Fitch Affirms Ratings on Ryder System (R) Following Review; Outlook Remains Stable

Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and Short-term IDR for Ryder System, Inc. (Ryder) (NYSE: R) at 'A-' and 'F2, following the completion of its fleet leasing peer review. The Rating Outlooks is Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The rating affirmation reflects Ryder's established market position in the truck leasing business, growing market share in the logistics and supply chain solutions (SCS) business, relatively consistent operating performance through market cycles, adequate leverage, strong liquidity, and a largely unsecured funding profile.

Rating constraints for the truck leasing sector include customer concentration in the SCS segment, cyclicality inherent in used vehicle pricing and the commercial rental business, potential regulatory impacts on business trends and, for Ryder more specifically, the company's pension burden, which can have an outsized impact on company leverage.

The Stable Outlook reflects Fitch's expectation for continued economic access to the capital markets through various market cycles, limited sensitivity to rising interest rates, strong liquidity, stable leverage, and earnings growth over the outlook horizon driven by an increase in full service lease (FSL)/contract revenue and growth in the logistics business.

Operating Performance

Ryder reported stronger operating performance in 1H15. Ryder's stronger operating performance reflected an increase in FSL activity, good commercial rental demand, and new business and higher volumes in SCS, which more than offset higher depreciation and lease, rental and services expenses.

Fitch expects operating performance to improve further in 2016, supported by organic growth in FSL as more customers are willing to sign long term contracts given improvements in broader economic conditions. Additionally, Fitch expects growth in the logistics business to continue, which helps to diversify revenue sources, potentially cushioning earnings volatility on the downside and enhancing existing customer relationships. Commercial rental volume is likely to decrease with higher demand for long-term leases, but the firm has shown an aptitude for managing excess fleet, when necessary, and generating vehicle sale gains.

Fitch believes interest rate sensitivity is relatively limited for Ryder as rental contracts are typically short term and increased funding costs can be immediately passed through to the customer. However, there is a slight lag on the leasing side given the contracts are typically intermediate term; however, Ryder seeks to mitigate this by issuing term debt in an attempt to match fund that portion of the business.

Leverage

Ryder's managed leverage increased to 2.7x at 2Q15 from 2.6x at YE14, as higher capital expenditures were funded with increased borrowings. This was partially offset by a 5.2% increase in total equity, which benefited from strong earnings and a reduction in share repurchases. Fitch expects Ryder to scale or pull-back on repurchase activity, as necessary, to manage leverage within its long-term targeted range of 2.25x - 2.75x.

Fitch expects leverage to decline modestly by YE15 due to increased earnings. Fitch's current ratings incorporate the expectation that leverage will be managed at-or-near each company's articulated target.

Liquidity

Fitch considers Ryder's liquidity profile to be solid, supported by the substantial cash generating capability of their operating lease portfolio. While free cash flow generation is currently negative, this is because the firm is investing in rental and lease fleet assets which are expected to generate meaningful cash earnings. When lease and/or rental demand declines, the firm has historically quickly managed its fleet down. A reduction in the fleet yields positive free cash flow and an ability to de-lever, as was observed during the financial crisis.

Corporate credit facilities serve as a source of contingent liquidity. Ryder has a $1.2 billion credit facility, which also provides a backstop to its commercial paper issuance. Borrowing availability on the facility was $848 million at 2Q15.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT

Negative rating actions could be driven by an increase in leverage resulting from a decline in earnings and/or free cash flow beyond Fitch's expectations, or a substantial pension charge, which inflates leverage meaningfully beyond the targeted range for an extended period. Additionally, deterioration in the firm's competitive positioning, weakening asset quality, an inability to realize residual values on used vehicles, a material increase in non-earning vehicles, and/or a decline in liquidity could result in negative rating action.

Fitch believes a positive rating action is limited in the medium term; however, positive rating momentum could develop over time from greater revenue diversification, stronger liquidity and lower leverage.

Established in 1933 and headquartered in Miami, FL, Ryder is one of the world's largest providers of highway transportation services. Ryder's stock is listed on the NYSE under the ticker 'R'.

Fitch has affirmed the following:

Ryder System, Inc.
--Long-term Issuer Default Rating (IDR) at 'A-';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2';
--Senior unsecured debt at 'A-'.

The Rating Outlook is Stable.

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