General Electric Co.’s (GE:US) finance unit has bankrolled Penske Truck Leasing Co. for more than 15 years. That’s about to change.
The joint venture between GE Capital Corp. and companies controlled by Roger Penske, a member of GE’s board (GE:US), plans to refinance $6.4 billion of borrowings over the next two years. A $700 million offering last month of unsecured bonds due in June 2019, used to finance an equity infusion, was the first step, according to a statement this week.
After relying solely on GE Capital for financing since 1996, Penske Truck hired JPMorgan Chase & Co. to arrange a $1 billion loan and plans to tap the corporate bond market as borrowing costs reach record lows. The transactions come as GE Capital shrinks assets after $32 billion of credit losses in the aftermath of Lehman Brothers Holdings Inc.’s 2008 collapse.
“This is setting up Penske to be an independent borrower down the line without GE’s support,” said Hitin Anand, an analyst at CreditSights Inc. in New York. “It’s good from the standpoint of what GE’s doing for its own shareholders.”
Randolph Ryerson, a spokesman for Reading, Pennsylvania- based Penske, declined to comment beyond the statement.
GE Capital and LJ VP Holdings LLC, an entity formed earlier this month as part of a reorganization of the joint venture, jointly issued the 3.8 percent, senior unsecured bonds. GE Capital has the option to take over responsibility for making payments on the debt starting next year, according to the prospectus.
Proceeds from the offering will be used to finance an equity injection by LJ VP into Penske Truck Leasing, the companies said. The leasing company will use that money to repay borrowings from GE Capital, Penske said in the statement.
“This is essentially a refinancing transaction, and it strengthens Penske Truck Leasing by allowing them to take advantage of a strong market and attractive interest rates to raise third-party debt,” Russell Wilkerson, a spokesman for Stamford, Connecticut-based GE Capital, said in an e-mail.
Moody’s Investors Service gave the debt a rank of Baa3, one step above junk, and Standard & Poor’s gave Penske Truck Leasing a corporate rating of BBB-, also one level higher than junk. The April 25 bond sale was designed to help Penske Truck Leasing obtain investment-grade credit ratings, the company said in the prospectus.
“These strong credit ratings will allow us to consider additional diversified sources of capital in the financial markets,” Brian Hard, chief executive officer of Penske Truck Leasing, said in the statement.
Repaying GE Capital
The venture may also turn to asset-backed debt secured by its vehicles and leases as it seeks to “repay in full our debt to GE Capital as soon as reasonably practicable,” it said in the prospectus. It plans to end borrowing under its loan agreement with GE Capital.
Founded in 1969, Penske Truck Leasing manages a fleet of about 209,700 trucks, tractors and trailers, according to the prospectus. Leasing, rentals and maintenance accounted for 79 percent of the company’s $3.83 billion of operating revenue last year, with its logistics operation providing the rest.
GE Capital has cut its ownership share of Penske Truck Leasing to 49.9 percent from 79 percent in 2006, according to the prospectus. The stake was valued at $889 million as of Dec. 31, the company said in its annual report. Penske Corp. and Penske Automotive own the remaining 50.1 percent.
Penske Truck Earnings
GE Capital and Penske amended the agreement governing the joint venture to allow either company to require it to pursue an initial public offering any time after Dec. 31, 2017, according to the prospectus. They also extended the term of the partnership until 2023, according to the statement.
Penske Truck Leasing earned $238.9 million in profit last year while paying $233.5 million in interest on its borrowings, it said in the prospectus. It distributed half its 2011 net income to its owners last month.
Roger Penske, CEO of Penske Corp. and Penske Automotive Group Inc. (PAG:US), has been a member of GE’s board since 1994. He was re-elected at GE’s annual meeting last week, backed by 87 percent of voting shares.
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