TEXT-S&P raises United Rentals rating to 'B+'

Thu Aug 30, 2012 9:04pm IST

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Overview
     -- U.S.-based equipment rental company United Rentals Inc.     
(URI) has improved operating performance and credit measures.
     -- We are raising the our ratings on URI, including our corporate credit 
rating, to 'B+' from 'B'.
     -- The stable outlook reflects our expectation that the company will 
maintain credit measures and financial policies consistent with the higher 
rating.

Rating Action
On Aug. 30, 2012, Standard & Poor's Ratings Services raised its ratings on 
Greenwich, Conn.-based United Rentals Inc. to 'B+' from 'B'. We also raised 
our issue-level ratings on the senior secured notes to 'BB' from 'BB-'; the 
recovery rating on the notes remains '1', indicating our expectation that 
lenders would receive very high (90% to 100%) recovery in a payment default 
scenario. We raised the rating on URI's senior unsecured debt to 'B+' (the 
same as the corporate credit rating) from 'B' and the recovery rating remains 
'4', indicating our expectation of average (30% to 50%) recovery in a payment 
default scenario. The rating on the subordinated debt is now 'B-' (two notches 
below the corporate credit rating) and the recovery rating remains '6', 
indicating our expectation for negligible (0% to 10%) recovery in a payment 
default scenario. We now rate the company's preferred stock 'CCC+'. The 
outlook is stable.

Rationale
The upgrade reflects our expectations that URI will likely continue to benefit 
from improving fundamentals in the equipment rental industry, but that it will 
generate negative free cash flow in 2012 because of elevated capital 
expenditures. The company recently acquired the No. 2 player in the equipment 
rental industry, RSC Holdings Inc. (RSC). Although this transaction increased 
leverage to about 4.7x, the company should benefit from synergies and strong 
demand, which could reduce leverage to about 4.1x by the end of 2012. 

Our forecast assumes:
     -- Nonresidential construction spending increases about 10% in 2012, and 
then flattens in 2013.
     -- The company continues to benefit from good demand from industrial end 
markets.
     -- Contractors tend to rent versus buy equipment because of market 
uncertainty.

The company's "fair" business risk profile primarily reflects its leading 
position in the cyclical, highly competitive, and fragmented equipment rental 
industry. URI is the biggest player in the market, with a large and diverse 
rental fleet. The company has good geographic and customer diversification. It 
also benefits from good economies of scale for purchasing rental equipment and 
has more flexibility to transfer equipment among branches.

We expect improvement in nonresidential commercial construction spending, 
which spur demand for equipment rentals, to continue to support URI's 
performance. Nonresidential construction spending has been weak since late 
2008, but we expect it to improve in 2012, growing by 10% and then flattening 
in 2013. Conditions in the equipment rental industry have also improved 
recently because of contractors' preference for renting versus buying 
equipment when projects are relatively scarce or uncertain. Additionally, the 
equipment rental companies are benefiting from good demand from some 
industrial end markets, such as energy. Over the long term, we expect 
customers' outsourcing trend to continue. In the quarter ended June 30, 2012, 
URI reported rental revenues increased by about 15%, partly because of a 7% 
increase in rental rates and stable time utilization at 67%. URI's 12-month 
EBITDA margin improved to 39% as of June 30, 2012, from 33% a year ago, 
reflecting increased pricing power, strong demand, and lower fixed costs as a 
percentage of revenues.

The ratings also reflect URI's "aggressive" financial risk profile. The 
largely debt-funded acquisition of RSC reflects URI's very aggressive 
financial policy, in our view. Pro forma for the transaction and $200 million 
in share repurchases, as of June 30, 2012, URI's total debt to EBITDA was 
approximately 4.5x. We consider debt to EBITDA of 4x to 5x appropriate for the 
rating. We believe the combined entity will continue to benefit from strong 
fundamentals in the equipment rental industry, and earnings growth could 
result in leverage of about 4.1x by the end of 2012. We assume some benefits 
from synergies in our forecast. However, execution risk and economic 
uncertainty could delay an improvement to credit metrics.

Liquidity
We consider URI's sources of liquidity to be "adequate" under our criteria to 
cover its needs in the next 12 to 18 months, even if its EBITDA declines 
unexpectedly. The company has minimal upcoming debt maturities. Our assessment 
of the company's liquidity profile incorporates the following expectations and 
assumptions:
     -- We expect the company's sources of liquidity, including cash and 
facility availability, to exceed its uses by 1.2x or more over the next 12 to 
18 months.
     -- We expect net sources to remain positive, even if EBITDA drops by 15%; 
     -- We believe the company could absorb low-probability, high-impact 
shocks. The company has good relationships with its banks and access to the 
capital markets, as its recent debt issuance to fund the transaction 
indicated. 

We expect the company to invest in capital to an extent that is likely to 
result in negative free cash flow in 2012. We also expect the company to 
exercise prudent management of its rental fleet, thereby generating positive 
free cash flow when the growth rate slows and the cycle turns, consistent with 
the counter-cyclical nature of cash flow in the equipment rental industry.

As of June 30, 2012, the company had $41 million in cash and nearly $500 
million available under its $1.9 billion asset-based revolving credit 
facility. Springing financial covenants govern the company's credit facility, 
and the covenants remained untested as of June 30, 2012. 

Recovery analysis
For the full recovery analysis, see the updated recovery report on United 
Rentals Inc., to be published this week, on RatingsDirect. 

Outlook
The stable outlook is supported by the current favorable business conditions 
in the equipment rental industry. We could revise the outlook to negative if 
the economic recovery falters further, eroding operating performance more than 
we expect, or if issues related to the integration of RSC appear likely to 
hinder performance, and leverage rises to greater than 5x. We could raise the 
ratings if the company appears likely to achieve and maintain improved credit 
measures and positive free cash flow, and if it adheres to a financial policy 
that could support a higher rating. For instance, we could raise the ratings 
if the company sustains total debt to EBITDA of 3x to 4x and the operating 
environment in the equipment rental industry is likely to remain positive. 

Related Criteria and Research 
     -- U.S. Economic Forecast: Keeping The Ball In Play, Aug. 17, 2012
     -- Industry Economic And Ratings Outlook: Risks Increase For U.S. Capital 
Goods Companies As The Eurozone Debt Crisis Drags On And China's Growth Slows, 
June 29, 2012
     -- Issuer Ranking: U.S. Capital Goods Companies, Strongest To Weakest, 
March 28, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Criteria For Rating The Global Capital Goods 
Industry, April 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Upgraded; Outlook Action
                                        To                 From
United Rentals Inc.
United Rentals (North America) Inc.
 Corporate Credit Rating                B+/Stable/--       B/Positive/--

Upgraded
                                        To                 From
United Rentals (North America) Inc.
 Senior Secured                         BB                 BB-
   Recovery Rating                       1                  1
 Senior Unsecured                       B+                 B
   Recovery Rating                      4                  4
 Subordinated                           B-                 CCC+
   Recovery Rating                      6                  6

United Rentals Trust I
 Preferred Stock                        CCC+               CCC
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