KBRA Affirms Rating for Element Fleet Management Corp.

KBRA affirms the issuer rating of A- for Element Fleet Management Corp. (TSX: EFN, “Element” or “the company”), an automotive fleet leasing and management company based in Toronto, Canada. The Outlook for the rating is Stable.

Key Credit Considerations

The rating reflects Element’s leading position in the automotive fleet management industry, with a large-scale, cost-competitive franchise in its core operating markets. Key to the credit profile is the company’s focus on mission-critical assets and ability to provide a broad range of end-to-end fleet management services that span the total vehicle life cycle to a wide and diverse, blue-chip customer base. This has supported stable revenue and cash flow generation, as well as solid asset quality metrics, with the company reporting minimal credit losses through various cycles and low residual value risk exposure. The rating is further supported by an improving trend in profitability. Element’s operating performance has continued to improve over recent periods as production has normalized, combined with higher penetration rates from existing clients, increasing revenue diversification with ancillary service offerings, and growth in Mexico and Australia & New Zealand regions. The rating is constrained by Element’s elevated leverage metrics that have increased YoY with debt-to-tangible common equity of 8.5x as of 1H25 versus 6.8x as of 1H24, reflecting an increase in borrowings and the redemption of preferred shares in 2024. The rating also considers the level of secured funding (~50% of total debt at mid-year 2025), while acknowledging the notable progress in reducing the proportion of secured debt over the past few years by diversifying funding sources, primarily via unsecured debt issuances. While primarily centered on organic growth, in the event of a future acquisition, we would expect any potential transaction to be digestible and in line with management's communicated strategy, including a focus on cultural alignment, though inherent integration risks exist. The rating is also sensitive to general macroeconomic conditions in North America and Pacific regions.

Rating Sensitivities

While a rating upgrade is not expected over the near-term, a significant decline in leverage metrics that is maintained over time would be viewed favorably. This, in conjunction with continued improvement in funding diversity, including reducing the level of encumbered assets, positive earnings trends, and strong asset quality metrics could drive positive rating momentum over time. The Outlook could be revised to Negative, or the ratings could be downgraded, in the event of an extended period of elevated leverage metrics versus peers or if sustained lower utilization and/or write-downs result in material deterioration of leverage, earnings, liquidity and/or asset quality metrics. Ratings could be negatively affected if secondary and tertiary impacts of trade tensions and tariffs cause a recession or intensify economic uncertainty.

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