Fitch Expects to Assign IDR of 'BBB+' to Penske Truck Leasing Co. LP; Outlook Stable

Fitch Ratings expects to assign a long-term Issuer Default Rating (IDR) of 'BBB+' to Penske Truck Leasing Co. LP (PTL), with a Stable Outlook.

Fitch also expects to assign an unsecured debt rating of 'BBB+' to the company's planned note issuance. Proceeds will be used to repay borrowings on existing facilities.

The ratings reflect PTL's established market position in the truck leasing business, experienced management team, strong asset quality, and relatively consistent operating performance through various economic cycles. The ratings also reflect the expectation that $700 million of equity will be injected into PTL from the general and limited partners. The injection will be funded with $700 million of debt issuance proceeds from an intermediate holding company formed by the partners for the equity infusion. Fitch believes the increase in equity will reduce leverage, defined as debt/equity, from 6.5 times (x) at Dec. 31, 2011 to a range of 3.0x to 3.5x on a pro forma basis. Fitch expects leverage to remain within this range longer term. The equity injection is expected to settle on April 30, 2012, at which time the expected rating on the IDR will convert to an actual rating.

Rating constraints include the company's modestly higher leverage relative to peers, lack of demonstrated access to diverse funding sources, cyclicality inherent in used vehicle pricing and the commercial rental business, and volatility in defined benefit pension obligations.

Operating performance improved in 2011 with a 39.0% increase in net income from continuing operations due to a 6.2% rise in operating revenue. Performance was driven by growth in commercial rental, improved leasing activity, and strong vehicle sales gains which offset higher depreciation and interest expense. Fitch expects earnings to improve further in 2012 supported by continued demand in commercial rental, a strengthened fleet recovery and organic growth in the logistics business.

PTL's leverage, as measured by debt/equity, increased to 6.5x in 2011 from 6.0x in 2010, driven by greater debt outstanding due to higher capital expenditures. Fitch expects leverage will decline to the range of 3.0x to 3.5x after the $700 million equity injection; however, Fitch believes capital expenditures will remain elevated to refresh the rental fleet and support anticipated growth in lease activity. Fitch's current ratings incorporate the expectation that leverage will be managed under 3.5x longer term, with earnings retention sufficient to fund organic growth.

Fitch considers the company's liquidity profile to be solid with $130.7 million of balance sheet cash at year-end 2011, in addition to $354.7 million of available borrowing capacity on the General Electric Capital Corporation (GECC) revolver. Borrowing capacity on the GECC revolver is expected to terminate once the company accesses the public unsecured debt markets and new issuance proceeds will be used to repay existing borrowings over time. Liquidity from GECC will be replaced with a $1 billion corporate revolver and ABS conduit capacity. Fitch would view increased funding diversity and an ability to economically access the public debt markets over time positively.

The Stable Outlook reflects an expectation for strong liquidity, higher capitalization, and earnings growth in 2012 driven by an increase in commercial rental volumes, higher vehicle sale gains, improvement in contractual lease activity, and organic growth in logistics. Free cash flow is expected to be negative in the coming year as the company refreshes its fleet, but Fitch expects that spend to translate into strong earnings growth over time.

Negative rating action could be driven by an inability to economically access the unsecured markets, a decline in earnings and/or free cash flow beyond Fitch's expectations, deterioration in asset quality, an inability to realize residual values on used vehicles, a reduction in liquidity or an extended increase in leverage beyond the targeted range. Conversely, positive rating momentum could result from demonstrated access to the unsecured markets through market cycles, increased funding diversification, reduced leverage, and operating performance that is consistent with Fitch's expectations and broader industry performance.

Established in 1988 and headquartered in Reading, Pennsylvania, PTL is a leading provider of full-service truck leasing, truck rental, contract maintenance and logistics services. The company is a partnership between GECC (49.9%), Penske Corporation (41.1%) and Penske Automotive Group (9.0%). Ownership interests are expected to be maintained at current percentages after the $700 million equity injection.

Fitch expects to assign the following ratings with a Stable Outlook:

Penske Truck Leasing, LLC

--Long-term IDR of 'BBB+';

--Senior unsecured debt rating of 'BBB+'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Fitch has done a Rating Assessment Service for Penske Truck Leasing Co. L.P.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 16. 2011);

--'Finance and Leasing Companies Criteria' (Dec. 12, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834

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