The investment-grade debt rating of Penske Truck Leasing has been affirmed by Moody’s, reflecting the rating agency’s “expectation that Penske will continue its consistent performance despite North America’s extended trucking downturn.”
The report by Moody’s last week affirms the company’s Baa2 senior unsecured rating and its P-2 commercial paper rating. Baa2 at Moody’s is two notches above the line separating investment-grade and non-investment-grade debt.
Baa2 also is considered equivalent to a BBB rating by S&P Global Ratings. S&P has a BBB rating on Penske Truck Leasing.
Ryder Corp. (NYSE: R), which competes with Penske Truck Leasing on truck rentals, also has a Baa2 rating at Moody’s. But at S&P Global, Ryder carries a BBB+ rating.
Penske Truck Leasing is a privately held business with three owners, according to the latest 10-K report of Penske Automotive Group, a publicly traded company that is primarily a truck retailer.
Privately held Penske Group, a large automotive and transportation-focused conglomerate, owns 41.1% of Penske Truck Leasing; Penske Automotive Group (NYSE: PAG), owns 28.9% of Penske Transportation Solutions, of which Penske Truck Leasing is part; and Mitsui & Co., a Japanese trading company, owns 30%.
In its analysis released with the debt rating affirmation, Moody’s said Penske Truck Leasing’s earnings – which per usual practice were not released as part of the report – should improve “modestly in 2025, boosted by a slight recovery in rentals.”
The metrics included in the report said Penske’s operating margin is projected to exceed 11% in 2025. Its ratio of debt to earnings before interest, taxes, depreciation and amortization, considered extremely important for ratings agencies as it is a key metric for the ability to service debt, is expected to fall below 3.5X.
As a point of comparison, even though it is a different industry, shortline operator Patriot Rail recently underwent a ratings review by all three ratings agencies – Moody’s, S&P Global and Fitch – and the debt-to-EBITDA ratio there was put at about 5.5X.
While the most recent S&P report on Ryder doesn’t list its EBITDA ratio, it did say it projected its Earnngs before interest and taxes (EBIT) to interest coverage at 3X to 3.5X in 2024. The Moody’s report did not quote a direct EBIT-to-interest number for Penske Truck Leasing but said a ratings upgrade might be possible if the company generated an EBIT-to-interest ratio greater than 3X. (A lower debt-to-EBITDA ratio is positive; a higher EBIT-to-interest ratio is also positive.)
In the latest 10-K report, PAG said its equity in the earnings of the affiliates, which includes PTS (which in turn includes 28.9% of Penske Truck Leasing), was $197.6 million last year, $298.8 million in 2023 and $490.7 million in 2022.
A planned contraction
Penske Truck Rental this year is expected to implement what Moody’s said was a “planned rental fleet contraction.” That is expected to help increase free cash flow, another major benchmark for ratings agencies. Although Moody’s said the contraction will result in “modestly positive” free cash flow, its liquidity position “reflects persistently negative free cash flow.” The reason, the agency said, is that Penske Truck Leasing has heavy reliance on used equipment sales to generate cash.
The negative free cash flow, Moody’s said, is largely the result of using short-term financing to line up with the revenue from those leases. With the planned reduction in the size of its fleet, the need for that financing will drop, resulting in greater free cash flow, Moody’s said.
The nature of Penske’s business, with its perpetual need to invest in new equipment, means the company has “sizable ongoing debt maturities” which Moody’s ticked off. The key parts of that: an unsecured revolving credit facility ($2.25 billion) and its commercial paper program ($2 billion).
Stable outlook
The move by Moody’s to affirm the debt rating also affirmed its outlook on Penske Truck Leasing as stable, meaning conditions are not present for an upgrade or downgrade to its rating anytime soon. “The stable outlook reflects our expectation that key secular trends will continue to support growth in outsourcing for Penske’s services,” the agency said. “The outlook also reflects our expectation that trucking market fundamentals will be flat in 2025, not deteriorating further but not meaningfully improving.”
Although the rating is stable, Moody’s said the debt rating could be upgraded if the Penske Truck Leasing debt-to-EBITDA ratio could be maintained below 3X and the EBIT-to-interest ratio stays above 3X. A downgrade could be triggered if the operating margin fell below 7%, debt-to-EBITDA rose above 4% and EBIT-to-interest declined toward 2X.
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