Element Rail Leasing I LLC (Series )

Transcription

1 Presale: Element Rail Leasing I LLC (Series ) Primary Credit Analyst: John F Lampasona, New York (1) ; john.lampasona@standardandpoors.com Secondary Contact: Hector O Campos, New York (1) ; hector.campos@standardandpoors.com Corporate & Government Credit Analyst: Betsy R Snyder, CFA, New York (1) ; betsy.snyder@standardandpoors.com Legal Contact: Natalie Abrams, New York (1) ; natalie.abrams@standardandpoors.com Table Of Contents $ Million Secured Railcar Equipment Notes Series Rationale Transaction Strengths Transaction Weaknesses Mitigating Factors Industry Characteristics Sector Outlook Transaction Structure Administrator/Servicer Portfolio Characteristics Cash Flow Assumptions APRIL 9,

2 Table Of Contents (cont.) Utilization Rates Lease Rates Useful Life And Residual Proceeds Operating Expenses Cash Flow Results Sensitivity Analysis Payment Priority Events Of Default Early Amortization Events Legal Matters Surveillance Standard & Poor's 17g-7 Disclosure Report Related Criteria And Research APRIL 9,

3 Presale: Element Rail Leasing I LLC (Series ) $ Million Secured Railcar Equipment Notes Series This presale report is based on information as of April 9, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Rating As Of April 9, 2014 Class Preliminary rating(i) Preliminary amount (mil. $) A-1 A (sf) A-2 A (sf) B-1 BBB (sf) (i)the rating is preliminary and subject to change at any time. Profile Expected closing date Expected maturity date Legal final maturity date Optional redemption Denominations Collateral Issuer Administrator Servicer Trustee April 17, April 19, April 19, Subject to certain restrictions, the class A-1 notes can be redeemed in whole or in part on any payment date after October 2015; the class A-2 and B-1 notes can be redeemed in whole or in part on any payment date after April $100,000 initially and then in $1,000 increments. A $401,544,000 (the current value) portfolio containing 4,267 railcars. The issuer has the right to lease revenues from the portfolio and any residual cash flows from the sale of railcars. Element Rail Leasing I LLC. Element Rail LLC. Trinity Industries Leasing Co. Wilmington Trust Co. Rationale The preliminary ratings assigned to Element Rail Leasing I LLC (ERL) secured railcar equipment notes series reflect our view of: The likelihood that timely interest and ultimate principal payments will be made on or before the legal final maturity date; The initial and future lessees' estimated credit quality; The railcar collateral's value and rental-generating potential; The transaction's legal and payment structures; APRIL 9,

4 Trinity Industries Leasing Co.'s (TILC's) demonstrated servicing ability; and The liquidity reserve account, which will have a target balance of nine months' interest. Transaction Strengths In our view, this transaction's strengths include the following: The railcar leasing market's historical stability and relatively high and stable utilization rates; The minimal risk of technical obsolescence, the stable equipment, and the equipment's long useful life; The young age of the railcars included in the portfolio: the average age is slightly more than four years old; The low amount of maintenance needed because of the railcars' young age; The long lead-time for government-mandated improvement programs, whereby TILC knows well in advance when it has to remove the railcars from service for required maintenance; The low write-offs; and The diversified pool of tank and non-tank freight cars. Transaction Weaknesses In our view, this transaction's weaknesses include the following: The majority of the leases are full-service, which exposes the transaction to the railcars' uncertain variable expenses, such as maintenance and servicing. DOT-111 railcars, which are subject to potential regulation changes, account for 35% of the pool. We have not rated, or rated speculative grade, 54.4% of the lessees, based on the number of railcars. Mitigating Factors In our view, the transaction's weaknesses are mitigated by the following: Our stress scenarios include stresses to the expenses due on the portfolio's full-service leases. The stress scenarios we apply to the utilization rates can typically incorporate 50% lessee defaults during the lease term for a five-year operating lease that is subject to six months of downtime in between lessees. We apply stress scenarios to the cash flow modeling for fleet utilization, lease rates, and operating expenses through four sector downturns, each of which is four years long. The recovery in railcar shipping volume, which began in mid-2010, continues to benefit the railcar leasing business, based on the Association of American Railroads' data. Although DOT-111 tank cars account for 35% of the portfolio, those that haul crude oil and ethanol represent 30% of the portfolio and those DOT-111 tank cars that were manufactured before 2012 (when tank car manufacturing standards were updated) represent 10% of the portfolio. There is no certainty as to which cars might be impacted as no regulation has been passed; however, in our opinion, the 10% referenced have the most potential. In addition, all of the current lease agreements include provisions that allow an increase in monthly lease payments effective upon the date a regulatory authority mandates a modification. The demand for tank cars remains strong due to increased domestic oil production. APRIL 9,

5 Industry Characteristics Sector Outlook Our general outlook on the railcar leasing sector is as follows: The industry is somewhat concentrated, with only a few major participants and several smaller ones. Railcar leasing is typically a very stable and predictable cash flow source because of multiyear leases and relatively high-quality lessees compared with other transportation equipment leasing businesses. Railroad companies and shippers have typically chosen not to invest in tank cars, and therefore lessors own about 75% of tank cars in the U.S. Railcar demand was strong from 2004 through 2007, but then declined through early 2010 because of the weak economy. Overall railroad traffic has increased modestly since then, with demand for certain leased railcars (particularly cars that transport petroleum and intermodal traffic) driving the improvement. A large percentage of lessees have investment-grade credit with low credit losses. Railcar manufacturers include Trinity Industries Inc., American Railcar Industries, Greenbrier, Union Tank Car, Freightcar America, and National Steel Car. Railcar lessors include American Railcar Leasing, Greenbrier, Union Tank Car, Chicago Freight Car Leasing, CIT, GATX, GE Rail, TTX, Trinity Rail Leasing, The Andersons, First Union Rail, SMBC Rail Services (formerly known as Flagship Railcar Services), Helm, and the new start-up, CAI Rail. Demand for certain railcars, such as boxcars, is highly cyclical. The modest recovery in railcar shipping volume, which began in early 2010, has benefited the railcar leasing business; we expect this trend to continue, assuming the economy continues to grow modestly. The Association of American Railroads reported that U.S. freight carloads declined by 0.5% in 2013 after declining by 3.1% in This includes a 31.1% increase in petroleum and petroleum products carloads, offset by a 4.3% decline in coal traffic, which accounted for almost 40% of total carloads. At the same time, container traffic increased 4.6%. Canadian freight carloads rose by 1.8%, with a 6% increase in coal carloads, a 13.7% increase in petroleum and petroleum products carloads, and a 4.5% increase in container carloads. Mexican carloads rose by 6.1%. The distribution of commodities transported is somewhat different, with motor vehicles and related carloads accounting for close to 25% of the total. Combined, in 2013, North American carloads rose by only 0.2%, with coal declining by 3.6%, petroleum and petroleum products increasing by 24.1%, and container traffic increasing by 4.4%. In the first 13 weeks of 2014, U.S. carloads rose by 0.9%, with coal carloads declining by 0.6% and petroleum and petroleum products carloads increasing by 7.1%. Intermodal carloads rose by 3.8%. Canadian freight carloads declined by 7.0%, including a 3.8% declined in coal carloads. Intermodal carloads increased by 1.5%. Mexican carloads rose by 2.0%. Combined North American carloads decreased by 0.7%, and intermodal carloads rose by 3.3%. Increased domestic oil production has resulted in strong demand for tank cars. This reflects new drilling techniques that allow economic oil production from areas such as the Bakken formation in North Dakota and Montana. This oil production, and the resulting demand for tank cars, appears to be a long-term trend, as the U.S. is expected to be the largest oil producer in the world by the end of the decade. Although pipeline construction might ease the demand for tank cars somewhat, it is unlikely to have a major effect. Any pipeline will take several years to build and is likely to alleviate traffic only along the north-south routes. East-west traffic is expected to increase as refineries on the east coast and in California begin to receive more oil from domestic sources. In addition, unit trains (large trains with a single type of car for a single purpose, such as a train of only tank cars traveling from Bakken to a refinery) are able to APRIL 9,

6 move the oil more quickly than the pipelines many are anticipating. After a spate of accidents that involved tank cars transporting crude oil, railroads have proposed a series of operating changes (such as slower train speeds in populated areas), and regulators are weighing other rule changes. It is too soon to tell what the final rules will be regarding transporting crude oil by rail. However, we believe any new regulations regarding retrofitting or replacement of older tank cars will take years to phase in. With tank car manufacturers already busy building to meet new demand, near-term replacement of older (pre-2011) tank cars would take years. Transaction Structure Element Rail Leasing I LLC (ERL) is a special-purpose bankruptcy-remote limited-liability company organized under the laws of Delaware. ERL is a wholly owned subsidiary of Element Rail LLC (Element). Element will act as the issuer's administrator. ERL will purchase in a true sale a portfolio of railcars and their related leases from Element. The issuer will then grant a security interest in the leased railcars and leases, along with the rights under the related agreements and accounts, to the indenture trustee for the bondholders' benefit. According to the data we have been provided, ERL will acquire approximately $401,544,000 in appraised value of railcars. The total portfolio will include 4,267 units that comprise a variety of railcar types worth approximately $401,544,000 in current value. The trustee will pay principal and interest due on the notes from the payments that the underlying lessees make, the earnings from any invested funds, the proceeds from any railcar dispositions, the insurance proceeds, and the amounts on deposit in the specified cash accounts (see chart 1 for the transaction structure). APRIL 9,

7 Administrator/Servicer Element Corporation was incorporated on May 11, 2007; however, they only recently began operating in the railcar leasing business. The administrator, Element, was formed in December 2013 and is responsible for providing certain accounting, entity governance, and other related support services to the issuer. Failure by the administrator to perform its obligations under the administrator agreement could result in noteholders experiencing delays and reductions in payments. Although the administrator has limited operating history, they work closely with TILC, the servicer, to manage certain aspects of the portfolio railcars and the leases. The administrator cannot replace the servicer except upon the occurrence of certain events including, but not limited to, failure of the servicer or Trinity to pay when due certain indebtedness, a utilization differential for the servicer's fleet exceeding specified limits, and a monthly lease differential for the servicer's fleet exceeding specified limits. TILC, a wholly owned subsidiary of Trinity Industries Inc. (Trinity), was incorporated under the laws of Texas in APRIL 9,

8 Trinity is a leading North American designer and manufacturer of tank and non-tank freight railcars. TILC is engaged in leasing tank cars and non-tank freight cars to industrial companies in petroleum, chemical, agricultural, energy, and other industries. TILC also manages railcar equipment for third-party owners, including Element. As of Dec. 31, 2013, TILC's managed fleet consisted of approximately 75,683 railcars, including 54,117 railcars that are owned by TILC or managed for wholly owned special-purpose subsidiaries of Trinity. The fleet utilization rate was 99.5% as of Dec. 31, The ERL transaction's servicing agreement contains provisions requiring TILC to lease and re-lease the railcars it manages regardless of whether the railcars are part of the securitized fleet, its own fleet, or other fleets that it manages. The ERL deal's monthly management fee is 5% of aggregate collections when the utilization rate is 97.5% or greater and 4% otherwise. TILC's owned and managed fleet is one of the largest among the top railcar operating lessors, which include GE Rail, GATX Corp., Union Tank Car Co., CIT Rail Resources, and First Union Rail. Lease revenues include all ancillary services that are provided along with the railcar rentals. Shippers typically lease approximately 75% of the tank car fleet, a percentage that has held relatively constant for the past several years. Tank cars are used to transport renewable fuels; agricultural, chemical, semigaseous or gaseous products; and other types of industrial liquids, including petroleum-based products. Non-tank freight cars include open-top hoppers, which transport products including coal and mineral aggregates; covered hoppers, which transport products such as grain, cement, plastic products, and other granular products; autoracks, which transport passenger cars and light-duty trucks; boxcars, which transport paper, auto parts, and refrigerated consumable products; mill gondolas, which transport rolled steel and other milled metal products; and intermodal cars, which transport standardized intermodal containers. Portfolio Characteristics ERL's portfolio includes approximately 4,267 railcars. The portfolio includes about 93.3% full-service leases and 6.7% net leases calculated by the number of railcars. The initial fleet composition includes 2,088 tank cars and 2,179 non-tank freight cars (see table 1). All information regarding the fleet is as of March 31, Table 1 Portfolio Breakdown By Railcar Type Car type No. of railcars % of total Tank 2, Non-tank freight 2, Total 4, The portfolio is relatively young as the weighted average age is 4.2 years. The 277 railcars, which are 10 years or older, are a diversified mix of freight and tank cars with leases expiring in the next seven-to-68 months. In most cases, our assumed lease rate factor for the cars is less than the actual lease rate factor. This results in a decrease in assumed rent once the current lease expires. As further explained in our Cash Flow Assumptions section, we assume the railcars are sold at a fraction of their depreciated value at the end of their useful lives. A railcar's useful life is typically years, APRIL 9,

9 which is longer than the transaction's 30-year life (see table 2 and chart 2). Table 2 Portfolio Stratification By Year Of Manufacture Year of manufacture No. of railcars % of total(i) Pre , Total 4, (i)amounts may not total due to rounding. Chart 2 APRIL 9,

10 The demand for specialty railcars is typically based on overall economic growth; the growth of certain industry segments, such as manufacturing and shipping; and the replacement of older equipment. Of all of the railcar types, tank car leasing has historically been the most stable and predictable source of cash flow. The lease terms of these railcar types average more than four years and, in many cases, the equipment stays with a single lessee for its entire life, which results in utilization rates of more than 90% throughout economic cycles. The commodities transported in these cars tend to be less affected by economic cycles than other commodities. To counter the lower demand for specialty railcars in economic downturns, lessors tend to shorten lease terms with lower lease rates to maintain strong utilization levels. This allows lessors to extend lease terms at higher rates when demand recovers. The mix of industries serviced by the transaction's closing date portfolio is, in our view, diverse: based on the number of railcars, 46% of railcars are used to transport chemicals, renewable fuels, petroleum, industrial gases, and petrochemicals; and the remaining 54% is used to transport mining and mineral, agricultural, coal, and plastics (see table 3 and chart 3). Table 3 Portfolio Stratification By Industry Served Industry type No. of railcars % of total(i) Agriculture Chemical Mining and mineral 1, Petroleum Renewable fuels Coal Industrial gases Petrochemical Plastics Total 4, (i)amounts may not total due to rounding. APRIL 9,

11 Chart 3 As of March 31, 2014, there were approximately 53 lessees in the pool. On the closing date, we expect the largest lessee will account for approximately 16% of the total railcars leased (as measured by the number of railcars). We expect no other lessee to account for more than 10% of the total railcars leased. Railcars leased to the five largest lessees account for approximately 45.4% of the monthly lease revenue. A lessee default could increase the portion of railcars that may need to be remarketed due to repossession. Based on the current portfolio composition by lessee (as measured by the number of railcars), 45.6% are rated investment-grade, 23.5% are rated speculative-grade, and the remaining 31.0% are not rated. Generally, once a lessee defaults, TILC would have to repossess the railcars and remarket them. We performed a sensitivity analysis of the utilization rate to address the risk that the issuer would not receive cash flow during the downtime. The stress level we apply to the utilization rate can incorporate 50% lessee defaults during the lease term, as shown in the Cash Flow Results section. Table 4 Portfolio Stratification By Standard & Poor's Rating Rating No. of railcars % of total(i) AAA AA APRIL 9,

12 Table 4 Portfolio Stratification By Standard & Poor's Rating (cont.) AA AA A A 1, A BBB BBB BBB BB BB BB B B B NR 1, Total 4, (i)amounts may not total due to rounding. NR--Not rated. The servicer establishes each lease's rate when the related lease term begins. After the initial lease terms have expired, the leases generally continue on the same terms on a month-to-month basis. The servicer will establish renewal lease rates for those railcars whose related lease is renewed. Renewal lease rates are typically based primarily on the initial lease rate, the railcar industry's strength, customer demand, and the applicable railcar's age and expected useful life. As of March 31, 2014, the initial lease rates for the railcars averaged $799 per month on a weighted average basis (based on the number of railcars). In addition, the leases' weighted average remaining term was approximately 4.8 years (see tables 5-7 and charts 4-5). Table 5 Portfolio Stratification By Lease Rate Range Lease rates No. of railcars % of total(i) Less than $ $500-$599 1, $600-$ $700-$ $800-$ Greater than $899 1, Total 4, (i)amounts may not total due to rounding. APRIL 9,

13 Chart 4 Table 6 Portfolio Stratification By Remaining Lease Term Remaining lease term (months) No. of railcars % of total(i) , and above Total 4, (i)amounts may not total due to rounding. APRIL 9,

14 Chart 5 Table 7 Comparison With Recent Transactions Element Rail Leasing (Series ) Trinity Rail Leasing 2012 LLC (Series ) Trinity Rail Leasing 2012 LLC (Series ) FRS I LLC ARL No. of railcars 4,267 7,201 4,866 5,541 3,020 Average age (years) Avg. remaining lease term (years) Average lease rate ($) % of tank cars Largest lessee (%) % investment-grade lessees Largest industry (%) Cash Flow Assumptions The transaction's cash flows depend on a number of key inputs, some of which are contractual (for example, lease APRIL 9,

15 rates) and some of which we modeled based on historical performance, our economic scenarios, and our expectation of the railcars' lifespan. We have incorporated the stresses for each of those components into four sector downturns (each of which is four years long) over the fleet's life. The downturns' depth, length, and starting time are rating-dependent, which means that a higher rating is subject to deeper and longer downturns within a shorter time frame. Our internal cash flow model includes input assumptions for the following: The railcars' lease rates and terms by car type; The railcars' depreciation schedule by car type; The railcars' maintenance schedule by car type; The base fees and write-off assumptions; The inflation rate for rent, maintenance, and other expenses; and The railcars' residual value ranges from 0%-10% at the end of the transaction. In addition, our internal cash flow model includes input assumptions for the following economic conditions: Years 1-4: recession; Years 5-9: normal economic conditions; Years 10-13: recession; Years 14-18: normal economic conditions; Years 19-22: recession; Years 23-27: normal economic conditions; and Years 28-31: recession. Under our stress assumptions, we expect that the transaction will pay timely interest on each payment date and full principal by the final maturity date. We have stressed and changed four of these aforementioned inputs over the transaction's life. We adjusted our assumptions for the value of these inputs to stress the transaction at a level that we believe is commensurate with our assigned preliminary rating. Utilization Rates Based on our assumptions, fleet utilization levels during any of the downturns step-down to and then recover from depressed levels of 70%-75% for an 'A' rating. During a four-year downturn, we assumed that the utilization at the beginning (year one) and end (year four) of the downturn was halfway between the bottom and base levels. During the recent sector downturn, U.S. fleet utilization briefly dipped below 70%. In our view, stressing the utilization rate at similar levels lasting two years is commensurate with an 'A' rating stress level. Fleet utilization is generally a function of several operating parameters, among them lease term, downtime in transit between lessees, and lessee default assumptions. For a five-year operating lease that is subject to six-month downtime in between lessees, for example, 70% utilization can typically incorporate 50% lessee defaults during the lease term (see chart 6). APRIL 9,

16 Chart 6 Lease Rates We model future lease rates based on a "lease rate factor curve," which converts a railcar's value to the corresponding lease rentals using a factor that changes (one that typically increases) over time. To determine this calculation, we begin with the appraised value provided by a third-party appraiser, in this case RailSolutions Inc. We model the car depreciation by applying a constant compound factor of 6% to freight cars and 7% to tank cars. We forecast the lease rates including an inflation factor using this model as our base case. For our stress tests, we reduce the base-case lease rates by 30%-35% for the 'A' rating level. Similar to how we model the fleet utilization, we "step down" to halfway between the base and bottom during years one and four of each downturn (see chart 7). APRIL 9,

17 Chart 7 Useful Life And Residual Proceeds Railcars typically have a useful life of approximately years depending on the car type. For the purposes of modeling, we assume that all railcars have a 35-year useful life. At the end of the useful life, we assume that the railcars are sold at a haircut commensurate with the lease rate stress. We determine the book value by depreciating the initial railcar value at a rate as described in the Lease Rate section above. While most of the cash flow comes from lease rentals, we do assume a modest residual value of around 10% at the end of a railcar's useful life. Operating Expenses Operating expenses include maintenance, storage, insurance, and taxes for that portion of the fleet on full-service lease. For this securitization, the servicer provided updated maintenance expense estimates by railcar type. During a downturn, companies often return cars more frequently, which leads to increased maintenance expenses. Lower U.S. fleet utilization has reduced congestion and led to higher speed and greater miles travelled for the leased cars. In APRIL 9,

18 addition, railroad operators have increasingly deployed wheel sensors to detect possible damages, and have been removing cars from the operating fleet for wheel replacement more proactively than in the past. This has also increased maintenance expenses, and we have incorporated this increase into our cash flow model. For our base-case modeling, we adjusted the railcars' maintenance costs so that they were in line with the utilization rate, assuming that unleased railcars require minimal maintenance. We generally inflate expenses by 2%-2.5% per year. During a downturn, we stress operating expenses by 25%-30% for the 'A' rating stress level. Similar to how we model utilization and lease rates, this stress "steps up" halfway to the peak of 25% during the first and last year of each downturn we model. Cash Flow Results We ran a number of stress tests where cash flow is put through sector downturns when both fleet utilization and re-leasing rates decrease and operating expenses increase (see table 8). The magnitude of the stresses is rating-dependent. We also model cash flows where we do not give any credit to car residual value. Under all stress scenarios, our model shows that the bonds will be paid timely interest and ultimate principal according to the payment priority. Table 8 Cash Flow Results Description 'A' stress case Stress modeled Cut utilization to 70%-75% and reduce the base-case lease rates by 30%-35%, while increasing the operating expense by 25%-30% during four sector downturns; residual value 10% Noteholders are paid in full with what maximum haircut/cost increase? Timely interest and ultimate principal are paid Sensitivity Analysis Break-even scenarios We performed certain sensitivity analyses, such as break-even scenarios, where we held certain stress assumptions constant and increased the stress based on a single factor, including utilization or re-leasing rates (see table 9 and 10). Based on our results, we believe that the transaction can withstand a further increase of utilization or re-leasing rate stress while holding everything else constant, before the transaction fails to pay the full principal amount at legal final maturity. Given that the notes have different payment profiles, the timing of our stress curves could have a different impact on the notes. Therefore, we applied differing timing to our stress curves to determine the effect. Table 9 Break-Even Scenarios 'A' Description Utilization break-even Stress modeled Same as the 'A' stress case listed in table 8, increasing the utilization stress to the point after which the notes would not get paid in full Noteholders are paid in full with what maximum haircut/cost increase? 33% additional stress for the series class A-1 notes; 21% additional stress for the series class A-2 notes APRIL 9,

19 Table 9 Break-Even Scenarios 'A' (cont.) Re-leasing rate break-even Five-year stress delay 10-year stress delay Same as the 'A' stress case listed in table 8, increasing the lease rate stress to the point after which the notes would not get paid in full Same as the 'A' stress case listed in table 8, assuming no stress during the first five years of the transaction Same as the 'A' stress case listed in table 8, assuming no stress during the first 10 years of the transaction 42% additional stress for the series class A-1 notes; 23% additional stress for the series class A-2 notes Timely interest and ultimate principal are paid Timely interest and ultimate principal are paid Table 10 Break-Even Scenarios 'BBB' Description Utilization break-even Re-leasing rate break-even 10-year stress delay Stress modeled Same as the 'BBB' stress case listed in table 8, increasing the utilization stress to the point after which the notes would not get paid in full Same as the 'BBB' stress case listed in table 8, increasing the lease rate stress to the point after which the notes would not get paid in full Same as the 'BBB' stress case listed in table 8, assuming no stress during the first 10 years of the transaction Noteholders are paid in full with what maximum haircut/cost increase? 25% additional stress for the series class B notes 25% additional stress for the series class B notes Timely interest and ultimate principal are paid Payment Priority All three classes of notes from both series bear fixed interest. On each monthly payment date, according to the transaction's documents, the funds will be distributed in the payment priority shown in table 11. Table 11 Payment Waterfall (Excludes Net Disposition Proceeds) Priority Payment 1 Pro rata, required expense amount and service provider fees. 2 To the servicer, reimburse servicer advances. 3 Pro rata, (i)all current and past due interest on the class A notes, other than current or past due additional interest; and (ii)to each hedge provider, all senior hedge payments due in respect of hedge agreements, provided that any amounts drawn from the liquidity reserve account or any liquidity facility will not be applied to the payments of any hedge termination value or edge partial termination value. 4 Pro rata, all current and past due interest on the class B notes, other than current or past due additional interest. 5 Pro rata, (i)deposit in the liquidity reserve account an amount equal to the positive difference (if any) between the liquidity reserve target amount and the sum of the balance in the liquidity reserve account and the aggregate liquidity facility available amounts; and (ii)all interest owed to the liquidity facility providers in connection with draws under the related liquidity facilities, and then reimburse or repay, pro rata, in an amount equal to all other amounts due. 6 Pay the scheduled principal payment amounts due on the outstanding class A notes to the earliest issued series and then to subsequent series in chronological order of issuance; and then, within each series, to each class sequentially in ascending numerical designation, but pro rata among any alphabetical sub-classes of the same numerical class. 7 Pay the outstanding principal balance of the class A rapid amortization notes, sequentially among each rapid amortization series, and then, within each rapid amortization series, to each class sequentially, but, pro rata, among any alphabetical sub-classes of the same numerical class. 8 If an early amortization event has occurred and is then continuing, pay an amount equal to the class A notes outstanding principal balance (after the payments in items 6 and 7 above), pro rata. 9 Pay the scheduled principal payment amounts due on the outstanding class B notes to the earliest issued series and then to subsequent series in chronological order of issuance; and then, within each series, to each class sequentially in ascending numerical designation, but pro rata among any alphabetical sub-classes of the same numerical class. APRIL 9,

20 Table 11 Payment Waterfall (Excludes Net Disposition Proceeds) (cont.) 10 Pay the outstanding principal balance of the class B rapid amortization notes, sequentially among each rapid amortization series, and then, within each rapid amortization series, to each class sequentially, but, pro rata, among any alphabetical sub-classes of the same numerical class. 11 If an early amortization event has occurred and is then continuing, pay an amount equal to the class B notes outstanding principal balance (after the payments in items 9 and 10 above), pro rata. 12 All current and past due additional interest on the class A notes, pro rata based on the amount due. 13 All current and past due additional interest on the class B notes, pro rata based on the amount due. 14 Pay any redemption premium owed to the class A noteholders, pro rata. 15 Pay any redemption premium owed to the class B noteholders, pro rata. 16 Pay subordinated hedge payments to the hedge providers, pro rata based on the amount due. 17 Pay any indemnities of the issuer payable to the initial purchaser (and the initial purchaser of the additional notes), pro rata based on the amount due; 18 Pay or reimburse the issuer (or the servicer on its behalf) for costs of optional modifications to the extent not paid from any other available source of revenues of the issuer. 19 Remaining proceeds to the issuer. Payment priority after an event of default If an event of default occurs, collections will be distributed according to the payment priority outlined in table 12. Table 12 Payment Waterfall After An Event Of Default Priority Payment 1 Pro rata, (i)pay or reimburse the portion of the required expense amount described in this item, and to the expense account in an amount equal to the required expense deposit; and (ii)pay the service providers. 2 Repay outstanding servicer advances (together with interest thereon as provided in the servicing agreement). 3 Pro rata, (i)all current and past due interest on the outstanding class A notes, other than current or past due additional interest, until paid in full; (ii)all interest owed to the liquidity facility providers in connection with draws under the related liquidity facilities, together with all principal amounts drawn under any liquidity fcility and not previously reimbursed, (iii)all unpaid senior hedge payments to the hedge providers, and (iv) all indemnification obligations payable to the liquidity facility providers in connection with the related liquidity facilities, provided that any amounts drawn from the liquidity reserve account or any liquidity facility will be applied only to this item (other than payments of any hedge termination value or hedge partial termination value). 4 Pro rata, the class A notes outstanding principal balances until paid in full. 5 Pro rata, all current and past due interest on the Outstanding Class B Notes of each Series, other than current or past due Additional Interest, until paid in full; 6 Pro rata, the class B notes outstanding principal balances until paid in full. 7 Pay all current and past due additional interest on the class A notes, pro rata. 8 Pay all current and past due additional interest on the class B notes, pro rata. 9 Pro rata, pay any redemption premium owed to the class A noteholders. 10 Pro rata, pay any redemption premium owed to the class B noteholders. 11 Pay subordinated hedge payments to the hedge providers, pro rata. 12 Pay Any indemnities of the issuer to the initial purchaser (and the initial purchaser of the additional notes), pro rata. 13 Pay or reimburse the issuer (or the servicer on its behalf) for costs of optional modifications to the extent not paid from any other available source of revenues of the issuer. 14 The remaining proceeds to the issuer. APRIL 9,

21 Events Of Default Under the transaction documents, each of the following constitutes an event of default: A failure to pay interest (other than additional interest) for five business days; A failure to pay principal on the final maturity date; A failure to pay any other amount when due and payable in connection with the notes, to the extent there is money available to do so continuing for five days; A failure by the issuer or administrator to comply with any covenants under the operating documents that has a material adverse effect on the noteholders and continues for 30 days (or 60 days if the issuer has begun to remedy the failure) or more after written notice has been given to the issuer; A material breach of an issuer representation and warranty that remains uncorrected for 30 days (or 60 days if the issuer has begun to remedy the breach) or more; The voluntary or involuntary bankruptcy of the issuer; A judgment of more than $1 million that is not covered by insurance is rendered against the issuer and either enforcement proceedings have begun or a 10-consecutive-day period during which a stay of enforcement will not be in effect has occurred; The issuer is required to register as an investment company under the Investment Company Act of 1940; The operative documents are found to be not valid and binding; The trustee removes the servicer or the administrator and no successor servicer or administrator assumes the duties within 180 days; The notes' outstanding principal balance exceeds the railcars' adjusted value and the optional reinvestment account; The issuer uses or permits the use of the railcars in a way not permitted by the indenture; The servicer materially defaults on its obligations under the account administration agreement and the issuer has failed to exercise its right for 30 days after being informed; or The issuer fails in its performance of certain material covenants and such failure remains unremedied for 30 days. If an event of default occurs, control parties on behalf of more than 50% of the notes of the most senior class of notes then outstanding (i.e., the class A notes until they are paid in full) may declare the notes to be immediately due and payable, institute judicial proceedings for collection, and sell the railcars. Early Amortization Events Under the transaction documents, an early amortization event will occur if any of the events or conditions listed in table 13 occurs on a payment date (and has not been cured or waived). Table 13 Amortization Events 1 The number of railcars that are subject to a lease is less than 80% of the total number of railcars. 2 The debt service coverage ratio is less than A servicer termination event has occurred and is continuing as a result of the utilization differential for the servicer's fleet, the monthly lease differential for the servicer's fleet, or rent abatement expenses for the servicer's fleet exceeding certain specified thresholds. APRIL 9,

22 Legal Matters In rating this transaction, Standard & Poor's will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Surveillance We use surveillance data to perform periodic reviews on all rated railcar securitizations to identify potential and emerging trends. Our ratings reflect our opinion of the transaction's ongoing risk profile. Our surveillance group undertakes a number of steps to determine whether the ratings assigned to a transaction continue to reflect our view of that transaction's performance. These steps include: Analyzing the servicer reports that detail the underlying collateral's performance; Making periodic telephone calls and holding meetings with the issuer's and the servicer's key management personnel to identify any emerging trends or changes in servicing standards; Monitoring the supporting ratings on a transaction; and Keeping informed of related industry developments and events that may affect a rated transaction's overall performance. Our surveillance group will continue to develop and provide performance information, research, and analysis to increase the level of transparency, as well as information on our methodology, ratings, and rated transactions' performance. Standard & Poor's 17g-7 Disclosure Report SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at Related Criteria And Research Principles Of Credit Ratings, Feb. 16, 2011 Revised Methodology And Assumptions For Global Railcar And Container Lease Securitizations, June 21, APRIL 9,

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