Joshua Harman of Virginia sued Dallas-based Trinity Industries, alleging that it made a quiet design change that transformed guardrail systems across the U.S. into potentially deadly hazards. On Monday, a jury agreed with Harman. Patrick G. Lee/Bloomberg
WASHINGTON — Dallas-based Trinity Industries is insisting that Monday’s jury verdict in the federal fraud trial will be set aside on appeal, but the company may be hard-pressed to avoid damage in the meantime.
Firth Ratings, one of the major credit-rating agencies in the U.S., issued guidance this afternoon warning that the company’s liquidity could be at stake, now that the jury decided the company was responsible for damages to the U.S. equal to $175 million. As a result, the ratings agency “could potentially” review the company’s long-standing debt rating with an eye toward lowering it. For now, though, the company’s long-term credit rating remains stable at BBB-, Fitch said.
“This depends on further clarification that would result from a final ruling by the U.S. district court with respect to the timing and amounts of payments assessed against (Trinity),” Fitch said in a guidance issued Wednesday.
The uncertainty lingering over the verdict for Trinity stems from the fact that the full amount it will owe is not known. The False Claims Act calls for the damages to be trebled, and other fees could push the total owed to $800 million or more. Fitch notes that it “assumes the reasonable worst case scenario as approximately $1 billion.”
The more immediate problem for Trinity will be if the court requires it to post a bond while it files its appeal, a chance that Fitch says it “believes is possible although the probability is low.”
“The required payment by TRN, including potential bonding requirements during any appeal process, could be material,” the statement said. “TRN’s liquidity would be pressured if cash collateral must be posted during the appeal process.”
If it must post a cash deposit, “a downgrade or Negative Rating Outlook is viewed as likely due to the immediacy of the required payment that would reduce TRN’s liquidity and potentially delay value added capital projects. However, Fitch considers a more likely scenario to involve a modest bonding requirement or the usage of surety bonds through the appeal process.”
The ratings agency said it believes Trinity’s free cash flow for 2014 is between $50 million and $100 million.
“Depending on the final ruling, Fitch believes TRN may be able to fund a sizable penalty between $400 million-600 million if liquidity remains strong and TRN’s financial strength is supported by stable economic conditions and a prudent capital deployment strategy. In the event of a penalty in excess of approximately $500 million, Fitch believes TRN’s credit profile would deteriorate below investment grade.”
The agency also notes that a final ruling against Trinity “could potentially lead to future personal injury and wrongful death lawsuits related to TRN’s guardrails. Such lawsuits are not unusual for a guardrail manufacturer, but increased scrutiny surrounding the safety standards of TRN’s ET-Plus guardrail product could lead to future adverse rulings. ”
About Trinity Industries
Headquarters: Dallas, Texas
Annual Revenue $4.4 billion, with about $2.1 billion from its rail car manufacturing group
Annual Profit $772 million
Sales of highway products (including guardrails) $336 million
Employees: 18,460, about evenly divided between U.S. and Mexico.
Source: Trinity Industries 2013 Annual Report
Stock price: Opened Wednesday at $34.26. It had been climbing all year, from just over $22, until Sept. 18, when it began from a high of $50.30.