sales). URNA must contend with considerable ongoing risks, which imply the need for low financial leverage and strong liquidity. The industry is highly cyclical and capital intensive, with the potential for rapid changes and significant fluctuations in the demand for rental equipment, and is competitive and fragmented with local companies competing against the few national scale operators such as URNA. Staying competitive requires access to considerable capital to grow the equipment fleet, so capital spending can increase substantially.URNA cut capex in 2020 and aged its equipment portfolio somewhat, so is likely to need to replace that reduction with higher than replacement level spending over the near term in Moody's view. Moody's also anticipates URNA will continually improve its product mix by broadening and diversifying its equipment offerings, to be sensitive to market needs. With the large amount of equipment purchases, as gross capex has averaged $2.3 - $2.4 billion in the three years before 2020, URNA must regularly dispose of its used fleet even in weak market conditions. There is risk in the ability to do so at prices in line with book estimates.All classes of URNA's debt were upgraded by one notch except for the rating of the first lien debt, which was affirmed at Baa3. The first lien and second lien debt are both rated at Baa3. Although the first lien has a somewhat higher priority of claim, Moody's believes the difference in expected loss was not sufficient to differentiate the ratings given the low default probability.Moody's views the company's environmental risk to be low. 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, although 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.The SGL-1 speculative grade liquidity rating reflects URNA's very good liquidity, supported by about $2.7 billion of availability under a $3.75 billion ABL facility that matures in 2024, balance sheet cash of about $202 million, and expected free cash flow of about $1.2 billion in 2021 - including the proceeds from equipment sales that we expect to be in the $850 million range. Higher cash flow generation from a rebound in revenue will be more than offset by a significant increase in capital expenditures.The stable outlook reflects Moody's view that URNA will have low single digit topline growth as the economy recovers from recession, and that URNA will gradually deleverage toward the low 2 times debt-to-EBITDA range by the end of 2022.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded with debt-to-EBITDA sustained around 2 times and FFO-to-debt maintained around 40%. Moody's would also expect maintenance of strong margins that preserve financial flexibility to fund what may be large capital investment in an expanding market after a period of lower than replacement level spending, strong liquidity to manage through the industry cycles and consistent evidence of equipment sales at strong realized values.The ratings could be downgraded if debt-to-EBITDA is likely to approach 3 times, FFO-to-debt declines below 25%, or if market expansion becomes overly aggressive and is likely to stress margins. In addition, the ratings could be downgraded if there is a loss of market share during an expanding market, or an inability to promptly delever following debt-funded acquisitions or weakening liquidity.The following rating actions were taken:Upgrades:..Issuer: United Rentals (North America), Inc..... Corporate Family Rating, Upgraded to Ba1 from Ba2.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD....Senior Secured Regular Bond/Debenture, Upgraded to Baa3 (LGD3) from Ba1 (LGD3)....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 (LGD5) from Ba3 (LGD5)Affirmations:..Issuer: United Rentals (North America), Inc.....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)Outlook Actions:..Issuer: United Rentals (North America), Inc.....Outlook, Changed To Stable From PositiveThe principal methodology used in these ratings 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 2020 and a rental fleet of approximately 615,000 units. Investment in rental equipment approximates $13.8 billion across the company's 1,165 rental locations across North America (and 11 branches in Europe). The company has two reportable segments: General Rentals and Trench, Power and Fluid Solutions. 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 $8.53 billion of revenue for 2020.REGULATORY DISCLOSURESFor 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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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. 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