Fitch Ratings has published the 'BBB+' Long-Term Issuer Default Rating (IDR) assigned to GATX Corporation (GATX).

The Rating Outlook is Stable. Fitch has also published GATX's 'BBB+' senior unsecured debt rating, 'F2'short-term IDR and 'F2' commercial paper (CP) rating.

Key Rating Drivers

IDRs AND SENIOR DEBT

The ratings reflect GATX's established market position within the railcar leasing industry, a diversified fleet portfolio across customers, industries and car types, strong asset quality, manageable exposure to residual value risk given conservative depreciation policies, appropriate leverage, solid liquidity, a predominantly unsecured funding profile and an experienced management team.

Rating constraints specific to GATX include the largely monoline nature of the business and its reliance on wholesale funding sources. Rating constraints applicable to the broader railcar leasing industry include the competitive operating environment, the cyclicality of the railcar market, utilization rates and lease rates, particularly in light of current macroeconomic uncertainties, and the potential impacts from federal, state, local, and foreign environmental regulations on railcars, particularly tank cars.

In North America, GATX serves more than 850 customers with more than 160 railcar types. GATX's international rail business is more concentrated, serving over 250 customers with greater than 50 railcar types. However, Fitch believes the reduced diversity is offset by less volatile lease rates in Europe, given less competition and greater demand to replace aging equipment driven by regulatory considerations.

Asset quality remains solid, with modest impairments and manageable residual value risk, given GATX's conservative depreciation policy and the long economic life of its assets. The company reported impairments of $48.9 million in 2022, driven by the exit of its rail business in Russia and impairments related to the intended sale of its specialized gas vessels, in addition to a $15.3 million impairment charge recorded in 1Q22 associated with its 50% interest in joint venture affiliate Rolls-Royce & Partners Finance Limited (RRPF) related to aircraft spare engines in Russia. GATX reported an impairment ratio of 0.6% in 2022, compared with a four-year average impairment ratio of 0.2% from 2019-2022, which is consistent with peers.

GATX has been able to consistently sell railcars at gains relative to depreciated value, with remarketing income of $109.7 million in 2022. Fitch expects GATX's asset quality to remain solid, with increased gains on asset dispositions resulting from continued strength in the secondary market for railcars in N.A.

GATX's operating performance benefited from continued strengthening in the railcar leasing market in North America in 2022, with 10 quarterly sequential increases in absolute lease rates and improved utilization, which was somewhat offset by impairment charges recorded during the period. Annualized pre-tax income (including GATX's share of affiliates' earnings from portfolio management) as a percentage of average assets (ROAA) was 2.3% in 2022, down modestly from 2.6% in 2021.

This compares to a four-year average of 2.7% from 2019-2022, which is within Fitch's 'bbb' category earnings and profitability benchmark range of 2.5% to 3.5% for balance sheet intensive finance and leasing companies with an 'a' category operating environment score. Adjusting for impairments, pre-tax ROAA would have been 2.9% in 2022. Fitch believes GATX's operating performance in 2023 will be near its four-year average, although the macro environment remains uncertain.

GATX's leverage, measured by gross debt (including recourse debt and lease obligations) to tangible equity, amounted to 3.5x at Dec. 31, 2022, which is within Fitch's 'bbb' category quantitative benchmark range of 3.0x to 5.0x for balance sheet-intensive finance and leasing companies with an 'a' category operating environment score. Leverage was up modestly from the four-year average of 3.3x from 2019-2022, but Fitch expects leverage to remain below 4.0x over the long term.

Fitch views GATX's liquidity as solid, with $452.2 million of cash and short-term investments and $850 million of available borrowing capacity under its revolving credit facilities at YE22. GATX also generates significant cash flow from operations and has historically harvested meaningful proceeds from the sale of railcars. Near-term debt maturities include $250 million of unsecured notes due March 2023 and $250 million borrowed under the delayed draw term loan due December 2023. Fitch expects GATX to seek to opportunistically refinance these issuances and/or repay the notes at maturity with available liquidity.

GATX benefits from a robust pool of unencumbered assets, with unsecured debt representing 96% of total debt at Dec. 31, 2022, which provides the company with meaningful financial flexibility in times of market stress. Fitch believes GATX's funding profile compares favorably to other finance and leasing companies.

The Stable Outlook reflects Fitch's expectation for the maintenance of strong asset quality performance, appropriate leverage, solid liquidity, consistent access to the capital markets and a largely unsecured funding profile. The Outlook also reflects the expectation for operating performance to remain in line with GATX's four-year average pre-tax ROAA.

A Long-Term IDR of 'BBB+' corresponds to a Short-Term IDR of 'F1' or 'F2' according to Fitch's Non-Bank Financial Institutions Rating Criteria, dated Jan. 31, 2022. In order to achieve the higher short-term rating, an issuer would need to have a Funding, Liquidity and Coverage factor score of at least 'a'. GATX's Funding, Liquidity and Coverage factor score is 'bbb', thus resulting in the lower of the two short-term IDRs of 'F2'.

GATX's unsecured debt rating is equalized with its Long-Term IDR, reflecting the significantly unsecured funding profile and expectations for average recovery prospects under a stress scenario.

GATX's CP rating is equalized with the short-term IDR.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT

Factors that could, individually or collectively, lead to positive rating action/upgrade over the longer term include sustained railcar usage/demand, enhanced operating consistency, a continuation of strong asset quality metrics, a sustained reduction in leverage below 2.5x, and maintenance of a solid liquidity profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade include a sustained increase in leverage above 4.0x, a reduction in the diversity and/or credit quality of its customers, a material and persistent reduction in fleet utilization and/or an increase in impairments either of which negatively impacts operating performance, a material decline in the proportion of unsecured debt in the funding structure, and/or weakening of the liquidity profile.

The short-term IDR is primarily sensitive to changes in the long-term IDR and would be expected to move in tandem. However, a material improvement in GATX's Funding, Liquidity and Coverage profile, resulting in an upgrade of the factor score to 'a' could result in an upgrade of the Short-Term IDR to 'F1'.

The unsecured debt rating is sensitive to changes in GATX's long-term IDR and to changes in GATX's funding profile, including the mix of unsecured debt and the level of unencumbered asset coverage. A material increase in the use of secured debt combined with a decline in the level of unencumbered asset coverage could result in notching between the IDR and unsecured debt.

The CP rating is sensitive to changes in the short-term IDR and would be expected to move in tandem.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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