KBRA Affirms Element Financial Corporation’s Issuer/Senior Unsecured Debt Rating of BBB+ following Acquisition Announcement

Element Financial Corporation has announced an agreement to acquire GE Capital’s (NYSE: GE) fleet management operations (“GE Fleet”) in the United States, Mexico, Australia and New Zealand, while Arval, a wholly-owned subsidiary of BNP Paribas has signed a Memorandum of Understanding to acquire the European portfolio. Following the announcement, Kroll Bond Rating Agency (KBRA) has affirmed the issuer/senior unsecured debt rating of BBB+ for Element Financial Corporation (TSX: EFN, “Element”, or “the Company”). The outlook on all ratings is stable.

• KBRA views the overall impact of the transaction as credit positive as it bolsters Element’s presence in North America as a dominant fleet management company, expands the Company’s North American reach and the scale of its operations, while also providing the Company with greater capacity to undertake international operations. Additionally, the transaction strengthens Element’s key fleet management vertical—in KBRA’s view the least risky part of Element’s business, while providing valuable cost and revenue synergies, which are expected to improve earnings over time.
• Integration challenges inherent in such a considerable acquisition are apparent, however, KBRA notes EFN’s previous partnership with GE, in June 2013, when the Company acquired the Canadian operations of GE’s North American fleet management business—which are essentially on the same platform—and the Company’s established track record of successfully integrated other strategic acquisitions.
• The transaction is valued at CAD 8.6 billion and represents a premium over the acquired net earning assets that is consistent with Element’s previous fleet management acquisitions.
• The North American share of GE’s portfolio amounts to CAD 5.5 billion of net earning assets acquired by Element, while the Australia and New Zealand shares amount to CAD 1.8 billion.
• Significant annualized cost savings are expected to be realized from the consolidation of the Company’s existing and acquired technology platforms, administrative functions and office facilities together with increased purchasing efficiency.
• To fund the transaction, Element will use the CAD 2.7 billion net proceeds from its May 29, 2015 public offering of subscription receipts, subordinated debentures and preferred shares, combined with CAD 6.3 billion in debt financing from a syndicate of Canadian and international banks through an increase of Element’s senior credit facility, which will also be extended for a three year period from the close of the transaction.
• Computed on the basis of the Company’s most restrictive covenant, the Company’s tangible leverage ratio is projected at 4.3 to 1, following the close of the transaction, which is consistent with KBRA’s BBB+ rating for the Company. The rating also considers other factors post acquisition including the balance between increased scale and earnings power for the Company and the ensuing integration risks. The ratings are based on KBRA’s Finance Company Rating Methodology, published April 1, 2013. The ratings and detailed supporting rationale are available at www.kbra.com.

To view the full report, please click here: www.krollbondratings.com/show_report/2477

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