[October 22, 2014]

Fitch: Trinity Liquidity Risk Key Concern Post FCA Ruling

The False Claims Act (FCA) ruling against Trinity Industries Inc. (TRN) could potentially lead to a review for a negative rating action, according to Fitch Ratings. This depends on further clarification that would result from a final ruling by the U.S. District Court with respect to the timing and amounts of payments assessed against TRN.

The FCA ruling does not have an immediate impact on the company's ratings or Outlook. Trinity's Long-term Issuer Default Rating (IDR) is 'BBB-'. The Rating Outlook is Stable.

The required payment by TRN, including potential bonding requirements during any appeal process, could be material. TRN's liquidity would be pressured if cash collateral must be posted during the appeal process, a scenario Fitch believes is possible although the probability is seen as low. Fitch assumes the reasonable worst case scenario as approximately $1 billion.

In a cash collateral scenario, a downgrade or Negative Rating Outlook is viewed as likely due to the immediacy of the required payment that would reduce TRN's liquidity and potentially delay value added capital projects. However, Fitch considers a more likely scenario to involve a modest bonding requirement or the usage of surety bonds through the appeal process.

Following final judgment from the U.S. District Court of Eastern Texas, Fitch expects TRN will appeal the ruling if the outcome is unfavorable to the company. Typical appeal processes are lengthy and a final resolution could take as long as several years, allowing TRN to use future free cash flow (FCF) to reduce debt financing of any final legal rulings. Fich continues to estimate TRN's FCF in 2014 at $50 million-$100 million.

Depending on the final ruling, Fitch believes TRN may be able to fund a sizable penalty between $400 million-600 million if liquidity remains strong and TRN's financial strength is supported by stable economic conditions and a prudent capital deployment strategy. In the event of a penalty in excess of approximately $500 million, Fitch believes TRN's credit profile would deteriorate below investment grade.

A final ruling could potentially lead to future personal injury and wrongful death lawsuits related to TRN's guardrails. Such lawsuits are not unusual for a guardrail manufacturer, but increased scrutiny surrounding the safety standards of TRN's ET-Plus guardrail product could lead to future adverse rulings.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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