2013 Outlook Is Stable for U.S. Finance and Leasing Companies

Fitch Ratings forecasts stability in its recently released report 2013 Outlook: U.S. Finance and Leasing Companies. Fitch believes that reduced leverage, relatively stronger capital, liquidity and funding profiles, tightened underwriting standards, and more rationalized cost structures should help this sector and help maintain ratings stability this year.

Potential changes to this outlook include the possible recessionary impact from failure to resolve the U.S. fiscal cliff or the disorderly outcome to the euro zone debt crisis, which could impact global growth and demand, or disrupt access to wholesale funding markets. Conversely, maintenance of strong capital, liquidity and leverage positions, along with stable earnings and asset quality performance, could lead to positive rating actions in individual instances within this sector.

The report considered the following key issues and sectors:

• Aircraft Lessors: The outlook on the aircraft leasing sector continues to be stable due to continued passenger traffic growth, particularly in Asia and Latin America, and a growing market share for lessors as a fleet management solution for airlines around the world. Demand for newer aircraft is likely to remain robust, as emerging countries experience increased demand for passenger airline travel and airlines in more mature markets seek to modernize their fleets in the face of rising fuel costs. Conversely, market values and lease rates on some popular aircraft models remain soft, which has affected profitability and residual values. Low interest rates continue to put pressure on lease rate factors, which tend to be fixed for a number of years. When interest rates rise, there could be a potential mismatch with funding costs at some companies. Slowing growth in some emerging market economies, where significant portions of aircrafts are leased, is likely to put near-term pressure on airlines.
• Lease Accounting: Fitch does not anticipate any changes to lease accounting in 2013, but will continue to closely monitor any developments. The International Accounting Standards Board and Financial Accounting Standards Board plan to publish a revised exposure draft on proposed changes to lease accounting during the first quarter of 2013. The proposed standard is based on a right-of-use model, which would effectively apply finance lease accounting to all leases. If implemented, this standard would have a meaningful impact on the way lessors account for leased assets and rental income. It may also impact the economics of leasing certain assets and soften demand for long-term leases. Implementation is not expected until 2015, at the earliest.
• Commercial Fleet Lease: Fleet lessors have benefited from a recent strength in used vehicle prices, which helps to mitigate residual value exposure in closed-end leases. However, Fitch expects gains to normalize after peaks experienced in 2011, but remain strong in 2013. Liquidity remains relatively strong for many commercial fleet lessors due to consistent cash flow generation. Fitch expects cash flow and balance sheet leverage to remain or improve slightly as earnings growth offset increase funding needs for additional capital spending or to manage leverage in the near to medium term.
• Trucking: Capital expenditures for truck leasing are expected to be higher than average in 2013, as older fleets are renewed for more efficient vehicles. Conversely, rental capital spending will likely decline in the coming year as replacement for this segment was primarily completed during 2011 and 2012. Commercial rental demand is expected to remain stable at current levels after experiencing solid growth during 2012, reflecting customers' hesitancy to enter long-term lease contracts against the backdrop of heightened economic uncertainty. Lease residual gains will likely decline moderately, but should remain relatively strong as buyers continue to avoid the more expensive post-2010 engines. Maintenance costs are expected to decrease due to the lower age of the fleet.

Fitch Ratings forecasts stability in its recently released report 2013 Outlook: U.S. Finance and Leasing Companies. Fitch believes that reduced leverage, relatively stronger capital, liquidity and funding profiles, tightened underwriting standards, and more rationalized cost structures should help this sector and help maintain ratings stability this year.

Potential changes to this outlook include the possible recessionary impact from failure to resolve the U.S. fiscal cliff or the disorderly outcome to the euro zone debt crisis, which could impact global growth and demand, or disrupt access to wholesale funding markets. Conversely, maintenance of strong capital, liquidity and leverage positions, along with stable earnings and asset quality performance, could lead to positive rating actions in individual instances within this sector.

The report considered the following key issues and sectors:

• Aircraft Lessors: The outlook on the aircraft leasing sector continues to be stable due to continued passenger traffic growth, particularly in Asia and Latin America, and a growing market share for lessors as a fleet management solution for airlines around the world. Demand for newer aircraft is likely to remain robust, as emerging countries experience increased demand for passenger airline travel and airlines in more mature markets seek to modernize their fleets in the face of rising fuel costs. Conversely, market values and lease rates on some popular aircraft models remain soft, which has affected profitability and residual values. Low interest rates continue to put pressure on lease rate factors, which tend to be fixed for a number of years. When interest rates rise, there could be a potential mismatch with funding costs at some companies. Slowing growth in some emerging market economies, where significant portions of aircrafts are leased, is likely to put near-term pressure on airlines.
• Lease Accounting: Fitch does not anticipate any changes to lease accounting in 2013, but will continue to closely monitor any developments. The International Accounting Standards Board and Financial Accounting Standards Board plan to publish a revised exposure draft on proposed changes to lease accounting during the first quarter of 2013. The proposed standard is based on a right-of-use model, which would effectively apply finance lease accounting to all leases. If implemented, this standard would have a meaningful impact on the way lessors account for leased assets and rental income. It may also impact the economics of leasing certain assets and soften demand for long-term leases. Implementation is not expected until 2015, at the earliest.
• Commercial Fleet Lease: Fleet lessors have benefited from a recent strength in used vehicle prices, which helps to mitigate residual value exposure in closed-end leases. However, Fitch expects gains to normalize after peaks experienced in 2011, but remain strong in 2013. Liquidity remains relatively strong for many commercial fleet lessors due to consistent cash flow generation. Fitch expects cash flow and balance sheet leverage to remain or improve slightly as earnings growth offset increase funding needs for additional capital spending or to manage leverage in the near to medium term.
• Trucking: Capital expenditures for truck leasing are expected to be higher than average in 2013, as older fleets are renewed for more efficient vehicles. Conversely, rental capital spending will likely decline in the coming year as replacement for this segment was primarily completed during 2011 and 2012. Commercial rental demand is expected to remain stable at current levels after experiencing solid growth during 2012, reflecting customers' hesitancy to enter long-term lease contracts against the backdrop of heightened economic uncertainty. Lease residual gains will likely decline moderately, but should remain relatively strong as buyers continue to avoid the more expensive post-2010 engines. Maintenance costs are expected to decrease due to the lower age of the fleet.