Fitch: Outlook Stable for U.S. Commercial Finance & Leasing Sector; Subsector Outlooks Initiated.

NEW YORK -- The overall Rating Outlook for the U.S. commercial finance and leasing company industry is Stable, according to Fitch Ratings. Fitch has also initiated individual Rating Outlooks to several industry subsectors ranging from Positive to Stable in response to changes in the landscape of the commercial finance and leasing company sector. The most obvious change has been the virtual disappearance of the diversified commercial finance company business model with only CIT Group, Inc. and General Electric Capital Corp. remaining in the industry. Companies such as The FINOVA Group, Heller Financial, Inc., Transamerica Finance Corp. et al. have either been acquired or are in liquidation while others such as GATX Financial Corp. and Textron Financial Corp. have reduced their operating scope to focus on core competencies. As such, composite industry averages provide little insight due to the diversity inherent in the sector and issuers pursuing sector specialization strategies.

The Rating Outlook incorporates Fitch's forecast of real U.S. Gross Domestic Product growth of 3.3%, oil prices stabilizing at or near current levels, and the willingness of international institutions to continue to finance U.S. budget and trade deficits. Meaningful negative departures from Fitch's forecast could have an unfavorable impact, albeit not necessarily immediate, on the Rating Outlook given the historical link between the commercial finance and leasing sector with macroeconomic factors.

In late 2002, Fitch suggested that credit metrics for the commercial finance and leasing sector had appeared to begin stabilizing. However, concern at that time remained as equipment values remained under pressure and, as such, a negative rating bias was maintained. During this period, it appeared that almost all equipment types, for a host of reasons, faced valuation pressures, be it automobiles, class 8 trucks, aircraft, and yellow iron. The out-of-balance supply/demand situation eventually straightened itself out as the domestic economy began showing signs of strengthening in late 2003 as well as accelerated economic growth in certain global regions, such as China. For business sectors still mired in the 2001 downturn, such as the airlines, aircraft demand by Chinese carriers helped raise lease rates from their depressed levels in 2002 and avert further significant equipment impairment expenses by the leasing companies.

All signs indicate that China will realize another year of robust economic growth in 2005. As such, Fitch believes that operating lease companies, owners of hard assets, are well positioned to benefit from the growth in China as pressure on commodity prices, such as steel, will likely continue. This should in turn allow operating lessors to selectively raise lease rents leading to improved operating results, and stronger capital retention. Thus, Fitch's Rating Outlook for operating lessors is Positive, particularly for those issuers whose fleet has a blended cost well below the current spot rate for new equipment.

The Rating Outlook for the remaining subsectors is Stable. This reflects Fitch's view that the trend in these issuers' credit metrics will range from stable to moderate improvement. Since 2002, throughout the specialty finance industry, most management teams have concentrated on repairing/strengthening their companies' balance sheets oftentimes to the perceived detriment of equity investors. Whether this trend continues in 2005 is unclear as some issuers have become increasingly sensitive to returning value to common shareholders, be it in the form of larger dividends or stock buybacks.

Nevertheless, Fitch believes that many of the issuers in its commercial finance and leasing company universe have applied a lessons learned approach from the demise of FINOVA and others in managing their businesses. Consequently, while commercial finance and leasing still remains an economically sensitive business, issuer-specific risk has declined. Not withstanding this, as a market funded industry, maintenance of committed sources of liquidity has been and will remain a key driver of individual issuer success.

Fitch forecasts that the Fed Funds rate will rise by roughly 75 basis points to 3% at Dec. 31, 2005 from 2.25% at Dec. 27, 2004. The rise in short term rates should have a corresponding increase in commercial paper interest expense and some impact on long-term debt borrowing costs. While higher interest rates have been traditionally viewed a negative for financial institutions, finance and leasing companies may be able to nullify the impact if they are able to pass along their higher borrowing costs to their customers. Moreover, because finance and leasing companies maintain lower leverage levels than banks, in a rising rate environment, the equity component of each new loan/lease should generate incrementally more income and help negate some of the potential squeeze on margins. Therefore, an increase in interest rates, particularly if it is gradual, may not be a negative, if it is accompanied by a strong increase in new business volume.

Aside from monitoring the sector's credit metrics, Fitch continues to closely track industry merger and acquisition (M&A) activity and the impact of Basel II. M&A activity is expected to be moderate with bolt-on transactions accounting for most of the completed deals. For all practical purposes, the number of available company targets are few as GECC has acquired many of them over the last five years. CIT and GECC are expected to remain the most acquisitive industry participants. Aside from CIT and GECC, Fitch believes that smaller companies, such as GATX and Textron Financial, could be involved in acquisitions as their managements strives to increase each company's operating scale in individual business units targeted for growth. In the case of GATX, Fitch believes that the company would consider making railcar acquisitions with Textron Financial focusing on completing inventory finance acquisitions.

The impact of Basel II on the commercial finance and leasing company sector remains somewhat unclear. While Basel II will not apply to commercial finance companies in the U.S., it would appear that companies owning banking licenses in Europe will be subject to the new capital framework. In terms of the competitive environment, the impact of Basel II will depend both on the quality of the banking subsidiary's portfolio, as well as its choice of regulatory approach (i.e., Standardized, Foundation IRB, Advanced IRB). Therefore, it will probably take a few years to ascertain the impact, if any, of Basel II on the competitive positions of commercial finance and leasing companies with operations that are subject to the new capital rules.

Additionally, Basel II may have implications as to how commercial finance and leasing companies fund themselves. As a general matter, higher quality borrowers will benefit from lower capital charges under Basel II, which could benefit these issuers for funding purposes. Since Basel II will require less capital against the better-rated commercial finance and leasing companies, banks may in turn become more active in extending loans to them at attractive terms that also meet internal profitability hurdles. Thus, for the higher-rated finance and leasing companies, this may require a change in financial strategy as commercial banks have generally been viewed as the lender of last resort to the industry.

With the implementation of the Sarbanes Oxley legislation, many of the qualitative factors, which Fitch has historically closely monitored, have become increased areas of emphasis for investors. Of the 28 companies that Fitch maintains ratings on in the commercial finance and leasing company sector, there have been changes, or announcements of future changes, in the chief executive officer or president at 14 of these firms beginning in 2003. About half of these changes were due to retirements and normal executive succession. The current stability of the sector may have also played a role in the timing of these retirements.

While there has been significant media coverage of Albert Gamper's and Ronald Zech's retirements from CIT and from GATX, respectively, other company leaders with significant industry experience will(have) also retire(d) including James Beard from Caterpillar Financial Services Corp., Joseph Cappy from Dollar Thrifty Automotive Group, Stephen Gillotti from Textron Financial Corp., and Lewis Rubin from XTRA, Inc. On a combined basis, these individuals have approximately 80 years of experience in leading their companies through multiple business cycles. Their successors, be it Jeffrey Peek at CIT, Gary Paxton at Dollar Thrifty, or Jay Carter at Textron Financial, have demonstrated a willingness to tweak each company's existing business strategy with the intention of improving operating results. In other situations, such as at Boeing Capital Corp. and Bombardier Capital, new management was installed to change the operating scope of the business. Nevertheless, even in the smoothest succession situations, changes occur which Fitch will be monitoring and analyzing. The impact of the management changes is considered in Fitch's industry Outlook.

During 2004, Fitch took 26 individual rating actions with a majority of them being positive in nature. Only seven actions consisted of affirming the existing ratings and maintaining a Stable Outlook. The unusual level of changes reflected a stronger than expected rebound in the U.S. economy as seven actions included affirming the existing ratings while revising the Rating Outlook to either Stable or Positive from Negative. Mergers and acquisition activity had less of an impact on rating activity than in previous years with Transamerica Finance Corp.'s ratings being raised to 'AA-' from 'A' to reflect the unconditional guarantee provided by AEGON N.V. on its remaining public debt while LNR Property Corp.'s ratings were lowered in anticipation of its acquisition by Cerberus Capital Management L.P. and expected weaker capital base and higher financial leverage.

Looking to 2005, it is expected that the majority of rating actions will consist of affirming existing ratings and maintaining Stable Outlooks. There are currently four issuers with Positive Rating Outlooks, GATX Financial Corp., Interpool, Inc., Ryder System, Inc., and XTRA, Inc. In contrast, Fitch maintains a Negative Rating Outlook for Bombardier Capital Inc. due to its parent's, Bombardier Inc., continued operating weakness and the guarded outlook its core markets.

Subsector Outlooks initiated by Fitch:

Equipment Finance Companies

-- Rating Outlook Stable.

Operating Lease Companies

-- Rating Outlook Positive.

Equipment Rental Companies

-- Rating Outlook Stable.

BDCs/Corporate Finance/Real Estate Companies

-- Rating Outlook Stable.