• Synchrony (SYF) posted a 1Q26 performance that sends favorable signals around the consumer sector and related spending trends while asset quality metrics held in quite well. A big test lies ahead in 2026 on a range of consumer headwinds and payroll worries that lurk. Household discretionary cash flow will be feeling the affordability pinch, as will many business lines, from the Iran fallout.

• SYF has been our favorite bellwether to monitor given the mix of accounts, the scale of operations, and the disclosure granularity by sales platform. SYF’s narrow credit card focus offers more data to track across a range of subsectors in retail, health care, and other services. We covered the steadily expanding partner network in an earlier detailed report on SYF (see Synchrony: Credit Card Bellwether 10-30-25).

• For 1Q26, we see charge-offs down YoY, 30-day and 90-day delinquencies essentially flat YoY, net interest margins higher YoY, and an allowance cushion that is almost double charge-offs.

• Betting against the US consumer has typically been a bad idea even if occasionally betting against underwriting standards of various lenders is sometimes a good idea. Synchrony financial has not been one to bet against, however, even when consumer sentiment is at an all-time low, the affordability of the “household basket” is trending in a negative direction, and payrolls have been stagnant in cyclical context.

The above chart highlights the superior performance of Synchrony in the equity markets relative to other major consumer finance companies. We include Capital One in the chart as a good comp. We also include the Financials ETF (XLF) and Regional Bank ETF (KRE). We looked separately at a number of consumer finance operations and related asset quality metrics across the financials peer group. Each consumer lending operation can have its own flavor (credit cards, auto, instalment credit, etc.), but we see “cards” as one of the best gut checks on spending and asset quality.

For SYF, steady asset quality and very high net interest margins have brought rewards to shareholders across time. As detailed above, SYF has shown its resilience across the period from the end of 2019 and across a pandemic, an inflation spike, a Fed tightening cycle, and now into a low payroll and low consumer confidence stretch. From the end of 2019, SYF equity total returns soundly beat COF, the XLF ETF, and KRE.

The above SYF stock return chart plots the performance from the start of the tightening cycle in March 2022. SYF materially outperformed the Financials ETF (XLF), Regional Bank ETF (KRE) and Capital One (COF). The table below cuts across more short term and longer term time horizons and we expand the universe of comps to include the broader equity benchmarks as well as dropping in American Express and Ally. We line them up in descending order of total returns for the trailing 1-year period.

For the most recent activity, the news out of 1Q26 and the related guidance was favorable. With 1Q216 earnings, SYF announced a dividend increase of 13% and a major upsizing of its stock repurchase program to $6.5 bn.

Our interest in SYF is mostly about its role as a bellwether for credit card trends in the “normal people” crowd and not the “black card” types. The spending in areas such as the Home & Auto platform and the Health & Wellness market reflect some of the more challenging and sometimes unpredictable spending buckets in the typical household experience. The market is facing the headwinds of rising costs. We break out those platform and sector trends further below.

Given the “all-time low” headline around consumer sentiment, low employment growth, AI and services fears hitting various stocks and flowing into layoffs (Meta and Microsoft), and the recent Iran War fallout, the next two quarters will be a test in asset quality and delinquency trends. For now, the asset metrics mix is holding in quite well. Iran damage, tariff cost mitigation actions (i.e., layoffs) and AI capex causing payroll expense offsets roll up into a complex set of moving parts for the consumer in 2026.

The above table updates the chart we introduced in the Oct 2025 report (see Synchrony: Credit Card Bellwether 10-30-25). We see steady trends overall across charge-off metrics, allowance adequacy, and 30-day and 90-day delinquencies. The 1Q26 period saw charge-offs as a % average loan receivables improve more notably from 1Q25. Delinquency metrics were essentially flat YoY. Allowance coverage improved.

The above table highlights income statement line items and some key headline operating metrics such as purchase volume and average active accounts. SYF has shown discipline in its growth and is not chasing accounts at the expense of prudent risk management. The average active account numbers in 2025-2026 are below 2023-2024 with purchasing volume steady after a 2023 peak.

Net interest margins are an eye-opener at 15.5% with net charge-offs at a low 2% handle. The very brief threat earlier in the year by Trump to propose a10% cap on interest rates went away quickly. There were questions around whether it could even be done legally without legislation. Someone also more likely than not explained to Trump that such a move would damage the consumer finance sector, the banks, and in turn set off a wave of credit contraction that would crush the Personal Consumption Expenditure line (“PCE”) that contributes around 68% of GDP. That 10% cap threat briefly whipsawed some financial equities earlier in the year including SYF and COF (see Policy Mud on the Wall: Consumer Debt, Residential Mortgages 1-15-26).

Another key factor for the consumer finance companies and deposit heavy funders is the direction of FOMC policy and what it all means for funding costs and interest margins. The potential for easing has become more uncertain with the Iran War and how that could flow into Fed actions. The multiplier effects of inflation and energy cost fallout could also flow into consumer credit quality as well as spending appetites.

Other contingent threats ahead include AI multiplier effects into payrolls and distressed drawdown risks on credit cards. The 2026 consumer credit quality challenge is not straightforward. The good news for SYF security holders and lenders is a good track record across some wild macro backdrops even if just since 2020.

The above table breaks out the trends for the 5 sales platforms since 2019. The scale in each bucket is reflected in the purchase volume and relative receivables balance. A quick scan of the purchase volume and receivables columns comparing 2019 to 2025 tells the story.

The expansion of the partners and range of purchasing channels continues across everything from Health & Wellness (including dental groups and veterinarians) to the usual retail partner programs (Diversified & Value), and online marketplaces (Digital). Home & Auto is tied into demographics in a “driving country” and the rising cost of services and parts and merchandise.

As detailed on the 1Q26 earnings call, the expanded base of partners leaves SYF well positioned for growth in 2026:

We continue to expect accelerated growth in purchase volume and average active accounts without any further broad-based credit refinements as we move through the year. The outcome should more than offset the impact of elevated payment rates to drive mid-single-digit growth in ending loan receivables by year-end. The rate of receivables growth should follow seasonality and accelerate as we move into the back half of the year. This will be driven by growth in our core portfolio as well as a combination of both recently launched and soon-to-be launched programs, including Walmart OnePay, Bob’s Discount Furniture, RH and approximately $725 million of those commercial co-brand loan receivables, which was added in early April.

The new partners list keeps growing as SYF targets more retail product segments in each category across goods and services.

A quick balance sheet update…

Below we update the borrowing and leverage trend line. We wrote the commentary given SYF’s role as a bellwether for consumer asset quality, but the solid balance sheet, capital ratios and financial flexibility excite shareholders given the very favorable excess cash flow and capital ratios that allow SYF to rewards shareholders via dividends and buybacks.

The above table updates the routine quarterly disclosure on SYF capitalization metrics. SYF is very well positioned.

The above table drives home how cash generation has made life pleasant for shareholders as detailed earlier in the relative stock performance charts.

The above table breaks out the balance sheet line items with the most notable trends from 2019 being a larger earning asset base funded by a higher mix of deposits and a lower mix of total debt.

The above table details the mix of borrowings across the capital structure for the holding company and the bank level debt borrowing outside the much-enlarged deposit base detailed in the prior chart.

Synchrony gives some confidence to the market on credit quality with a lot of action to play out ahead with the payroll actions by large employers and small businesses wrestling with tariffs, the Iran War, and AI ramifications.

See also:

Market Commentary: Asset Returns 4-19-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

CPI March 2026: The CPI Cycle Could Prove Maddening 4-12-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

UST Deltas: Elevation Realities 3-29-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

VIX: Market Still Not Getting the Vapors 3-6-26

Meanwhile…Back in Economics and Tariffs 3-2-26

• Synchrony (SYF) as a bellwether and consumer indicator: With all the debate going on around consumer asset quality, the direction of “sentiment/confidence” benchmarks, and the propensity of households to spend, we keep looking for good indicators closer to the trenches. That is, we want to add more information to track beyond the monthly PCE release (income and outlays) or the PCE lines in GDP updates. We thought it worthwhile to add a leading consumer credit bellwether to the collection. Transaction trends (volume, frequency, payment rates, value growth, etc.) tell a story, and the 3Q25 numbers at SYF support the consumer resilience theme.

• Company reports beat BLS and BEA data these days: We like using bellwethers generally across industries to get a read on the macro direction of household habits and the consumer sector. We chose a leading credit card player that can be used as another indicator. SYF is close to being a pure play on credit cards, so they are a good pick as a large cap with a long history (as a unit of GE before the 2014 IPO and 2015 split-off). SYF also offers extensive, granular quarterly disclosure generated off a wide range of “partners” in retail and spending groups in their five “Platforms.”

• SYF has a very wide range of partners and customers in their channels: SYF touches almost 70 million consumers, so that is a useful starting point for extrapolation from the consumer level while we also track big ticket sectors such as housing and autos. SYF only has a single digit % mix of lower credit tier customers, so the challenge of subprime risk is a separate channel to track with other issuers. The “partner” mix includes major mega-retailers including digital leaders with household names such as Amazon and Walmart/Sam’s Club in the mix. Headline names come along with myriad regional retailers and selling groups. SYF details the range of partners and related location counts on its site.

• Credit trends at Synchrony are stable: The “stable outlook” from the rating agencies for SYF are easily defended based on SYF balance sheet health and asset quality. We are not looking to play bank analyst on SYF or to place SYF credit quality or relative value in the peer group context of the banks. We are more zeroed in on what the operating performance, asset quality metrics, and the overall platform strategy of this major credit card and consumer finance bellwether says about the consumer sector resilience factor. That is a hot topic at this point in the cycle and notably with payrolls under a cloud and some subprime headlines creating some excitement (e.g. Tricolor).

• SYF operating performance has won over the stock market: Profitability, asset quality metrics, and balance sheet health paints a picture of stability in credit but the equity markets vote has been favorable also as we detail below. SYF’s risk profile as a bank (technically an S&L Holding Company under the OCC umbrella) brings regulatory checks (including the FDIC ) and a very high mix of deposit funding at the bank level at 85% of total funding. For macro extrapolation, SYF 3Q25 offers inputs on transaction volumes and payment rates, so the directional color adds value. In SYF’s case, they had been defensive in recent periods and had tightened credit, but they are shifting modestly again given the favorable credit trends they have experienced. As we have seen with a number of banks, SYF has been releasing reserves from a very large allowance. SYF’s reserve cushion is north of 10% as detailed below.

• Net interest margins and yields vs. charge-offs bring good news: As a financial subsector, credit cards are riskier than auto loans and residential mortgages. The net interest income margins in 3Q25 of 15.6% can be framed against a loan receivables yield of 21.9%. That type of yield and more than adequate reserves and prudent provisioning policies offer a comfort zone and a lot of room to absorb surprises.

• SYF equity performance in the context of broader benchmarks stacks up favorably: The objective operating numbers show impressive stability across a wild period of inflation, tightening, and tariff worries since 2019 that underscore consumer sector resilience. Over the past 5 years, SFY equity return beat the S&P 500, the small cap Russell 2000, and the Midcaps while also trouncing the Financials ETF (XLF). That performance comes in a mature business where SYF has executed well while embracing creative technology solutions and channel strategies to serve more consumers/borrowers. Basically, it is an interesting company.

• The asset quality trends have been favorable through 3Q25: The quality performance has allowed SYF to release more reserves and stay ambitious in its stock buybacks. Delinquencies and charge-off rates are down YoY in 3Q25 with a reserve allowance cushion of +10.35% vs. 3Q25 charge-off rates of 5.16% in 3Q25 (down from 6.06% in 3Q24). The platform strategies cut a very wide path and SYF works with such major players as Amazon and Walmart (a new product plan rolling out with WMT into 2026 after its earlier deal ended in 2018).

• The game is about capturing the consumer and the right partners: The visual above on “CareCredit” struck us as one of the opportunities that allows SYF to tap into such a wide range of partners. Healthcare is one of the largest sectors in the economy (18% of GDP). As we detail below, Digital and Wellness are two of the targeted growth areas. In the sections that follow, we run through some of the more interesting disclosures from what is described as one of the largest “monoline” credit card and consumer lending banks. There are bigger banks with higher credit card market share, but those are the banks that operate across a much wider array of business lines.

• Disclosure and details help: The big bank disclosure and granular operating analysis does not offer the array of angles you get with Synchrony. We will dig into Ally in coming days with their stand-alone consumer story, and we always have the “captives” at GM and Ford along with major equipment finance operators such as Deere Capital and CAT Financial for color on consumers and small/mid businesses. For a view on the consumer, we chose Synchrony as the best name to lock in on for a gut check on the consumer and related credit quality patterns at the household level.

• The 3Q25 earnings call brought phrases such as the following:

“…we still think the consumer is in pretty good shape. They’ve been very resilient.”

“…pretty optimistic in terms of the trends we’re seeing across the portfolio.”

“…we’re pretty optimistic in terms of everything we’re seeing from the consumer”

“…we’ve begun gradually reversing some of our tightening in areas where we see strong risk-adjusted growth opportunities.”

“…continued strength in our credit performance and acceleration of our purchase volume trends…was broad-based across our 5 sales platforms and all generations.”

• Vote of confidence from the equity markets: The above stock return chart covers the last stretch of time starting in 2019 just ahead of COVID. The SYF equity returns across the years underscore that Synchrony has been a solid performer vs. the broader financials group. The comps above include a notable consumer-exposed bellwether such as Ally, which is an on-the-run choice in the credit markets for many bond investors investing in middle-tier credits. SYF even edged out Cap One (COF) during that timeline. SYF also ran ahead of the broader Financials ETF (XLF). Not shown in the above chart is that SYF beat the S&P 500 and the Regional Bank ETF (KRE) since 2019. We look at more comps and timelines further below.

• Cap One as another guide: One major name that beat Synchrony over 10 years was Cap One (COF). COF has grown from a credit card player and “mailbox stuffer” with applications in the “old days” (the 90s) to now being a top 10 bank with a wide range of operations and a market cap over $140 bn. That compares to SYF at $27 bn and Ally Financial at over $12 bn. The impressive success of Capital One’s history is a reminder that a financial operator such as SYF has a lot of ways to grow profitably. Good credit systems and controls and execution have helped them so far.

• The broader time horizon performance: We look at the broader mix of financials and market comps across various time horizons in the table below. COF still shows the majority of its loans being in credit cards, but consumer credit (e.g. auto loans) and commercial banking are major operations also. The strategic question longer term for SYF vs. COF revolves around where SYF will seek to pursue loan growth. We see SYF as the better one as a consumer proxy for our purposes since they give so much disclosure and in-the-weeds detail. In terms of consumer health, the recent American Express performance and color from 3Q25 is on the “consumer is all right” bandwagon. The minimal AXP charge-off rates agree.

• The past cycle saw the consumer shine: The timeline below covers a busy cycle running across a pandemic that saw a return to ZIRP and then a post-COVID consumer spending boom that rolled into an inflation spike and ensuing tightening cycle. SYF held up very well across the timeline with the trailing 1 year showing Cap One, SYF, and American Express well ahead of the S&P 500. SYF put up very strong numbers over 6 months.

• Extrapolation value with a lot of data points: SYFs desire is to grow its receivables base in a profitable manner and at healthy net interest margins. That process comes with rigorous disclosure from SYF that offers an extensive array of angles to view the company and consumer spending patterns. The various retail groups and organizations in the partner network offer some useful extrapolation into a bigger macro picture around consumer spending. The PCE lines for goods and services generate 68% of GDP, and credit cards play a big role.

• Consumers face a credit test ahead: Markets had been getting consumer credit jitters and were starting to worry about an asset quality cycle that has proven to be relatively immune to the headlines across COVID and the tightening cycle. The latest test for consumers is payroll anxiety, tariff worries, health care cost escalation (notably health care premiums). The worries offer a good reason for us to start tracking Synchrony as one of the bellwether indicators of delinquencies and charge-offs. The lack of macro data from BLS and BEA is not helping at this time since the cyclical transition to slow growth is in evidence. That is, there is cyclical pressure in evidence once you adjust for the GDP distortions from declining imports that juice up headline GDP numbers (see 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25).

• SYF’s main focus is credit cards, so the feedback is valuable: We get broad top-down commentary on the consumer sector from the megabanks (JPM, BofA), but SYF earnings calls really dig into the nuances of credit cards and across the five platforms. Examples include how they view student loan borrowers’ credit attributes across time in terms of credit card performance. They also address borrower generation trends and customer profiles along with payment rate color (i.e., maintaining a debt balance vs. pay-down). The vantage point that SYF can bring to consumer habits cuts across hundreds of consumer segments and different products and services (e.g. health care and veterinarians). SYF paints a useful picture.

• Interest income was essentially flat in 3Q25 and 9M YTD 3Q25 YoY: Interest income climbed off the bottom from 2021 to 2024 along with interest expense. The return to ZIRP with COVID in March 2020 continued across the full FY 2021 period, and that shows up in the income numbers. The very high yields on credit cards never fails to impress at 20% handles (21.9% for 3Q25), and the main challenge for SYF is to be prudent in provisioning based on borrower quality, history, and mix. The moving parts of net interest income shows a net margin of 15.6% in 3Q25 after 14.6% in FY 2024 and 15.1% in FY 2023. The direction of net interest margins (“NIM”) will tie into the FOMC actions and how that flows into deposit costs. Lower provisioning and reserve releases have helped bolster earnings based on favorable asset quality trends.

• For 3Q25, purchase volumes grew but were lower YTD: The 3Q25 picture showed purchase volumes higher by 2% to $46 billion (vs. $45 bn in 3Q24). Average transaction value rose YoY for the 4^th straight quarter to a modest +0.4%. SYF cited improvement across all credit grades and generations in the portfolio. “Spend frequency” rose by +3.4%. Based on the portfolio performance, SYF even started to ease up on some earlier credit standards tightening. These data points go in the positive column for the health of the consumer sector.

• Receivables guidance calls for flat growth in FY 2025: As detailed further below the net receivable balance was slightly lower at -2% and total active accounts down by 3% to over 68 million. Receivable balances can be a function of numerous variables including new business asset transactions (buy/sell receivables), and payment rates by cardholders and how that flows into card balances and interest income.

• Asset quality improving: As we cover in the asset quality detail further below, charge-offs remained materially below the loan loss cushion from 2020 to 2025 that averaged above 10%. The provisioning line has some notable distortions in 2021on some major asset sales, some regulatory adjustments, and some reserve releases tied to very favorable charge-off trends in 2021-2022 despite the COVID hangover. Receivables growth kicked into gear again in 2022-2023.

• Retailer share arrangements (“RSAs”): The RSA line moves with volumes and partner terms. RSAs are described by SYF as follows: “Most of our program agreements with large retail and certain other partners contain retailer share arrangements that provide for payments to our partner if the economic performance of the program exceeds a contractually-defined threshold. Economic performance for the purposes of these arrangements is typically measured based on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for credit losses, retailer payments and operating expenses)…All of these arrangements are intended to align our interests and provide an additional incentive to our partners to promote our credit products.”

• Growth has slowed from the peak: The above table details the balance sheet since 2019. We see a sharp decline in 2020-2021 in loan receivables followed by a rapid rise in earning assets as we detail below in the platform breakouts. The decline in 2025 in loans is expected to reverse in trend during 2026 based on management 3Q25 commentary.

• The growth challenge earlier in 2025 was a good news/bad news outcome: The good news was that SYF was more defensive on credit and showed a desire to be prudent. The bad news was more for the equity side that wants to see growth, better asset quality, and higher net interest margins. Basically, growth lagged. Asset quality is objectively better (some reserve releases are not offsides), and now growth is resuming with some easing and new partner deals that should drive more volume into 2026.

• “Cuspy” parent credit ratings: The absence of a Moody’s rating on parent unsecured bonds (BBB- S&P, BBB Fitch) raises some eyebrows, but we were never one to set our sundial by what the agencies think. The BBB- rating will intrinsically affect bondholders at the margin, and that is just the reality. The “cuspy” holding company bond rating of BBB- from S&P do not seem to give much credit to Synchrony for its very successful navigation of a credit cycle that included a pandemic, an inflation spike, a major Fed tightening cycle, and recurring predictions by many of the impending doom of the consumer. In contrast, the equity market rewarded SYF performance.

• The bank level debt is BBB by S&P and BBB by Fitch: The holding company notch by S&P to BBB- vs. bank level debt also is one that will keep bondholders on alert in the absence of a Moody’s rating. Bondholders will naturally wonder whether there were some disagreements with the one agency. The logical scenario is that there was a dispute years ago when SYF was less “proven” outside of GE, and in the end SYF stayed with the two agencies who were fully on board.

• The credit story is favorable in the numbers even if the agencies are not helping: For our purposes (we are not playing bank analyst) it is the direction of consumer asset quality and operating stats that matter more (volume, mix, platform channel color). The excess capital, strong net interest margins, and the level of profitability allow for aggressive buybacks. At the very least, the objective numbers offer some favorable empirical support that SYF has a healthy financial profile.

• Favorable balance in funding strategies: The diversity of the capital structure is reassuring given the balance across the various funding markets from the dominant funding layer of deposits to unsecured debt markets at the parent and bank level. The current non-deposit mix is more optimally balanced than 2019 across funding sources in ABS, parent company bonds, bank level debt, subordinated debt, and preferred stock including fixed and floating rate (some on fixed to floating). For 3Q25, deposits were 85% of total funding, unsecured debt 7% and secured debt 8%.

• The moving parts across the five SYF platforms tell a balanced story: These breakdowns underscore the impressive range of SYF’s customer base and partners in their credit card operations whether dual branded or private label. Partners run the gamut from highly recognized national and global names (e.g., Amazon, PayPal, Sam’s Club, Lowe’s) to more obscure retailers and payment programs. Each platform disclosure allows investors to frame purchase volume (up 3% in total) and loan receivables (down -2% in total). We see 3 of 5 platforms posting higher purchase volumes. The average receivables balance in 3Q25 posted minimal movement YoY with 3 of 5 slightly higher. Interest income and fees posted small moves also with 3 of 5 lower in 3Q25 YoY.

• Well-managed duration of credit card program agreements: The program agreements with the 5 largest partners have expiration dates that range from 2030 to 2035. 22 of the 25 largest programs have expiration dates in 2027 and beyond. In the 9 months ended 3Q25, SYF added or renewed over 40 partners. This is part of the routine details provided as SYF makes ongoing announcements in press releases of their additions and renewals.

• Dual branded and co-branded cards: The dual/co-branded mix was 46% of total purchase volume in 3Q25 (+8% vs. last year). Consumer dual and co-branded cards were 31% of total loan receivables at 3Q25. Major product categories also include private label and general-purpose credit cards. SYF saw higher broad-based spending across these programs as well as the Synchrony-branded, general-purpose card. This color is consistent with some of the firm retail sales numbers seen in economic releases as 2025 proceeded, and the signs there signal a resilient consumer sector. SYF cited “continued points of strength coming from restaurants and electronics.”

• The platform mix cuts a wide path in retail and digital: We line the platforms up in descending order of receivables. Purchase volume, interest income and fees, and average receivables are detailed. Home & Auto is the only one with a significant decline in receivables but purchasing volume only saw a slight decline. Looking across the timeline, the Digital platform unsurprisingly shows healthy growth. Technology is an obvious catalyst for expansion. In 2024, 57% of applications were via online or mobile app channels (per SYF 10K). Meanwhile, 75% of credit card accounts with balances have activated digital servicing.

• “Income share” across the platforms mirrors receivables mix: The income share across FY 2024 was led by Digital (29% of FY 2024 interest and fees) and Home & Auto (27%), Diversified & Value (22%), Health and Wellness (17%), and Lifestyle (5%). Examples of major partners in Home & Autos are Lowe’s and PC Richard. For Digital, we see Amazon and Verizon and payment solution providers such as PayPal and Venmo. Diversified value examples are JCPenney and Sam’s Club. Lifestyle ties into a range of partners including Dick’s Sporting Goods, American Eagle, Guitar Center, Kawasaki, Suzuki among others.

• Wellness as a growth market: Health & Wellness includes a range of entities from health focused retailers (Walgreens) to health care providers and SYF’s own CareCredit brand. Health care is a natural target for growth given demographics and the basic reality that health care is around 18% of GDP. SYF’s “CareCredit program is a credit card designed to support your health and wellness wants and needs. It’s a way to pay for the out-of-pocket costs at over 285,000 locations nationwide including treatments, procedures and more…”

• The Ally business line acquisition broadened the mix: SYF acquired the Ally Financial point-of-sale financing business in a $2.0 billion cash deal. This acquisition and related mix flows into Home & Autos and Wellness. Growth business lines and specialty areas include roofing, HVAC, and windows, as well as in cosmetic, audiology, and dentistry. These were part of the rationale for the deal.

• The trends in asset quality have been favorable in credit cards: The moderately favorable trends in asset quality for SYF as of 3Q25 mirror the color from JP Morgan and BofA in their 3Q25 numbers. Cap One as a consumer finance and credit card giant also gave favorable asset quality results. The spend trends, payment rates, and asset quality performance is pushing back against the theme of a consumer in trouble. For SYF, that comes with the asterisk of a heavy base of prime quality borrowers and creditworthy households.

• SYF posted lower delinquency rates and lower charge-offs: The 3Q25, YTD and annual numbers are broken out in the chart, and delinquencies and charge-offs are ticking lower. Charge-offs during the reporting period were 5.16% in 3Q25 vs. 6.06% YTD and 6.31% in FY 2024. SYF offers supplemental disclosure with monthly numbers. The late months of 2024 wound down the monthly 30+ day delinquency rates in the high 4% range vs. the low 4% range or each month of 3Q25. Charge-offs in 3Q25 declined sequentially to 5.16% from 5.70% in 2Q25 and from 6.06% YoY from 3Q24. The charge-off rates by month in 3Q25 are in the low 5% range each month after 5.8% in June and a 6.3% in April and 6% handles for each month from Sept 2024 to April 2025. The trend is favorable across the quarters. Asset quality in 2025 is worse than 2021-2022, slightly worse than 2023, but modestly better than 2024.

• Credit scoring shows the focus on middle to upper tier consumers: SYF provides useful disclosure on its credit tier mix. SYF uses VantageScore credit data. Per SYF, the scores are set “at origination of the account and are refreshed, at a minimum quarterly, but could be as often as weekly, to assist in predicting customer behavior.” SYF categorizes these credit scores into the following three credit score buckets: (1) 651 or higher (73% of credit cards at 3Q25); (2) 591 to 650, “moderate” credit risk (19% of credit cards); and (3) 590 or less, “weaker” credits (8% at 3Q25).

• Buybacks dictate the capital allocation story: The cash flow chart above is mostly about tracking the rate of buybacks with the dividend rates tied to a combination of regulatory latitude and the steady decline in share count. The most recent quarter saw $971 million in buybacks in 3Q25 ($1.98 bn YTD). The board approved another $1 bn in buyback authorization for a total authorization of $2.1 bn.

• Excess capital comfort and solid profitability support buyback scenarios: The Tier 1 capital ratio at 3Q25 of 14.9% was up modestly from 2024. We look at the SYF capital history in the next chart. The buyback volume is reassuring equity investors while the asset quality and access to capital keeps credit markets happy and offers comfort around funding flexibility and reliability. The decline in dividends in total dollar terms across the cycle is consistent with the dramatic reduction of the share count since the pre-COVID period.

We include the above line items from the 3Q25 10Q and 10K for a convenient look at the actual vs. the minimum capital required. The company has plenty of capital, strong earnings, and a key stock market factor each quarter is the amount and timing of buybacks.

History and Highlights:

• Synchrony descends from the legacy consumer credit unit of GE: SYF was formerly GE Capital Retail Finance before its IPO in July 2014 and “split off” from GE In 2015 when GE exchanged its SYF shares for GE stock, leaving SYF as a stand-alone operation and constituent of the S&P 500. The GE unit was the largest provider of private label credit cards in the United States based on purchase volume and receivables. The spin/split off was part of an ongoing break-up of GE into more independent operations. That GE restructuring and business line exits have been ongoing across the decades and accelerated after the credit crisis.

• SYF purchased an Ally consumer lending business in 2024: Ally divested the point-of-sale financing business in March 2024 for $2.0 billion in cash. The deal bolstered SYF’s home improvement sector exposure (roofing, HVAC, windows, etc.) and its position in the health and wellness markets. The deal included the acquisition of $2.2 billion in receivables.

• SYF divested its Pets Best Insurance in March 2024: The deal was $1.1 bn in pretax gains and $802 million net of tax. The deal came alongside the acquisition of Ally’s consumer business. The realignment of the portfolio reflects the focus on building out the partner network while sustaining a strong capital base and thus buyback potential. SYF heads into 2026 with a strategy focusing on more growth based on what they laid out in the game plan for each platform. Digital and Wellness are key growth opportunities. Major wins such as getting Walmart back in the fold and targeting health care as a growth sector have seen favorable feedback in the equity markets. As detailed earlier, this is all part of the constructive story as reflected in the relative stock performance across numerous trailing periods into 2025.

• We look across the range of operating and financial variables at GM including the GM Financial unit, key model volumes, and the pension/OPEB exposure. GM is still holding steady at a BBB2 composite rating.

• The themes of a strong balance sheet, a liquidity hoard, very healthy cash flow, and an improving core performance in its increasingly US-centric operation and US-focused capex plan amount to good news in structural risks and operating prospects. GM Financial is a very strong performer while a much smaller GM International segment has a mixed history as China struggles.

• The partial offset to the favorable financial health story is that GM is now seeing weaker profits and narrower margins from tariffs. The execution risk in repositioning capacity within North America is a fact of life as GM seeks to get it done efficiently. The intrinsic consumer cyclical risks are running alongside the need to adapt to new tariff structures that are constantly changing.

• The shift in Washington policies on the ICE vs. EV trade-offs has been distinctly favorable for GM as the shelf life of its core products get extended. The emissions policies mitigate some of the other costs barraging GM in tariffs that flow into materials and supplier chains.

• GM happens to hold down the #2 position in EVs, and GM has experienced very favorable EV growth in 2025 YoY ahead of the new post-tax incentive world. Those favorable EV volumes will fade from here. Diminished customer appetites for EVs can be addressed by GM through more action in shifting its structural cost plan relative to original expectations.

Below we get into the weeds of the GM story, but the above stock chart indicates that GM has managed to somewhat delink from the legacy Detroit 3 peers (with Chrysler rolled up into Stellantis). We are in process on Ford and Stellantis reviews as well, but there is not much mystery to the fact that GM has held up better in a period of rapid change in the auto sector.

The timeline above for stock returns starts with the March 2022 tightening cycles. GM has materially outperformed Ford and Stellantis but underperformed the tech-heavy S&P 500.

CREDIT TREND: Stable

• ICE mix and GM performance trumps tariffs in GM credit story: The wave of tariffs and resulting supplier chain disruption threats to non-US assembly capacity in Mexico and Canada (notably Mexico for GM) tend to lead in the negative headlines, but the benefits of ICE leadership and GM’s light truck strengths allow the company to eat some tariffs while continuing to invest in the product plan and some core model success stories. That multiyear capex program includes material increases in US-based capacity, and that bodes well for healthier relations with Washington’s desire to dominate manufacturing investment plans. Trump and tariffs are a reality GM is dealing with. Lower earnings and margins are part of the adjustment stages.

• GM is a GMNA story now: GM is distinctly profitable in GMNA with the hemorrhaging Cruise segment now folded into GMNA. GM Financial is a clearly profitable and positive contributor from a P&L and strategic standpoint. The smaller GM International segment is a modest contributor and much smaller factor in the overall GM financial and operating profile than in past cycles. Exiting the EU was a long-term positive.

• Capex consistency and capacity shift underway: GM will be investing heavily in the US to expand production, and that does not bode well for Mexico operations and the USMCA auto ecosystem. GM clearly has the financial flexibility to fund such investment and can absorb any related restructuring charges from the actions. GM has already overhauled its global operations with its exit from the EU, so this is a process where GM has some history.

• Tariffs assure lower earnings and margins: GM believes they can offset 30% of the tariff expenses and will continue to work with their OEM Tier 1 and 2 suppliers to adjust to the new reality. The term “work with suppliers” from major OEMs is always ominous for the supplier chain since it entails sharing costs but also can provide incentives for suppliers to invest more in the US and keep the White House powers happy. The pressure on GM profit margins is evident already and will remain a challenge, but GM’s very healthy cash flow dovetails with a strong balance sheet and no shortage of financial flexibility.

The macro picture in total volumes

• Volumes drive unit costs: The constant risk factor for any major OEM is the intrinsic cyclicality of consumer durables broadly and autos specifically. The old rule of fixed costs and unit costs apply. Volume is in the denominator and high volumes can mask more than a few challenges. In GM’s case, the challenges are now lower than they would have been with Trump’s more ICE-friendly regulation playing to GM’s core strengths. Policy shifts improve GM’s ability to withstand the onslaught of tariffs. With the USMCA up for review by June 2026, that could matter even more later as GM scrambles to shift production capacity into the US with a capex program of almost $5 bn to get there over the next two years.

• LV SAAR histories show lower highs and one hopes higher lows: Running north of 16 mn SAAR quarterly are very healthy volumes. Cyclical risks are a fact of life, but a crisis like the 2008 meltdown and 2020 COVID pandemic changed the usual rules. The chart above tracks the Light Vehicle (“LV”) sales volumes on a quarterly SAAR average through 2Q25 numbers. We chose the quarterly average SAAR above to smooth out the highs and lows seen in monthly data with “retail specials.” The time series updates the history since 1979 – a year of high inflation when the table was being set for a Chrysler bailout under Carter (with legislation and Congress involved). Then came a double-dip recession and protracted bout of stagflation in 1980-1982. The new oil price backdrop in 1979 (Iran Oil Crisis) and rapidly shifting consumer preferences on the way into a recession are histories for another time.

• The current cycle is steady: We do not have the final 3Q25 LV data point yet from the Fed in the chart, but a strong summer sales season included a spike in EVs ahead of the end date for tax credits as of the end of September. As we go to print, Sept SAAR was cited around 16.4 mn. GM’s challenge is in addressing the tariff and de facto “relocation challenge” while adapting its EV mix to the new realities in a post-tax-credit world. GM also will be keeping a close eye on dealer needs to protect the connection to the consumer, and that has been the main motive behind “eating tariff costs.” In terms of the incentives to drive volume, GM has highlighted how their incentives relative to average transaction prices (“ATPs”) have been lower than the peer groups even while they are picking up market share.

• Capex will remain high regardless of the cycle: The priority for GM has been articulated routinely as they seek to keep structural costs in check and consistent with their margins and mix. The “lower highs” and higher lows” in SAAR seen in the recent cycle make for a less volatile volume story and hopefully will signal decent underlying demand in 2026-2027. The expectation of lower auto financing rates is swept up in the easing and UST curve slope debate.

OPERATING PROFILE

The multi-decade downsizing…

• GM has a long history of shrinking its footprint since the 40% market share days: We first started watching GM on the buyside in the early 1980s when it had a 40% handle market share in the US. That was numerous cycles, decades, and crises ago. The older guard will remember iconic names such as Pontiac and Oldsmobile among legacy brands that did not make it through the rounds of restructuring as GM saw its market share collapse over 50 years. Less iconic names such as Saturn did not last while Buick survived given its strong name recognition in China. GM is trying to rebuild that brand with a mix of China and South Korea produced models as well as a domestically produced model.

• Light trucks rule the story: Chevy and GMC trucks are the cornerstone of GM financial health, revenues, cash flow and dealer support. We look at higher volume models further below in the charts and commentary. Cadillac was a legacy luxury brand that faded against the non-US luxury offerings from Germany and Japan (Lexus) but Cadillac had recently been executing on an EV strategy. Cadillac’s winners in the mix are unsurprisingly tied to luxury SUVs.

• Footprint changes are not new but will now reverse: The industry evolved radically over the decades as transplants soared in manufacturing presence in the US (notably the Japan 3 and Korea 2) with luxury German nameplates among the transplants, who also reduce their political risk and currency mismatches as they built out extensive dealer and/or finance units in the US. The US OEMs had moved to low-cost global sourcing across the 1990s into the new millennium, but managing the supplier-to-OEM chain is now more complex than ever with the deluge of tariffs, the EV vs. ICE issues, and technology investment decisions (EVs, hybrids, AV plans etc.).

• GM as market share leader: With a 17% handle (17.2%) market share in 2025 YTD (9-30), GM remains the #1 seller of light vehicles in total for the US across its 4 major brands: Chevrolet, GMC, Cadillac, and Buick. GM ranks ahead of Toyota at #2 and Ford at #3. The good news for GM securities holders is that GM is very healthy financially, is picking up market share in 2025 from 16.5% in FY 2024. GM leads in full size pickups and full size SUVs. GM is adding US capacity in both those segments. GM just posted record sales of crossovers in 3Q25 as well with a +16% sales gain. We look at the broader mix of models further below.

• ICE vs. EV: GM boasts a very strong competitive position with its legacy ICE mix in light trucks (pickups, SUVs, crossovers), and ICE still dominates the market share mix at around 92% to 93% of US industry sales. That said, GM has moved into the #2 spot in EVs. With the revised regulatory climate under Trump, GM seeks to fashion the optimal cost structure and investment profile for an EV sector that is running well short of the original expectations under the Biden policies. The embrace of the term “natural demand” for EVs comes up a lot. It will now get put to the test.

• Political risk as a variable now runs alongside supplier chain challenges: Tariffs as a policy cannot be directly controlled by the OEMs, but they have the added risk of unpredictability. Even this past week, there was a lot of commentary that tariff pressures and supplier chain risks will get some relief for those assembling here. There were no details. Supplier chain financial stress risk is not a new feature, but the underlying causes are different now.

FINANCIAL TRENDS

• Exceptional asset protection and liquidity: The scale of GM’s asset base, the massive run rates on automotive EBIT even with the tariff cost pressure, the reality of automotive cash in excess of debt, the steady and reliable earnings and dividend flows from GM Financial with its strong asset quality are major positive factors. A detailed and manageable product cycle plan and notably over 2026-2027 makes a very strong case for credit quality and cash flow predictability. The 2028 variables will include major questions of who runs in the election and what their tariff views will be given the recent process of all tariff policies emanating from the White House (not Congress).

• Model cycles and cyclical uncertainty are built into expectations: Model cycles ending or fading still make for a steady overall financial profile at GM. The well-established ICE product strengths of GM are undeniable and notably in light trucks. GM has sustained a lead in numerous product segments, and the competition has not been able to crack such anchors as large pickups and large SUVs. The “labor arb” factor in pricing vehicles is being worked out of the system. There are some segments where GM and Ford both have faded (luxury vehicles and cars generally). GM’s performance in EVs was impressive in its product dexterity and allows for some optimism around its efforts to tackle new technologies such as AVs. On the other hand, the Cruise segment was a flop and was folded into GMNA.

• Legacy liabilities (Pensions and OPEB) are very manageable: We address the pension and OPEB legacy liabilities and funding process further below, but the new GM created separately from the Chapter 11 entity is a very different beast than the pre-2009 version. We see salaried defined pension plans frozen (no more accruals, shift to defined contribution) and the hourly worker defined benefit plan closed (no new members). The recurring funding needs are disclosed and manageable. The funding and cash flow demands will gradually wind down with the forces of nature and the actuarial tables (“death and taxes,” etc.).

OPERATING RESULTS

• 2025 profit trends are tailing off: The above table highlights the headline numbers with revenue and operating income declining in 2Q25 YoY and 1H25 YoY after a solid stretch from 2022 to 2024 despite higher interest rates, higher prices, and diminished affordability. Much is going right for GM with Average Transaction Prices (“ATPs”) of more than $51K in 1Q25 and 1H25 vs. $50K in FY 2024. GM outperformed the industry in growth. GM is #2 in EV sales across a range of product segments and price tiers with a game plan to stay in the EV battle with a right-sized and diverse mix.

• Consolidated EBIT margin compression: We look at the segment history below, but the adjusted EBIT margin declined to 6.4% in 2Q25 from 9.3% in 2Q24 after 1Q25 posted a decline to 7.9% from 9.0%. The FY 2024 EBIT margin was +8.0%, which rose from 7.2% in FY 2023. The tariffs are having a logical negative effect in 2025 which will continue into 2026.

• Guidance calls for lower margins on tariffs and volume: The new FY 2025 guidance range with 2Q25 numbers calls for adjusted EBIT is $10.0 to $12.5 bn ($11.25 bn mid). Free cash flow guidance is in the $7.5 bn to $10.0 bn range with $10.0 to $11.0 billion in capex plans including the battery JV. That is a healthy forecast considering the tariff headwinds, but the forecasted results are well down from the $13.7 bn to $15.7 billion estimate for 2025 that was presented with 4Q24 earnings. Tariffs have made a big and negative difference, but the Trump policies on ICE has supported GM’s core strengths.

• Segment guidance is solid: With the latest FY 2025 guidance after 2Q25, GMNA pricing was expected to be slightly higher, GMI “ex-China” will be “similar to 2024,” and GM Financial EBT is guided to the $2.5 to $3.0 billion range.

• Tariff costs are expected to be in the $4 bn to $5 bn range: The company expects to recover 30% of tariff costs with the remainder a mixed picture subject to other cost mitigation actions, supplier chain discussions, and uncertainty around the trade partner “deals” being finalized and related contingent risk scenarios that would come with those deals breaking down.

SEGMENT RESULTS

• GMNA 2Q25 EBIT weaker, margins softer: There is no hiding from the tariff expense with higher tariff costs than in 1H25 assured in 2H25. GMNA EBIT margins at 6.1% in 2Q25 vs. 10.9% in 2Q24 tell a clear story on the trend. Painful tariffs are now a fact of life that encourage relocation of production and a focus on supplier chains. GM believes it can offset 30% of the total tariff cost in 2025. Average transaction prices at $51K included lower incentives as a % of ATP with 2Q25 2 points below the industry average. Picking up market share (to 17.4% in 2Q25) with volumes higher and pricing favorable was the 2Q25 takeaway.

• Favorable GMNA volume trends: We see GM posting favorable variances in 2025 with volume higher across all brands with 2Q25 retail sales at +10% and 1H25 retail sales at +12%. GM was the leader in truck sales again with record crossover sales at +16% in 2Q25 and +23% in 1H25. EV sales share hit +15.8% in 2Q25 after +10.4% in 1Q25 – both substantially higher YoY. Chevy ranked #2 in EV sales and Cadillac #5 in total EV volumes. The recent 3Q25 sales volumes released last week were also quite solid. GM US deliveries were reported at +7.7% for 3Q25 and 3Q25 YTD at +10.3%. Chevrolet was +8.3% for 3Q25 and +9.0% for 3Q25 YTD volumes. GMC was +8.6% for 3Q25 and +10.3% YTD. Chevrolet and GMC are the two major brands, accounting for almost 88% of GM 3Q25 volumes. Cadillac rose by 25% in 3Q25 and 19.4% 3Q25 YTD. Overall, GM posted its best market share since 2017 in 3Q25 and the best YTD market share since 2015.

• GM International Operations (“GMI”): International trends have changed dramatically over the past decade with the exit from EU and numerous regions. From here, GMI will be mostly about China sales and JV activity. GM has material market share in Brazil (10.0% in 1H25, down from 12.3% in 1H24). China share was flat YoY at 7.2% in 1H25 (7.1% 1H24). China has been a challenge for GM given competitive conditions and market struggles detailed in the 10-K. GM’s China JV generated $4.4 billion equity losses in 2024 which included restructuring charges of $2.1 billion for impairment of the equity interests and another $2.0 bn for implementation of the restructuring plan. Back when GM’s IPO was leading to a lot of outsized sum-of-the-parts valuation by the street, China was assigned values at a very high multiple that helped pad the target price. Those days are over – at least for the foreseeable future.

• GMI looks very different than a decade ago: As discussed earlier, GM’s history as one of the European Big 6 is a distant memory as are the GM-owned Opel and Vauxhall brands that were sold to PSA and now roll up into Stellantis. GM also has downsized and discontinued much of its Southeast Asia based operations, wound down Holden in Aus/NZ operations, and exited India.

• GM Financial (“GMF”): GM has built up a very solidly profitable and captive unit as the company looked to rebuild something like the “old GMAC.” The acquisition of AmeriCredit in 2010 set GM on the course of rebuilding the finance unit (see History and Highlights further below). GMF now has a much larger earning asset base with favorable asset quality metrics as detailed below. For some context on the rate of growth since restarting its captive finance rebuilding, GMF has grown from $9.2 billion in net receivables in 2011 to almost $92 bn at 2Q25 (excludes leasing assets).

• Cruise folded into GMNA for 2025: For segment reporting, we include some of the old disclosure above that includes Cruise, which has now been folded into the GM North America segment (“GMNA”). GM changed its strategies around Cruise from an AV Robotaxi effort to an AV project for personal vehicles. The rationale was that robotaxi initiatives would be too capex intensive and undermine capital efficiency. The theory is the integration with the GM Super Cruise technology investments and ADAS could generate synergies with the AV effort (assisted driving tech meets autonomous). As evident in the segment results above, Cruise was a massive headwind for earnings, and the decision to exit is a net positive for earnings, cash flow, and capital efficiency.

CASH FLOW LINES

• Meeting the capex demands: The key cash flow lines above highlight the cash flow strengths of GM as the company maintains a higher rate of capex to meet product initiatives and the plan to expand US capacity. The US capex plan includes a priority of bringing back light truck, SUV, and crossover capacity to the US and scaling back in Mexico and Canada. The 2026 review of the USMCA will keep those stakes high.

• Capital allocation: The ability to return cash to shareholders has been reiterated, and the number above highlights that buyback numbers can swing dramatically subject to operating results and core business priorities. GM’s CFO indicated in a recent presentation that GM had bought back 30% of shares outstanding over the past 3 years.

• GM Financial dividends: The chart above highlights the steady upstreaming of dividends from GM Financial of just under $2 bn each year since 2022. That is a healthy add-on to the free cash flow generation from the core auto manufacturing operations.

AUTOMOTIVE CASH AND DEBT

• Cash flow and liquidity resilience is clear in recent history: The above table highlights the impressive base of cash flow and balance sheet liquidity with automotive cash in excess of automotive debt. The ability of GM to manage its liquidity is evident in the table above across a timeline that includes a pandemic, an inflation spike and tightening cycle, massive capex, and cumulative stock buybacks of almost $23 billion from 2022 to 1H25.

GM: Pension and OPEB

• Pension and OPEB quite manageable in the context of funding needs: The above chart details the underfunded position of GM in defined benefit (“DB”) pension and other postemployment benefits (“OPEB”). Pensions and OPEB have always been contentious topics with the UAW and a financial headwind in “old GM” before the 2009 bankruptcy and creation of a separate “new GM.” The Section 363 sale to the new entity included the transfer of pensions and OPEB to the new GM. OPEB is overwhelmingly about health care.

• The DB US hourly plan is the main event: The US DB plan obligation is 3.5x the remaining non-US projected benefit obligation, and US plan assets were around 4x the non-US plan asset level. ERISA rules are much more onerous, and there is always the chance the UAW will seek to open those plans again. The US DB hourly plan covers employees hired prior to October 2007 and for Canadians hired before Oct 2016. Salaried plans have shifted to defined contribution, and many salaried DB obligations were offloaded in pension risk transfer transactions (purchase of annuities). The salaried plan is “frozen” (no more accruals) while the hourly plan is “closed” (no new additions). Hourly workers will keep trying to restore DB benefits in future contract rounds, but GM will say “no” or pay a price in the market and in competitive costs. GM got past the latest round by increasing payments to retirees and eligible retirees and active plan members.

• GM Non-US DB obligations include legacy Opel and Vauxhall: Part of the cost of the EU exit by GM included taking on most of the legacy pension obligations. The legacy liabilities will remain a drag on the adjusted balance sheet. We do not consider the overall pension exposure in the US or non-US side as major risks at this point. Those liabilities can be managed with steady contributions and decent asset returns, but the natural actuarial course of life expectancy will gradually run down the pension obligations.

• OPEB is contract risk, pensions are debt risk: We have often written about pensions and OPEB over the years after years of covering the autos and airlines (always an adventure) and the color to assign is “grey” on the debt-like vs. contract-like nature of DB plans vs. OPEB. There has been no shortage of bankruptcies that offer up a lot of data points. A simplistic generalization in many of the bankruptcies across the cycles is that pension plans and health care plans get rolled into the post-emerged entity with salaried plans much more vulnerable to a freeze (pensions) or elimination (OPEB).

  The wide array of legal issues needs to be looked at on a case-by-case basis with collective bargaining agreements having a bigger seat at the table. That is separate from the Section 1113 provisions in collective bargaining Section 1114 on retiree benefits. That is a broader topic for another day, but those are rarely triggered given the scale of damage they do to the estate and going concern potential. That is especially when the unionized hourly workers could react with crippling strikes.

  Historically, recovery rate estimates often get manipulated by the “axed” who inflate the haircut on unsecured debt tied to pensions and OPEB. ERISA statutory clout is a major overriding factor. The battle around how to treat pensions and OPEB in recovery estimates is an old debate and the same with how to frame it in valuation metrics (see bullet below). When the US OEMs were in serious trouble, the claims risk handicapping was part of the exercise.

• Pension plan “drain rates”: The above chart breaks out the usual metrics on obligations, assets and returns, but we also like to look at the benefit payout rate. We sometimes call it the portfolio drain rate (“benefit payments % plan assets”) since that bill is due each year to retirees. That cash drain rate must factor into asset allocation decisions (debt vs. equities, coupon income, etc.) and need to be prudently managed. The obligation math and actuarial science (arts?) of course matter, but “cash in, cash out” is more intuitive. An easier and more objective and assumption free question answers this question “What was my actual return last year vs. what I paid out in benefits?” Given the maturity of the pension plans and retiree base for a company such as GM, credit allocations have been very attractive with a higher coupon serving as a helpful offset.

• Funding demands are the main topic whether mandatory or discretionary: For 2024, GM’s US DB plan paid out around 9.8% (benefit payment % beginning plan assets) after 9.3% in 2023. We see 7% handles across 2020-2022. That is a big cash payout each year. If we look back over the past 5 years for the US plans, we only see 1 year (2020) when returns exceed payout rates. That is where additional contributions can come in. For the US plan over the past 3 years, the contributions to the US plan were $526 million (2024), $357 mn (2023) and $71 mn (2022). The contribution for 2025 is expected to be “insignificant.” For non-US plans, the contributions were $653 mn (2024), $395 mn (2023) and $332 mn (2022). Non-US plan contributions are expected to be up to $125 million in 2025.

• Pensions and OPEB in valuation: The use of EBITDA vs. EBITDAP or EBITDAPO in EV math and adjusted EV multiples get tossed around a lot but in the end most analysis reverts back to EV/EBITDA and P/E multiples. With so many wild rides across the cycles and major automotive sector stress and bankruptcies, most of the scenarios have been tested.

  Adjusted EV multiples can occasionally make a material difference across industry peers such as when Delphi was emerging from Chapter 11 “pension free” and was going to be valued in the context of numerous suppliers with pension and OPEB exposure. Delphi was a unique story as it got swept up in the GM obligations and bailout working with the UAW and a very UAW friendly group of bailout architects.

• Don’t let the GAAP accounting get you down: The assumption-driven accounting for legacy benefits and the related lingo and nuances of ERISA vs. GAAP can seem daunting. The assumed plan asset returns (essentially a contra-expense line in GAAP pension expense) gets into quality of earnings questions (do they inflate expected returns relative to the asset allocation mix?). The changes in how discount rates are applied for obligation math (ERISA or GAAP) are important in the “objective” measurement process, but ERISA always trumps GAAP. The GAAP math can be a distraction at times, and that was especially the case across the ZIRP years when ERISA-based measurement and legislative relief on discount rates was the main event (relief which they in fact routinely received).

  A good working assumption is that minimum funding requirements can swing across the cycles with ERISA rules as the main focus that flows into statutory minimum funding requirements and cash flow demands. Discourse disclosure has improved over the years.

GM FINANCIAL: BALANCE SHEET HIGHLIGHTS

• Slow and steady growth in the GMF asset base: As noted earlier, a 10-fold increase in net finance receivables since the acquisition of AmeriCredit (see History and Highlights below) and growth in the recurring customer base is the bulk of the GMF story. GMF brings both strategic value in the core GMNA operations and is very supportive of retail customers and dealers. We covered the segment earnings story earlier.

• Impressive profitability, high quality and liquid assets: The dividend flow upstream to the parent leaves GM well positioned to deal with a range of potential cyclical outcomes. We look at the asset quality in the next table, and the liquid nature of the assets (securitization, liquidation) as demonstrated across an unusual cycle (i.e. a pandemic, inflation spike, tightening cycle, and affordability challenges).

• Support Agreement- Leverage Ratio: GMF’s support agreements and leverage requirements are broken out on the 10-K. “Our earning assets leverage ratio, calculated in accordance with the terms of the support agreement with GM (the Support Agreement), was 9.24x and 8.32x at December 31, 2024 and 2023, and the applicable leverage ratio threshold was 12.00x. In determining our earning assets leverage ratio (net earning assets divided by adjusted equity) under the Support Agreement, net earning assets means our finance receivables, net, plus leased vehicles, net, and adjusted equity means our equity, net of goodwill and inclusive of outstanding junior subordinated debt, as each may be adjusted for derivative accounting.”

• Support agreement with GM: GMF is a critical unit in the GM family given its importance to dealers and customers. The support agreement is strong one as detailed in the 10-K: “… If our earning assets leverage ratio at the end of any calendar quarter exceeds the applicable threshold set in the Support Agreement, we may require GM to provide funding sufficient to bring our earning assets leverage ratio within the applicable threshold. In determining our earning assets leverage ratio (net earning assets divided by adjusted equity) under the Support Agreement, net earning assets means our finance receivables, net, plus leased vehicles, net, and adjusted equity means our equity, net of goodwill and inclusive of outstanding junior subordinated debt, as each may be adjusted for derivative accounting.”

  “Additionally, the Support Agreement provides that GM will own all of our outstanding voting shares as long as we have any unsecured debt securities outstanding. GM also agrees to certain provisions in the Support Agreement intended to ensure we maintain adequate access to liquidity. Pursuant to these provisions, GM provides us with a $1.0 billion junior subordinated unsecured intercompany revolving credit facility, and GM will use commercially reasonable efforts to ensure that we will continue to be designated as a subsidiary borrower under GM’s corporate revolving credit facilities.”

GM FINANCIAL ASSET QUALITY

• Growth in earning asset base: Steady growth in receivables across retail customers and dealers is a good sign. Monitoring reserve adequacy, delinquencies, and charge-offs is a standard process each quarter. Leasing exposure is material and watching residual value trends in the used vehicle market is a core part of framing asset risks and “repossession losses.” The next stage of dealer needs around used vehicles and EV residuals will get more focus in the quarters ahead as the tax credits have ended and the natural demand for EVs become a hot topic.

• Allowance comfortably above net charge-off: The allowance cushion in the table remains at a multiple of charge-offs with plenty of cushion for setbacks in the event of an adverse turn in the cycle and employment weakness. The market is increasingly focused on a more sustained erosion of auto retail receivables credit quality with payrolls softening and pressure on a major subset of the consumer spectrum. Health care cost shocks and less friendly mortgage rates north of 6% won’t help the trends in consumer credit and monthly payment burdens.

• Growth in “prime” receivables share by GMF over the cycle: The quality of customer credit has risen since 2020 with the prime FICO share (680 or higher) up to 76% at 2Q25 vs. 64% in 2020. The near-prime mix is 12% (620 to 679) at 2Q25 vs. 15.4% in 2020 while subprime (less than 620) is down to 12.0% in 2Q25 vs. almost 21% in 2020.

GM: RETAIL SALES VOLUMES

• GM is about light trucks: The above chart breaks out the GM mix and volume trends for 2Q25 and 1H25 vs. the prior year (source: Automotive News). The categorization of light trucks includes pickups, SUVs, and crossovers, so the small slice of “cars” is now more one of convention (and some regulatory and trade nuances) than one of utility when they are all overwhelmingly passenger and/or fleet vehicles with some blurring into commercial use in the larger pickup categories. We use the 2Q25 numbers above to match up with the fiscal reporting periods in hand so far. GM 3Q25 earnings will be released later this month (10-21-25). We will update the 3Q25 data at that time. We update 3Q25 volumes below.

• Results are about volume, price, and mix: GM delivers an exceptional amount of detail in its quarterly reports and related slides. For those new to tracking autos, we recommend Auto News for an industry practitioners’ perspective without the “EPS spin.” Reading the Detroit News that posts auto coverage every day is also helpful. The Cox Automotive products are excellent for data and trends. These people eat, drink, and sleep autos. The details on EVs and dealer trends are especially helpful, and there is no shortage of information in what Auto News provides including extensive sales and production stats each month with an array of content and data offerings.

• 3Q25 keeps posting strong growth: GM released 3Q25 and YTD 3Q25 volumes in the middle of last week (10-1-25). Volumes remained quite strong in 3Q25 with GM holding down its market share lead with “ICE market share” at 17.4%. GM’s 3Q25 unit sale posted +7.7% in US vehicle sales and weighed in at +10.3% YTD. The calendar YTD share of 17.2% was cited as the best since 2015.

  The favorable volume variance again has GM outperforming the large OEM peer group. Chevrolet was +8.3% in 3Q25 and +9.0% YTD. Cadillac was +25.0% in 3Q25 on the back of good EV results from new luxury EVs. Those increases come with the asterisk of a banner period for EV’s looking to get in under the wire on the expiration of the $7500 tax credit. GMC is the second largest GM brand well ahead of Cadillac and Buick , and GMC posted +8.6% units in 3Q25 and +10.3% YTD.

• GM picking up market share with its strong position in light trucks and ICE: GM will spend $4 bn to $5 bn on expanding US capacity over the next two years. The mix of products underscores the benefits of easing emission standards and major cost savings on the rate of “buying credits” to mitigate the heavy fleet mix of light trucks (notably large pickups and large SUVs).

• GM has climbed to #2 in EV share and posted records in 2025: GM’s bragging rights is that it is #2 in EVs as a way of showing its commitment to the space with its 12 EV models. Chevrolet is the #2 EV brand and Cadillac is the #5 EV brand. GM wants also to show that it hits what it aims at these days in product planning. No company was more active in making its case for traditional ICE vehicles and challenging emissions rules than GM, but it also can make a claim that it shifted with the rules and was executing in its EV product program.

• ICE now trumps EV planning for GM: Cadillac and Buick were both targeted to be 100% EV by 2030. That is not happening. EVs are only 7% to 8% of the market, so the main event – notably for GM – is still all about ICE. On that score, Trump has been helpful to GM by lowering barriers to growing and sustaining GM’s very successful ICE business.

• “Executing” in EVs still meant losing money: Expending capital in a space where demand was well short of the regulatory ambitions has changed planning. GM has stated that the company will scale the EV operations to better match up with natural consumer demand. With respect to EVs, GM stated after 1Q25 that “50% of our entries were variable profit positive.” In a high-fixed-cost business, that only gets you so far, but with so many OEMs suspending, downsizing, or canceling EV plans for different models, the GM planning at least hedges EV bets and political risks in future elections. The new low-cost Bolt EV will be out later this year as a 2026 model, and that will be an affordable model that would “barbell” the mix with the Cadillac planning.

• The relocation and sourcing challenge: The shifts across product and model line items in sales and production (and where the production takes place) will get very interesting from here with the capacity relocation planning and the mix of import changes for GM (from Mexico, Canada, South Korea and China). The tariff terms keep on shifting with more potential changes underway including more supplier chain and OEM tariff changes being floated the past week (not specific yet). Autos are one of the biggest end markets for semiconductors, so there is plenty of drama ahead along the electronics chain. The USMCA is also up for review by June 2026, and it is hard to use rational economics as a guide for what will unfold. That negotiation could bring fresh uncertainty and even potential termination.

GM: KEY MODELS CHEVROLET AND GMC TRUCKS

• Trucks rule with pickups, SUVs, and crossovers: The lead themes around GM’s operating strategy on the product side as we wind down 2025 is to leverage the exceptionally strong ICE operations. The volume variances above tell a favorable story for GM through 2Q25. That continued into 3Q25, but we will break out those 3Q25 model details later. We summarized the latest 3Q25 volume trends above. These light truck models above have benefitted from the Trump policy of dialing back EVs and emissions and fleet rules and clearly extending the life of the most profitable and successful GM ICE platforms and model segments.

• GM is the leader of the legacy ICE carmakers (i.e. ex-Tesla) in EV share: GM has an EV strategy to target a low-cost EV with a Bolt redesign while also tapping luxury EV demand through its Cadillac brand. Cadillac has struggled against the Germans and Lexus in ICE vehicles, so the luxury EV plan has resonated. “Caddy” EVs could offer viable alternatives to the growing ranks of Musk haters. That strategy calls for GM to be well positioned in EVs at the right mix and cost structure. EVs remain unprofitable after fully allocated costs. GM tells a good story about balancing future ICE and EV volumes (and hybrids) and investing in manufacturing flexibility to produce ICE or EV at some of the same plants.

GM: KEY MODELS: BUICK, CADILLAC, CHEVROLET CARS

• Buick, Cadillac, and Chevrolet Cars still in the game: GM earnings and cash flow are tied to GM showing so much success in pickups, SUVs and crossovers, so it is sometimes easy to forget the models that are categorized as “cars” in the trade literature. The luxury Cadillac brand has strengths in luxury SUVs and EVs while the handful of Chevrolet cars are also detailed in the table with venerable names such as Camaro and Corvette. The Camaro has been discontinued while the Corvette is slated for a redesign in 2029. The Chevy Bolt is expected to be a high volume replacement for the Malibu as it also tackles the lower price EV segment.

• Cadillac remains a work in process: The Cadillac brand had struggled over the years against the luxury powerhouses of BMW, Mercedes, Lexus, and Audi having so much success over the cycles (some more than others). The Escalade at GM is part of its large SUV domination while the LYRIQ is a luxury SUV EV. The XT5 is a luxury SUV that was going to “go away” in the shift to all EV, but that plan is under review with EV vs. ICE decisions. The Cadillac XT4, which is a luxury subcompact crossover, is being phased out to make room for production of the Bolt at the Fairfax Kansas plant. The Malibu was also phased out already with the Bolt in theory set to fill in the void.

• The “other” vehicle lines: The above table updates some recent volume trends across models under the Buick, Cadillac and Chevrolet brands with Cadillac tackling EVs and Buick facing high tariffs for its subset of Asian-produced vehicle lines. The overall mix is going through a material amount of change since this past cycle as select models age, get phased out, or prepare for redesigns and final decisions on ICE vs. EV mix in the overall portfolio. The legacy Malibu line (midsize sedan) has been discontinued after a long run for that name (decades) in the latest sign of the death of the ICE sedan.

• Buick a challenge: With models produced across 3 countries (South Korea, China, and the US), Buick has its work cut out for it in US end markets. The Enclave is the only US made product with the Encore in South Korea, the Envista in South Korea, and the Envision in China. For 3Q25, the Buick models saw a -14.0% decline but with a +14.3% YTD increase. The big increase in 3Q25 was the US-made Enclave with major declines in 3Q25 for the Korean-made Encore (-38% 3Q25) and the China-made Envision (-35% 3Q25).

History and Highlights:

• Old GM vs. New GM: The current General Motors is a corporate entity that was created in 2009 out the rather convoluted Chapter 11 process and complex restructuring (Chapter 11 to Section 363 sale, etc.). The legacy GM went into liquidation under the name Motors Liquidation. That process is a long and tortuous story and includes the bailout politics and economics. The substance of the “new GM” creation is that the assets and many liabilities moved over to the new GM (contractual relationships, collective barging agreements, pensions, OPEB, etc.). Even the NOLs were moved over by separate legislative action. Then the New GM moved on from the crisis and put the longest recession in the postwar history in the rear-view mirror.

• The “New GM” did an IPO in Nov 2010: The transaction generated around $18 billion in common and $5 billion in preferred. The US Treasury received around $13.5 billion from the IPO. The government of Canada and Ontario and the UAW retiree health care trust also sold shares.

• GM separates supplier operations to lower fixed costs: Among the numerous adventures in restructuring GM’s fixed cost base in past cycles was the spinoff of the massive Delphi component operations into a separate entity in 1999. The Delphi history is a long story, but Delphi filed Chapter 11 in October 2005 and was mired in a protracted bankruptcy that was swept up in the auto crisis including GM’s Chapter 11. Delphi has given rise to multiple supplier entities since then (a story for another day). Ford went through a similar process with the spin-off of its supplier chain operations under the name Visteon, which was soon bailed out by Ford on the way to Chapter 11 for Visteon in May 2009.

• GM exits Europe: Among the most notable operating changes since 2009 was the radical downsizing of GM’s international operations and exit from Europe with the sale of Opel and Vauxhall to PSA in 2017. That was on the path to PSA becoming Stellantis in the PSA merger with Fiat, who for its part had taken over Chrysler in a complex set of transactions (Section 363 sale, etc.) in the Chrysler Chapter 11 of 2009.

• GM and Ford nonfactors in the EU: The consolidation of mass volume producers in Europe saw US operators dramatically downsized with Ford a shadow of its past with a 3% handle market share in 2024. GM’s exit from the EU over the recent cycles is a positive factor in its credit quality, capital efficiency, and strategic focus.

• GM creates a new captive finance company: Another radical change in the GM mix from its distressed and Chapter 11 years was the separation of GMAC from the auto company in a series of transactions that ended with the GMAC-to-Ally separated. For GM, the next stage of recovery was the buildout of a new captive finance capability in what today is General Motors Financial (“GMF”). GMF has grown since the acquisition of AmeriCredit announced in 2010 for $3.5 billion. AmeriCredit was a finance operator with a strategic focus on nonprime and subprime, but GMF has grown dramatically since then and morphed into a full-service captive finance operator with strong asset quality and steady growth (detailed above).

• The painful equity performance of Hertz since its emergence from Chapter 11 and making a big bet on EVs has haunted the company in both the debt and equity markets. The recapitalization and private equity derisking came first, and then the company looked for a touchdown with Tom Brady in EVs. The company is still digging out of its latest hole and is looking for almost a $2 bn swing in LTM EBITDA by 2027.

• Hertz now needs to bolster confidence that it can get back above $1 bn in EBITDA to sustain a viable equity market cap with too much secured debt and little financial flexibility as the current reality. The peak travel season of summer is crucial for car rental operators on the EBITDA line, and 2025 will not be bringing relief based on current guidance.

• The encumbered, layered and stretched balance sheet remains the second biggest problem behind operating losses. Hertz continues to address their cost structure and strategic game plan for the fleet. The history is not a good one on fleet planning when they deviate from the norm as they tried one too many times in the timeline from 2015 to 2024.

As we covered in the recent Avis commentary (see Avis Update: Peak Travel Season is Here 8-27-25), the period after COVID was quite volatile in the used car market, and that drove car rental margins to record levels as used vehicle inflation radically reduced unit costs for Avis and Hertz. The car rental profit windfall from used car valuations also drove a major increase in shareholder enhancement actions that were dominated by stock buybacks. Debt reduction was not a priority but reduced structural subordination was a priority for Avis.

The trend line for Hertz in the above stock chart is glaring enough. As HTZ plunged with its massive EV fleet problems and they endured a fleet cost spike, the challenge of excessive debt got much worse. Avis also showed high volatility during that wild period of dazzling EBITDA margins but had a rough run in 2024 until the big rebound in 2025. The result has been that some equity investors looking for a play on the high free cash flow car rental business would rather look to Avis on the basis of much greater financial flexibility and better financial risk symmetry to deal with any unexpected developments.

The above table opens up a wider range of comps for the car rental companies given the oligopolistic nature of the industry (with private Enterprise as the third player and by far #1 rental operation). The group above includes plays on travel via hotel and lodging (Marriott) and airlines (Delta and Southwest), on mobility (Uber), and on used cars (Carvana).

We frame the group against the S&P 500. Looking back to the longest time horizon (the emergence of Hertz from Chapter 11), the contrast between Avis and Hertz is a stark one with Avis +107% and Hert at -79%. Avis materially outperformed the S&P 500 as did Marriott and Uber.

We detail the consolidated results above for Hertz, and the EBITDA and EBITDA margin lines tell quite a story from the boom of 2021-2022 into the deep plunge of 2024 and a negative EBITDA of -$1.5 bn. The negative EBITDA line of 1H25 and 1H24 at least saw the positive line crossed (barely) in 2Q25. A notable backdrop for the travel-sensitive Hertz is the strong airport travel volumes (notably in 2023-2024) and decent travel period so far in 2025 that ran alongside the deep Hertz losses in 2024 and 1H25. That came after material margin erosion in 2023 while airport volumes and leisure travel soared.

The above chart frames the Americas RAC segment numbers. Americas RAC was where the most extreme volatility in the numbers can be found since that is where the fleet risks tied to residuals are concentrated along with around 80% of the global fleet (2Q25). We see the dramatic improvement in Adjusted EBITDA YoY in the Americas for 2Q25 and 1H25, but there is a long way to go to get a total Hertz EBITDA run rate above $1 bn for Global RAC.

The segment fleet size was lower YoY in 2Q25 and 1H25, but utilization has improved. Management cited a fleet age that showed 80% under 1 year. Market pricing was “challenged” (RPU), and HTZ still has a target of $1500 per month. Costs at $248 per unit was a solid improvement and inside the Hertz “North Star” target of $300.

The fleet replacement cycle and OEM negotiations are complicated by uncertain tariff risk and how materials costs (steel, aluminum, copper, textiles/upholstery, etc.) will flow into OEM fleet pricing strategies. The need to protect retail customers and key franchise dealers may not extend as generously to car rental customers.

While resilient used car prices usually are associated with higher new car prices, the reality of the new vehicle replacement costs brings a challenge to car rental in 2026 and 2027 given what is unfolding under Section 232 for autos and metals. That headwind will be there regardless of the outcome of the recent IEEPA legal challenge. The SCOTUS decision on the “reciprocal” and “emergency” tariffs are to be resolved in coming weeks (mid-Oct) after the Appeals Court ruled against the emergency Trump tariffs.

The above chart highlights the weak numbers in the International RAC operations but at least we see profits. The higher base of program cars reduces a major piece of the puzzle seen in the Americas.

The above chart highlights the “Depreciation per unit per month” (“DPU”) timeline across the recent cycles starting in 2015. The most striking numbers in the chart can be found in the benefits provided by the spike in used car prices with the supply-demand imbalance for used cars narrowly and vehicles broadly after COVID and semiconductors. The size of the bars in 2021-2022 and where they migrated into 2024 is an obviously negative visual capturing the financial performance of Hertz in 2024.

Managing residual value risk and building a core strength in used car remarketing has been a multi-cycle challenge in a world where technology is revolutionizing used cars sales. That is true for the dedicated used car players (Carvana, CarMax) and the leading franchise retailers (e.g. Lithia, AutoNation, etc.).

Hertz has tried to highlight how far it has come in used vehicle retail, and the recent Hertz-Amazon headline is the latest move. In the bigger context of financial risk and earnings, it is more about Hertz having a better read on forward residual risks and car rental pricing strategies to improve their ability to recover fleet costs.

Those 2Q21 to 2Q22 numbers drove record margins for Americas RAC segment including 34% in 2Q21, 39% in 3Q21, 32% in 4Q21, 34% in 1Q22, 33% in 2Q22, and 25% in 3Q22. That level of profitability fueled cash flow and EBITDA increases that sent debt/EBITDA metrics well below 1.0x in 2021-2022.

As the DPU chart drives home, that unit cost advantage reversed with a vengeance into 2023-2024 as EBITDA spiraled into the negative zone in late 2023 and into 2024. Peak travel period margins started to get cut in half in 2023 and then the serious loss period started.

Even operating in a normal environment was a struggle for Hertz in framing residual risks. Looking back, the period of 2016-2017 was a very rough one for Hertz in fleet residual risk as Hertz completely mismanaged investor guidance on vehicle depreciation (a de facto cash expense line in car rental and EBITDA definition) before blindsiding them in 3Q16.

Investors went into that late 2016 period armed with bad information. The DPU numbers back in the pre-COVID period seem low in today’s context, but vehicles were also much cheaper then and there was less to recover.

Those pre-COVID years are not very important now, but they were a part of a history that has led to so much turnover and different leaders at Hertz. The chaos from there across 2016-2017 led to damaged credibility in the credit and equity markets until COVID erased it all and sent Hertz into Chapter 11. Many of the strategic priorities and new Hertz speech content on how they fix the company sounds very familiar across time.

The above table captures the high-level balance sheet lines across total assets, revenue earning vehicles and the cash level with unrestricted cash low in historical context. The negative (-838 mn) EBITDA LTM is a long way from the $1 bn EBITDA targeted by 2027.

Unless Hertz starts reducing debt, EBITDA levels above $1 bn will be needed to have a viable balance sheet. That is certainly the case in the context of expected EV multiples (7x? 8x for a healthy Hertz?) and even justifying meaningful equity value commensurate with current levels (market cap $1.75 bn for Hertz, $5.7 bn for Avis).

For FY 2025, HTZ management cited the expectation of a slight negative EBITDA, which marked a slightly negative guidance revision. The $1 bn EBITDA line is a long way off.

The above table shows the capital structure line items across time since 2018, and the line items underscore the magnitude of the realignment from before the Hertz Chapter 11 filing in 2020 and ensuing re-leveraging of HTZ as it emerged from bankruptcy. We detail the very active capital allocation events further below.

The easy takeaway is that we see a lot more non-vehicle debt for both total and net non-vehicle debt (Hertz “corporate debt.”) We also see a much more encumbered balance sheet from term loans and secured bonds.

The First Lien Senior Notes ($1.25 bn) and Exchangeable PIK Notes ($261 mn) were part of a very busy series of 2024 financings. We also see the First Lien Revolving Credit Facility at $375 mn drawn, down sequentially from 1Q25 but up from year end 2024. As we see in the charts, the earlier years saw the RCF rarely drawn at balance sheet date and were usually for letters of credit and overcollateralization needs in vehicle funding.

The above table breaks out the trends in vehicle funding totals across various funding entities in the ABS markets and with the banks. We see ABS and MTN totals along with an array of international funding “vehicles” in the international operations. These vehicle funding entities were on the front burner during COVID as the rental fleet turned into a crisis. The collapse of travel made car rental fleets the “world’s most expensive parking lot” with debt service and depreciation payment requirements at a time when travel, car rental revenue, and earnings collapsed.

The fleet chaos, cash drain, and downsizing are all part of a longer and separate history tied up in the Chapter 11 process. The history offers a reminder of how “liened up” Hertz has become yet again during an economic expansion and multiyear travel boom. That leveraging took place in a hot credit market when it could have been terming out unsecured debt and unencumbering assets for any potential cyclical rainy days ahead. Operating trends and fleet mistakes prevented such prudent measures. Too much secured debt in a bad market would offer a reminder of what was the final straw for Hertz in 2020 at a time when Avis could make it through.

The above table goes more under the heading of “how we got here” as Hertz emerged from Chapter 11 at mid-2021 and then proceeded to derisk its private equity holders and engage in what at the time (and in retrospect) was a very aggressive set of financial policies in borrowing and buybacks.

That came with an extremely bullish stance on Electric Vehicles that soon sent the company into another residual value crisis and extremely negative EBITDA position. The company essentially turned once again into a quasi-distressed credit and lost access to the unsecured bond market.

This years peak season is over and it will barely put a dent in the earnings challenge the company faces.

See also:

Hertz:

Credit Snapshot: Hertz Global Holdings 6-12-25

Credit Crib Note: Hertz 5-14-24

Not Your Father's Hertz 2-7-23

Avis:

Avis Update: Peak Travel Season is Here 8-27-25

Credit Snapshot: Avis Budget Group 4-9-25

Credit Crib Note: Avis Budget Group 5-8-24

Avis: Gearing Up for a Transition Year in Fleet Costs 5-2-24

Avis: Credit Profile 8-3-23

Avis: Cash Flow Boom and the Swing in Car Rental 2-17-23

CPI Wrap for 2022: Beginning of the End? 1-12-23

• Avis has delivered a steady financial performance in 2025 that still features considerable volatility from the 4Q24 earnings report in early Feb 2025 through the 2Q25 numbers. The critical 3Q25 peak travel season is now underway.

• Avis presents the dilemma of high 9-handle leverage that could challenge the lofty equity valuation even as Avis offers the traditional anchor of solid free cash flow. It is easier to get comfortable with the stable credit profile of Avis than the stock valuation. The handicapping of “normalized” into 2026 is tricky as the market has been framing EBITDA in the $1 bn to $1.5 bn range. That would get leverage in a more reasonable range vs. expected EV multiples.

• For those who did not catch the 2Q25 earnings call, Avis is now looking to shift the discussion back to the broader growth opportunities across integrated mobility and the expansion of service revenue streams in high profile areas such as “mega fleet management” (notably EVs and AVs). The focus was on the Waymo partnership in Dallas and how that could expand.

• Avis is also jazzing up their product suite with Avis First as a de facto first class service to tap into the same demand (and more) for travelers that use premium offerings from airlines.

• The fleet cost trend was favorable in 2Q25, and firm used car valuations support car rental earnings via depreciation per unit (reminder: vehicle depreciation is a cash cost in car rental). The potential for lower interest rates could flow into the financing costs in vehicle funding that need to be recovered in car rental pricing. Lower financing costs can fuel better margins.

• The challenge of facing higher cost of new vehicle replacement and the potential for more tariff impacts raises a lot of risk issues as well. Car rental players can get better residual realization, but car rental companies still need to pay the piper (the OEM) for the flow-through impacts of rising material costs (steel, aluminum, copper, textiles, etc.), components, and the uncertain tariff impacts on imported vehicles.

The above stock return comp chart covers a timeline from the start of the tightening cycle in March 2022 through the latest close. The history from 2022 (well after COVID) is volatile enough even at a glance. The equity valuation challenge is underscored by the expectation that EBITDA will double into 2026 and the EV multiple is looking to find the right range (8x? 9x? 10x?). Avis securities markets still face the current LTM reality of debt/EBITDA north of 9x. That demands a lot more EBITDA to support Avis stock and bonds.

The evolving car rental industry structure and service mix…

We have watched car rental operators and the auto sector for a long time (anyone remember the Avis ESOP as a HY issuer in the1980s?), and the decades of morphing ownership profiles (the OEMs took minority and majority stakes long ago to protect their major customer volumes), industry consolidation, and changes in the OEM fleet sales policies (no more guaranteed buybacks in the US and full residual vehicle risk needs to be managed by Avis and Hertz).

The recent years after the wave of legacy Detroit 3 financial stress gave way to the challenge of technology and new services that were more promises than reality after COVID. Those other services with growth potential are now getting prioritized again. The Avis earnings call tagged the focus on traditional car rental metrics as “myopic.” That was a strange choice of words to describe metrics that frame volume, pricing, and unit cost and thus earnings, cash flow and leverage.

On the call, they focused on opportunities to leverage their personnel, infrastructure and market knowledge to be fleet mega managers as the market will see (in their view) explosive growth in robotaxis, autonomous vehicles broadly and electric fleets. The key term was “structural growth” to distinguish from recurring macroeconomic trends and opportunities in “cyclical growth.” The Waymo partnership and Dallas was the focal point. Those are topics for another day.

The idea is that infrastructure is the key. Even with EV under siege and being undermined by Team Trump, they pointed out that they continue to invest in charging capabilities and not increasing EV fleet share (a subtle dig at Hertz?). The question will be how quickly these fleets will see that scale and pace of growth. Waymo and Dallas is on the table now, but among notable comments from Avis was the willingness to commit balance sheet. With expertise in service, infrastructure and personnel, the mobility ecosystem expansion is realistic, and the experience in vehicle funding also could play a role. That will be an area to monitor into 2026.

The used car market vs. fleet replacement costs…

Among the more notable line items that every car rental securities holder and lender had to immerse themselves in since the Hertz adventure and COVID was how the used car market impacts car rental cash flow and the profit margins of car rental operators.

The Avis EBITDA margin Hi-Lo range was “other worldly” this past cycle as used cars went through the inflation spike to a peak in 2022 (see CPI Wrap for 2022: Beginning of the End? 1-12-23). Avis showed plenty of peaks and valleys in the 2021-2022-2023 timeline above, and the markets realized that car rental was about a lot more than leisure and corporate travel volumes and fleet size.

The ability to predict residual values of the fleet is an important core strength where Avis traditionally had done well before COVID when Hertz really fell down. Post-COVID, Avis took a major hit in 4Q24 in their fleet acceleration plan. As we covered in our credit snapshot earlier this year:

A $2.47 billion impairment charge was taken in 4Q24 as Avis accelerated its fleet rotation on higher cost vehicles purchased in 2023 and 2024. The impairment charge was a stark reminder of the importance of used car values and how sharp moves in new and used pricing can create costly fleet decisions.

The fleet negotiations for 2026 and next seasonal peak are still underway, and this is a very challenging variable to handicap. The OEMs clearly want to succeed with all their legacy customers, but a big variable is who will share the “tariff cost pain.” The OEMs will make maximum effort not to undermine their retail franchises and core retail base. Those dealers have become very involved in the used car business in recent years led by Lithia (see Credit Snapshot: Lithia Motors 5-20-25, Credit Crib Note: Lithia Motors 9-3-24) and AutoNation (see Credit Snapshot: AutoNation 4-4-25, Credit Crib Note: AutoNation 6-17-24). It is a major focus along the chain.

Tariff flow-through effects are going to unfold at a lag and largely based on the customer strategy of the OEMs. The idea that somehow the “jury is now in” on tariff economics or are on a game clock is rooted in the political desire to defend tariffs. The tariff costs are going higher, and that was clearly in evidence in the 2Q25 auto earnings calls. Where that goes from here on fleet costs for the car rental players will only be played out in the 2026 earnings reports.

The broader and morphing economic effects of capacity changes (less Mexico and Canada), the supply vs. demand by product segment, currency trends, or any trade partner pushback is going to take quarters – not months and certainly not weeks. The fact that the USMCA is up for review in mid-2026 (and could be terminated even earlier) is just one of numerous wildcards in the tariff debate. We still cannot even get Trump to admit that the “buyer writes the check to customs.”

The major car rental players in public markets – Avis and Hertz – do not have an easy peer group. We assembled this group in the chart above as comps to get some signals on travel (hotels and lodging, airlines), mobility (Uber) and used cars (Carvana). The main goal was to look at material moves across various time horizons. We mix in Southwest with Delta with Southwest such a major factor in the US short haul and business markets.

For Avis, the YTD period has been dazzling in stock returns and the same for 1 year. In contrast, the trailing 2 years and 3 years come up negative after the residual value bounce and mega buyback programs drove Avis numbers. The running returns since the Hertz collapse and Chapter 11 emergence at the end of June 2021 shows good numbers for Avis.

For Hertz, they squandered a very strong financial profile at exit from Ch 11 to derisk their major private equity shareholders. Then they dropped a pile of chips on EV fleet expansion in a disproportionate reshaping of the fleet. Hertz equity remains deep in negative range since emerging. With such a low stock price ($5.73 midday 8-27-25), it does not take much to ring the % change bell. They also may have broken a record for the number of CEOs in less than a decade.

Avis looking for some growth buzz…

The financial risk profile of Avis is still a juggling act between capital allocation to shareholders from free cash flow in FY 2025 (after the usual first half cash burn on fleet building and the 1Q seasonal low) and core business investment. For Avis, the goal is changing the discussion of what the company could be in the age of AVs and EVs. Avis is taking a fresh run at investment to tell a growth story. This is not a new angle and was big part of the Hertz buzz when the bidding war broke out during the Chapter 11 process.

The above table looks at the operating results since 2019 as the pandemic and collapse of travel approached in March 2020. We have looked at profit margin drama in detail in earlier commentaries (see Credit Crib Note: Avis Budget Group 5-8-24 ). The normalized margin in this business when looking back even further into the pre-COVID cycle show EBITDA margins more in the 10% area. The 2021 to 2024 margins detailed above saw 25.9% (2021) to 34.5% (2022) and then down to 20.7% (2023) before the industry struggled to find its “new normal” in 2024 and 2025.

If we assume 10% can be regained, and costs can be kept in check, free cash flow will remain very healthy. The question then is capital allocation and how financially committed Avis is to building out and investing in the new structural changes it is discussing and whether they will pay down debt.

When you look at the numbers generated by Avis and Hertz long enough, you need to remind yourself that the absence of a horrible year does not make it a good year. Avis has been a case study in predictability and execution only when framed vs. Hertz. Hertz has been on a crazy journey since 2016 that we have covered in other work (see Credit Crib Note: Hertz 5-14-24).

The travel volumes are mixed relative to what was expected for the travel sector, but pricing has been more of a challenge. Unit costs have been supportive. The seasonal 3Q period is always the peak season for car rental and travel patterns, so the year is shaping up well with FY guidance of $900 mn to $1 bn after $184 mn in adjusted EQBITDA for 1H25. That underscores how crucial the summer travel period is to annual EBITDA. That Sept quarter is typically well over half EBITDA in car rental names.

The exposure to massive swings in residual values are part of the history as cash effects as well as noncash fleet impairment charges such as Avis saw in 2024. The 2021-2022 period was one for the ages in how swings in residuals can cause dramatic moves in profit margins and cash flow. We have looked at those periods in detail in past commentaries (see links).

The above table details the main operating metrics of Avis. The good news on fleet costs per month saw the company get back to the $300 line on per unit fleet costs per month. Average fleet is modestly smaller in 1H25 vs. 1H24 after some slight growth in FY 2024 vs. 2023.

Fleet costs are the dominant line item that needs to be recovered in car rental rates with the main costs being the depreciation of the vehicle plus the financing costs of the vehicles in the funding structures. The prospects for lower interest rates thus looms large, and any interest rate movement lower on the short end of the curve would be a major win for Avis and Hertz.

The residual value risk factor for used cars has been picked over across prior commentaries and in used car commentaries on CarMax and Carvana. Generally, rising used car prices are perceived as positive by rewarding the sellers (car rental fleets) during seasonal downsizing. At the very least, the car rental operators do not want negative surprises on the estimated costs they sought to recover in rental pricing. They then get hit with a depreciation markup that is in substance a cash cost.

The tariff and vehicle cost issues are still being sorted out as OEMs make decisions on how much “to eat” on behalf of retail customers and how much to “cost share” (tariff cost share that is) with major fleet customers.

The above table highlights the trend line in fleet size, which is the core earning asset base that is generally funded separately by funding entities and securitization structures. Avis fleet size was growing again from 2021 to 2024 but has downsized YoY in 1H25. The Americas segment has grown from its size in 2019 while International has shrunk vs. 2019.

The framing of corporate debt (i.e. ex-vehicle funding entities) vs. car rental EBITDA is the critical metric for EV multiples and gauging where the equity valuation could be framed. The running 9.4x Net debt/EBITDA is not helping the current story, and Avis did not give leverage much airtime for obvious reasons.

The desire to see EBITDA at a minimum of $1 bn could get the company back into a more reasonable range for stockholders and lenders alike. As the table shows, the high margins of 2021-2023 placed Avis in a very different leverage zone with 1-handles for 3 years running.

The refi and extension activity has continued for Avis, who issued $600 mn of 8.375% bonds due June 2032 in May to repay the $500 mn floating rate term loan (drawn Feb 2025, due Dec 2025). During June 2025, Avis also repaid $100 mn of the 5.75% notes due July 2027.

With the unsecured debt issuance and refi of secured loans, Avis reduced structural subordination. At the very least, that reduction of asset encumbrances supports Avis by mitigating “rainy day contingency” risks of the sort Avis and Hertz discovered in 2020. Avis had ample room for refinancing and LOC support for vehicle funding in 2020. In contrast, Hertz ran out of lien room and ended in Chapter 11.

The vehicle funding structural nuances are something we addressed in earlier Avis and Hertz commentaries. Vehicle debt totaling $19.9 bn at 2Q25 is overcollateralized by a mix of vehicles, capital contributions, and letters of credit. The LOCs of $1.6 bn fall under the $2 bn senior revolving credit facility due 2028. Lower rates in the short end of the curve will be a blessing in the fall and into 2026 if those scenarios do play out. It is easier to be optimistic on the short rather than the long end.

The above table underscores the low capex intensity and tech-centric service nature of the core rental business. The commentary from Avis on their desire to invest in growth marks a change from the massive buybacks seen from 2021 to 2023 and the special dividend paid in 2023 after the residual value boom and record margins (see Credit Snapshot: Avis Budget Group 4-9-25).

The running tally of stock buybacks from 2021 to 2023 totaled $5.74 billion. If we add in the special dividend in 2024, we reach $6.1 bn in distributions to shareholders. That is where the total corporate debt stands at 2Q25. That offers a reminder of the cash flow generating power of Avis even if those 3 highly profitable years were not remotely normal.

See also:

Avis:

Credit Snapshot: Avis Budget Group 4-9-25

Credit Crib Note: Avis Budget Group 5-8-24

Avis: Gearing Up for a Transition Year in Fleet Costs 5-2-24

Avis: Credit Profile 8-3-23

Avis: Cash Flow Boom and the Swing in Car Rental 2-17-23

CPI Wrap for 2022: Beginning of the End? 1-12-23

Hertz:

Credit Snapshot: Hertz Global Holdings 6-12-25

Credit Crib Note: Hertz 5-14-24

Not Your Father's Hertz 2-7-23

• Toll’s July 3Q25 period saw modest gross margin pressures from a high base (25.6% 3Q25 vs. 27.4% 3Q24 with adjusted gross margins at 27.5% vs. 28.8%). TOL remains in the upper tier of the margin comps for the major builders.

• The equity market reaction was mild with TOL outperforming its large peers on earnings release day. That comes after some harsh reactions earlier in the year as some common headwinds were experienced across homebuilders (see Toll Brothers 1Q25: Performing with a Net 2-20-25).

• TOL equity had been the banner #1 performer across the trailing 2 years, but the trailing 1-year started from a strong position as weakness was racing into the builder equity performance in 4Q24 (after Sept 2024) before the recent rallies (see Footnotes & Flashbacks: Asset Returns 8-24-25).

• We have consistently viewed TOL credit quality as rock solid and the company underrated relative to the business risk, the metrics, the cash flow resilience inherent in the working capital cycles, the asset coverage, and the brand power. Toll deserves higher credit ratings with its stellar performance, mix of financial risk variables, and low industry risk.

• With net debt to capital of 19.3% on a book basis and 12.7% using market adjusted equity (8-25-25), TOL offers a lot of net asset cushion with inventory alone at 3Q25 totaling 5.7x net debt. That is impressive asset coverage.

The above stock return time series shows Toll Brothers (TOL) well ahead of D.R. Horton (DHI) and Lennar (LEN) as the Big 2 of homebuilding (#1 ranking depends on unit volumes vs. dollar revenues). DHI and LEN offer a broader view of the overall national housing market across more price tiers, and TOL fits in with the narrow luxury segment.

With TOL posting the highest average selling prices of the Top 10 public builders and DHI the lowest in that group, the three combined make for a useful frame of reference even if the median TOL homebuyer is not the median DHI or LEN buyer (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25).

As past commentaries have detailed and TOL routinely highlights on its earnings calls, the well-heeled customer base of TOL and the ability to design and price homes consistent with a healthy margin have been tested against a mixed backdrop of high mortgage rates. TOL is a differentiated way for the equity market to play the housing cycle than the average builder and the same fundamental distinction applies in credit markets.

The time horizon in the chart begins at the start of March 2022 when the tightening cycle sent short and long rates on a multiyear ride that saw mortgages in a 200 bps range from fall of 2023 through current days. We look at those UST curve trends in our rolling yield curve updates (The Curve: Powell’s Relief Pitch 8-24-25).

We add more time horizons for equity returns in the above chart, and we line them up in descending order of YTD total returns. The recent rebound is in evidence after a very rough path across 4Q24 and into the early spring with the rolling 1-month and 3-months period above underscoring the rally. TOL hung in better in the initial downdraft in late 2024 and early 2025, so had less room to rally.

We see TOL in the top 5 YTD at a modest +10.8% vs. Pulte at #1 with 22.0% and DHI #2 at +21.9%. Lennar is modestly positive at +4.2%. We see 1Y in the red for TOL at -6.0%, but the 2Y horizon ranks TOL at an impressive #1 with a +82% return.

On a broader industry note, the chart offers a reminder of how impressively the homebuilding sector performed well into the tightening cycle even with mortgage rates rising and the economy doing well. That came to a screeching halt in 4Q24, and now we are moving back into a bounce as noted in the chart. Toll is +33% over the trailing 3-months vs. +21.8% for the Homebuilder ETF (XHB).

The above table details the results of operations for TOL, and the numbers highlight the steady solid margins alongside resilient revenue and earnings. The 3Q25 quarter (7-31-25) saw a favorable volume variance at +5% along with a slight tick higher in average selling prices (ASPs) for the quarter but a weaker ASP trend YTD 9M FY2025. The 3Q25 home sales revenue line was in fact a record. Net signed contract value was flat YoY vs. 3Q24 while contracted homes by units edged lower by -4% with ASPs up +4.5% to $1.0 million.

The margin story is still constructive relative to the direction seen at other major builders. Home sales margins dropped to 25% handles in 3Q25 at 25.6% vs. 27.4% in 3Q24. Adjusted gross margin (ex-interest and inventory write-downs) was 27.5% in 3Q25 vs. 28.8% in 3Q24. These are strong margins in historical context as highlighted by the 2019 to 2021 margin history in the table. Guidance is calling for a 27.0% adjusted gross margin in 4Q25 and 27.25% for FY 2025.

The above table highlights the ASP trend line for the highest price levels among the major builder peer group. The ASPs for Toll are more then double the median national average for all new homes (see New Home Sales July 2025: Next Leg of the Fed Relay? 8-25-25). As always, the Pacific geographic segment is in its own price zone at over a $1.5 million.

The above table details the geographic revenue mix and trend line with the Mountain region leading the pack through 9 months just ahead of the South. The Mountain region is #2 in total units through 9 months at 2,335 units with the second lowest ASP at $874.9K. The South is #2 in dollar revenue through 9M 2025 but #1 in units at 2,456 with the lowest ASP of $823.6K.

The highest ASP region of the Pacific has the lowest volume at 933 but in a very pricey region. The #2 region in ASP is the North at over $1.0 million ($1,025K) but second lowest in units through 9M 3Q25 behind the Pacific.

The balance sheet is strong even if book value leverage ticked higher pro forma for the $500 million bond deal priced in June (5.6% of June 2035) that saw the redemption of the $350 million of 4.875% due Nov 2025.

Net debt to cap of 19.3% at 3Q25 was down sequentially from 2Q25 but up from 15.2% at 4Q24. The asset coverage metrics have improved with cash + inventory rising to 4.1x total debt at 3Q25 vs. 3.9x at 4Q24.

See also:

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Toll Brothers: Rich Get Richer 12-12-24

Toll Brothers: A Rising Tide Lifts Big Boats 5-23-24

Credit Crib Notes: Toll Brothers (TOL) 9-11-23

Toll Brothers F2Q23: Company Comment 5-25-23

Housing sector:

New Home Sales July 2025: Next Leg of the Fed Relay? 8-25-25

Existing Home Sales July 2025: Rays of Hope Brighter on Rates? 8-21-25

Home Starts July 2025: Favorable Growth YoY Driven by South 8-19-25

Other Homebuilders:

Taylor Morrison 2Q25: Resilient but Feeling the Same Macro Pressure 7-25-25

PulteGroup 2Q25: Still-Lofty Margins see a Mild Fade 7-23-25

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

• The H&E Equipment Services (HEES) deal closed in early June, and HRI needs to prove the higher financial risk can be easily navigated along with the integration of this transformative acquisition (see Credit Crib Note: Herc Rentals 12-6-24).

• The HEES deal sent leverage to 3.8x, and that is well above the range we see for the traditional BB tier balance sheet for this business with 2 handles more the norm in the BB tier. (Herc Rentals: Swinging a Big Bat 2-18-25)

• The cyclical questions will loom large into the tail end of 2025 in terms of how capital allocation will play out into 2026 with this healthy free cash flow generating business.

• We assigned a “negative credit trend” on Herc since the HEES deal (see Credit Snapshot: Herc Holdings 4-23-25) given the high leverage and execution risk. We still see the financial risk profile ahead of its credit ratings, but the history of this industry in sustaining credit quality is favorable with cash flow resilience and capex flexibility a feature.

• The good news for Herc bondholders is HRI credit quality is “performing with a net” with United Rentals posting a market cap almost 14x HRI and Ashtead 7x HRI in a consolidating industry. This is positive event risk symmetry.

The above stock chart highlights the healthy run for the leading equipment rental leaders across the COVID crisis, into the cyclical rebound, and then on across the inflation spike and tightening cycle that brought more than its share of volatility. Equipment leasing companies outperformed the broader market benchmarks over the post-COVID time horizon. The recent weakness of HRI has been notable but also unusual. Doubts around the H&E Equipment (HEES) integration process will need to be eased in 3Q25 and 4Q25.

Outbidding United Rentals for HEES was no small victory given HRI’s need to expand, but the aggressive move and the price tag raised questions on overpaying given the strategic importance of making a move. The HEES deal dwarfs anything that Herc has attempted since the June 2016 separation from Hertz, and the execution risk is not a small factor for shareholders.

The above time horizon table updates how Herc (HRI= Herc Holdings) has performed over multiple time horizons from very recent timelines back to 10 years. We line up the companies in descending order of total return YTD 2025. United Rentals and Ashtead are well ahead of HRI.

As the earlier stock chart has underscored since the end of 2019, HRI has been a solid performer and beaten the S&P 500 and Ashtead but fallen well short of United Rentals as the industry leader and juggernaut of M&A across the cycles. We see HRI really taking a beating YTD 2025 in its stock performance at -33% in the chart above and in the red zone for the trailing 1-year period.

The more recent periods have shown some backtracking for the industry after a very solid multiyear run. Even URI had faded from its 2024 peaks before regrouping and getting back on track. The multiyear megaprojects, steady industrial investment, and the cash benefits of the tax bill for equipment investment still carry the day when taken in tandem with the secular trends and a lot of scenarios for reshoring in the future – even if it takes a while.

The core customer markets across major projects (infrastructure, data centers, LNG, semis, utilities/power, healthcare, EVs/batteries, etc.) make for a story that always will get stock players back in the game on weakness. Free cash flow generation, flexibility in capex, and consistent shareholder enhancement and favorable capital allocation is just such an obvious part of the industry history at this point. The challenge for HRI is showing that they are a cheaper alternative in debt and equity and not just a struggling M&A story.

As we see with the other leasing issuers, the EBITDA margins are quite high but that also leaves room for replacement capex to sustain revenues and growth capex to expand the operations. One of the useful exercises in reviewing the equipment leasing operating results is they always come equipped with substantial information on end markets in their detailed slide packs (note: heavy on Dodge Analytics data).

From a top-down macro view, mega project starts are impressive in 2025 at over twice the level in 2024. Nonresidential starts are slated to climb each year from 2025 to 2028. Industrial spending will also be higher than 2024 in each year from 2025 to 2028. The same is true of infrastructure starts. That is a lot of activity.

We have covered the core operating profiles of equipment leasing operators in prior commentaries. Disciplined fleet management (supports pricing) and sustained growth in the business from so many expansion programs in mega projects are the main themes. That fits in well with the secular increase of leasing vs. owning in the “lease vs. buy” decision. Local accounts have been under pressure, but national accounts have been strong. The project pipeline is solid. As of 2Q25, Local was 53% of revenue and national 47%.

As noted in the chart above, operating results have posted solid numbers in terms of revenue growth and EBITDA margins as well as Rental EBITDA (“REBITDA”) and rental margins. Like the June quarter, the 3Q25 period will have more than a few underlying distortions with integration costs and some mixed results from the HEES side as customer disruptions and personnel changes unfold. There will also be some mix shifting as HRI pushes ahead on its specialty fleet adds while selling off a material amount of fleet in the merger.

For 2Q25, HRI posted +14% in rental revenue including the June 2 merger results but was -2% pro forma with Herc legacy branches at +4% and legacy H&E at -14.1% YoY. Mergers can be disruptive and that was clearly the case here. The systems will be integrated in 3Q25, so “legacy rollup data will no longer be available.”

The balance sheet realignment was certainly busy for Herc during 2Q25 with the HEES deal closing on June 2. By the book (literally), the net assets acquired totaled $4.83 billion including $2.2 bn of goodwill in the price tag. Since the end of 2024, total assets grew by $6.14 bn (including $1.8 bn of rental equipment) and total debt grew by $4.2 bn. The leverage of 3.8x is quite high for what we have seen in recent years for BB tier leasing companies, but HRI expects to be back in the 2x to 3x range by 2027. The rating agencies have given HRI a considerable amount of latitude.

The deal funding was multitiered to pay the price tag in cash and stock but also included some major refinancing demands of HEES debt and refinancing of the ABL lines that are actively used by equipment leasing companies. The funding checklist included $2.75 billion of new unsecured bonds, a $750 million term loan, $584 million in HRI equity, and $2.5 bn in new ABL borrowings that included $1.6 bn that needed to be refinanced.

The bonds came at a level that carried 7% handle coupons as part of M&A refinancings priced to sell, and those are good opportunities for HY investors. As we have covered in our Herc commentaries, we viewed the financial trend line for HRI as negative after this deal, and we believe that HRI presented more of a single B tier profile vs. the low BB tier composite assigned by the rating agencies. That said, Herc has the financial risk cushions and cash flow stabilizers that have come to be recognized in the equipment leasing issuer base. URI is the leaders of the pack with Ashtead at #2 and Herc a distant #3. A fund manager and income seeker was not going to let the 7.0% coupon pass by on the $1.65 bn 2030 notes or the 7.25% on the $1.1 bn 2033 notes.

The downside scenario for Herc bonds is a deep economic downturn and setback on valuation where HRI ends up owned by one of the Big 2 (notably URI are #1). The end markets for now remain steady as covered in our recent work on the major leasing issuers, but a cyclical contraction could wreak havoc in HEES’ integration and slow the deleveraging process. We don’t see that as likely. Confidence in the integration seems to be struggling as highlighted by the weak performance of HRI stock in recent periods.

The moving parts of capex and fleet planning across various locations and equipment types and managing new capex vs. equipment sales dominates what these equipment leasing companies do. Gross capex and net capex are moving quickly. HRI will see materially lower net capex this year as the integration continues and HRI rolls up the operations.

Incremental gross capex for 2025 guidance calls for $900 million to $1.1 bn. Net rental capex (gross capex less equipment sales) is estimated at $400 mn to $600 mn vs. $760 mn above. That is a reduction by almost 1/3 on outsized equipment sales and fleet integration focus. The increased spending on specialty is consistent with peers.

The 2025 free cash flow guidance calls for $400 mn to $500 mn. HRI already had started to significantly increase its equipment sales in 2Q25 in anticipation of integrating the HEES fleet for additional realignment. As of 2Q25, the fleet composition includes specialty (18%), aerial (26%), material handling (22%), earthmoving (14%), and a diverse bucket under “other” at 20%.

See also:

United Rentals: Cyclical Bellwether Votes for a Steady Cycle 7-29-25

Credit Snapshot: Ashtead Group 7-21-25

Credit Snapshot: Herc Holdings 4-23-25

Credit Snapshot: United Rentals 4-1-25

Herc Rentals: Swinging a Big Bat 2-18-25

United Rentals 4Q24: Strong Numbers Set the Table 2-2-25

United Rentals: Bigger Meal, Same Recipe 1-14-25

Credit Crib Note: Herc Rentals 12-6-24

Credit Crib Note: United Rentals 11-14-24

Rental Equipment: A Cyclical Confidence Booster 9-15-23

Ashtead 4Q23/FY 2023 - Company Comment 6-14-23

• We update Iron Mountain’s financial and operating profile for mid-2025 as double-digit revenue and EBITDA growth, very strong discretionary cash flow, and a sustained high rate of growth capex remains a core part of the valuation story line. IRM 2Q25 posted record revenue, record EBITDA, and record running growth capex while keeping leverage stable.

• The exceptional performance in the equity markets vs. comps in recent years relative to REITS, data centers and market benchmarks started lagging after such a great run, but double-digit revenue and EBITDA growth to across-the-board records was accompanied by an upward revision in guidance.

• Despite record capex and higher total debt levels, we see stable debt leverage metrics on rising revenue and EBITDA. The one-two punch of legacy business free cash flow and valuable higher margin reinvestment opportunities in attractive growth businesses (notably data centers) make IRM a very different company than the legacy income stock and HY bond issuer of bygone days.

• IRM has a hybrid business mix with extensive, granular disclosure that can make picking up coverage of the name a challenge, but IRM is one worth following in credit as well as in equities. In credit, IRM is the #8 issuer in the BB tier and #15 overall in the HY index. The cap structure includes a major revolver and term loans on a global scale.

• The business mix weighting is shifting gradually toward data centers and digital services but those remain in the minority of revenues relative to legacy high margin physical storage operations. The growth segments have been a big part of the shift in equity valuation metrics as well as dominating the capex budget. For IRM, “growth capex” dwarfs recurring capex as we frame further below. The recent 19x EV multiple at 2Q25 is a long way from the low teens in the pre-COVID period.

• IRM has not been broadly covered in equities by the “street” data center or REIT analysts despite the sustained growth on both sides of the balance sheet and its sheer scale. IRMs rise in the S&P 500 rankings over the past decade (low 300 range now) and bond market presence make it a priority name.

The above chart plots the stock return timeline for IRM since the end of 2019. It has been quite a ride (disclosure: we have been in and out of IRM stock over the years but no current ownership). We plot the return time series for IRM against the S&P 500, the NASDAQ and the REIT-heavy real estate ETF (XLRE). In the following time horizon table, we also compare IRM vs. the digital infrastructure and real estate ETF (IDGT) that includes numerous data centers. The weakness of REITs during markets with rising rates make IRM stand out even more.

As evident in the chart above, the impressive run in IRM equity started to fade in 2024. That does not mean the financial fundamentals are stalling, but the dip is more about framing the relative equity valuation and growth potential in 2025-2026. The recent weakness is more in the context of how far the IRM equity had already run.

As we said back in our December 2024 note on the company: “Even if a stock watcher is of the view that the stock is rich and has come “too far, too fast,” the credit quality comfort is in the revenue and EBITDA growth and the discretionary nature of the major growth capex programs. In other words, if markets slow down, so will the pace of growth capex as a stabilizer of financial risk metrics.

For credit investors, the steady growth and solid profit margin profile matches up well with a very deep asset base. IRM is an asset-heavy operation with a services stream of earnings that has clear growth prospects ahead. The bullish growth potential is underscored by its capex numbers and the empirical evidence in its data center growth.

IRM has seen the expansion of a range of digital services operations and emerging businesses such as Asset Lifecycle Management. IRM tells a good story of cross-selling and how the natural economic path of so many data and storage businesses feed into new revenue streams.

The above chart offers various time horizons vs. broad market indexes and some additional ETF benchmarks. The results highlight the superior performance across the cycles and steady execution across a cycle that included a pandemic and the first Fed inflation fighting bout since the early 1980s. The trailing 2 years, 3 years, 5 years and 10 years stand out vs. comps. The comparison with the REIT-heavy Real Estate ETF (XLRE) and the data center heavy IDGT ETF offer some useful frames of reference.

We have been tracking Iron Mountain for almost a decade, and the transformation has been very impressive as IRM converted to REIT status (effective 2014) and shifted its business mix into more growth markets across data centers, asset life cycle management services, and digital solutions for data and documents. We have covered those issues in detail in past commentaries (see links at the bottom), so we don’t have to revisit those topics here. IRM is in many ways a peer group of one, but IRM frames up well vs. narrower industry leaders.

The main themes are higher growth and higher value business lines in expansion mode. Importantly, we need to flag the anchors of exceptional gross margins and low capex intensity in legacy storage business lines that “feed” reinvestment in its growth capex operations. IRM can boast the proven depth of readily available funding sources in the unsecured bond markets from BBB tier buyers stepping down across the speculative grade divide and reliable demand from the higher quality BB HY buyer.

We drop in some bellwether REITS and Data Centers in the table above along with some major HY market services companies. These offer some logical frames of reference and notably for those playing in higher quality and mainstream HY names. We line them up in descending order of trailing 1-year equity returns. The chart offers some food for thought on industries that are often pummeled by rising rates (REITs) and those that have reaped the rewards of the data center boom.

There are some that are idiosyncratic stories (e.g. Aramark, ADT) as well as some secular growth stories with strong cash flow fundamentals that were also winners. Looking back across the years, United Rentals and IRM showed the ability to push through a tough tightening cycle as well as COVID turmoil. URI is clearly an unusually strong story (see Credit Snapshot: United Rentals 4-1-25). In equities, the valuation run for IRM is now facing some challenges as it outpaced some market views on sustainable growth metrics, but the credit story is stronger than it has been across this timeline history.

With a low BB tier composite credit rating in the HY index, IRM is on the short list of “most overdue for an upgrade” (and has been for a while). That is especially the case in light of how it has grown and its overall metrics relative to BBB tier REITs. IRM credit ratings are a victim of IRM’s own distinctive business mix in getting treated like a HY Services operation and not a REIT and tech play.

The credit ratings tend to treat IRM like a HY services company with a 5x leverage metric as opposed to a massive cash flow generator that is asset rich in key growth sectors at the same time as posting high margins with slow-growth legacy businesses offering recurring high margins and high cash flow. The legacy business differentiates IRM from other data center operations in being there to support growth capex and recurring dividend requirements consistent with its REIT status. The 5x lease-adjusted leverage for such an asset rich, high margin growth story is not a HY balance sheet. It is IG quality.

The evolution has seen IRM shift from a pure income stock “back in the day” with low multiples, high dividend yields, and high leverage (and a legacy HY bond issuer) to an increasingly tech-centric growth story with higher margins and very healthy discretionary cash flow. IRM posts a high EV multiple over 19x at 2Q25) that is almost 4x IRM’s leverage ratio. Despite that valuation profile, the extraordinary growth of the asset base has not gained IRM much traction with the credit rating agencies.

From our vantage point, a company with a 19X EV multiple vs. leverage of 5x (even if using EBITDAR based-metrics) makes for a very strong financial profile. IRM’s very high margins in its legacy storage business and rapid expansion and increasing share in high growth business lines such as data centers offer a lot of comfort. That all makes for a good cyclical and secular story.

The above table underscores the theme of growth in revenue and EBITDA along with 30% handle EBITDA margins. IRM cited all-time records for revenue, adjusted EBITDA, and AFFO (Adjusted Funds from Operations). As highlighted by IRM: “Data center, digital, and asset lifecycle management (ALM) businesses collectively grew more than 30% (for 2Q25).” That growth rate in high margin businesses has overhauled the context for evaluating credit risk as well.

IRM highlighted it is on track for its 37th consecutive year of organic storage rental growth. IRM also flagged 26% organic storage growth in data centers. IRM’s “commercial” highlights its global scale and cross-selling opportunities within a large and a well-established client base as they enter new service lines. The IRM sales pitch has been consistent across time, and it has been backed up by IRM’s numbers and execution.

The above table updates the segment results, and we see revenue and EBITDA growth that still translated into EBITDA margin expansion in 1H25 even if data center segment margins narrowed slightly for the 2Q25 period to a still lofty 50.8%. For 1H25 in Global Data Centers, we see higher revenues from organic storage rental growth and material YoY margin expansion on “lease commencement, improved pricing, and cost containment.” In other words, there are favorable results on the other side of the record growth capex.

The increased revenue and margins in the RIM segment for 1H25 organic storage rental growth and pricing power while organic growth in RIM services was in part tied to digital solutions services growth and higher volumes in legacy services mix.

The gross margin of over 70% (not shown above) in legacy storage rental (Section V in the quarterly supplemental disclosure document) is always worth highlighting since it serves as a massive cash flow generator that helps feed the cash flow available for dividends and growth capex.

“Corporate and Other” has an asterisk on it as detailed in earlier commentaries since it is not just a catch-all for “other corporate” as we often see in segment disclosure. The corporate segment includes Asset Lifecycle Management (ALM) operations and related services with $362 million of revenues set against the corporate segment expense base.

The above table updates the balance sheet trends of IRM as assets and debt both keep growing along with revenues and EBITDA. We see $15.6 bn in total debt at the end of 2Q25, and that includes around $9.3 bn in index bonds housed in the HY index and BB tier. As noted earlier in the bullets, that amount of bonds makes IRM #15 in HY index rankings and #8 in the BB tier. IRM’s position in the S&P 500 is around #314.

We are always surprised that IRM gets relatively low research focus in debt and equity. That is now changing with the data center play on the name, but more than a few data center purists will not pick it up and some REIT analysts duck the name. On the flip side, some legacy business service analysts do not want to let it go.

For the narrow balance sheet story, the level of detail in the debt footnotes each quarter is daunting given the global scale and multicurrency array of facilities and goal of managing currency risk vs. their revenue and asset currencies. The array of Revolvers, Term Loans, Mortgages, nondollar layers, and leases makes for a complex capital structure that may actually have held back the credit ratings. The granular disclosure and long history of the company in the markets and its global scale across 61 countries paints a picture of a disciplined and prudent liability management operation.

During 2Q25, IRM amended the credit agreement and increased the Term Loan A. IRM increased and extended the Aussie Dollar Term Loan. As noted in the table, the 5.0x lease adjusted leverage is well inside the requirement. Definitions and carve-outs with the banks have morphed over time and the “rent-adjusted” factor moved lower from 8x to 6x rent back in 2018.

IRM’s global scale and reach feeds into the data center story when many nations have data centers high on their priority list from the Middle East to Asia and Europe. That is especially the case where low-cost power is a competitive edge (Middle East).

The above table updates the capex mix across “growth” vs. “recurring.” The growth component dominates the capex story at over 94% of total in 1H25 and 91% in 1H24. The absolute levels of growth capex rose by 53% in 1H25 vs. 1H24, and that was after a 41% increase in growth capex during 2024 vs. 2023.

We have covered capex issues in earlier commentaries, but we would again highlight that growth capex multiplied by over 5-fold from 2018 to 2024 in a sign of IRM’s aggressive expansion in data centers, which rose almost 9-fold on the growth capex line from 2018 to 2024. Data centers accounted for 81% of total growth capex in FY 2024 and 89% of growth capex in 1H25.

The projected FY 2025 capex provided by IRM calls for $1.95 bn total in FY 2025. That is certainly consistent with the recurring headline commentary in the markets and from so many service providers and suppliers to those sectors including equipment rental.

For purposes of credit risk, the capex line is reassuring in magnitude given the discretionary nature of the planning and the ability to adjust the capex strategy over time with the operations set against much-enlarged revenue, EBITDA and cash flow base as some of these mega projects mature.

The equity markets are still wrestling with how to price all this growth into the IRM valuation as we saw the massive run in IRM equity falter in 2024. For credit quality, the outlook is positive as the revenue and cash flow performance is an anchor along with the exceptional asset coverage.

The above table updates the usual metrics from REIT guidelines and the traditional GAAP funds flow disclosure. Again, the capex line is the one that jumps off the page and which is consistent with all the mega project and data center headlines we all routinely see.

As covered in earlier commentaries on IRM (see Iron Mountain: Credit Profile 4-15-23), the dividend story line is one that tweaks the analytical framework given the REIT status and related requirements that they break out in detail in their usual SEC filings. Unlike the typical HY issuers analysis, you analyze debt funding needs for growth after giving weight to the projected dividend – not before.

At times we have heard people say “they are borrowing to pay their dividend” (a no-no in credit analysis 101). In fact, IRM is planning their debt funding needs after the dividend to fund the growth strategy that has driven a great stock valuation trend for IRM and stellar financial metrics. We see both sides of the balance sheet growing (total debt and total assets) and we see basically everything growing (Revenue, EBITDA, capex) which in turn allows for “organic leverage declines” or stable balance sheet metrics on rising EBITDA. We covered that in the balance sheet section of our IRM work.

See also:

Credit Snapshot: Iron Mountain 4-15-25

Iron Mountain 4Q24: Performance Bar Gets Raised 2-15-25

Credit Crib Note: Iron Mountain 12-18-24

Iron Mountain: Good Climb, Summit Unknown 11-10-23

Iron Mountain: The Quiet Man 4-16-23

Iron Mountain: Credit Profile 4-15-23

• The equipment rental business has always been one of our favorite indicators for cyclical end market signals whether in non-residential construction or across the wide range of industrial verticals on the other side of the lease. URI is sending more favorable vibes than we picked up from Ashtead in terms of capex guidance and as URI offers color from its Customer Confidence Index.

• The value of the URI guidance is rooted in the depth and breadth of its customer base with 1,615 North American branch locations and over 27K employees that all roll up into a very useful lens to gauge customer activity and expectations. The resilience of the URI capex program and related guidance is another vote of relative optimism during June quarter earnings.

• URI jumped on earnings day by almost 9% as the buyback program grew by $400 mn and guidance was generally affirmed at the midrange for capex and EBITDA. The increased buyback guidance was based on the incremental cash flow impact of the bonus depreciation terms of the tax bill, but the capex guidance is to us the main cyclical gut check each quarter. Gross and net rental capex were unchanged.

• Solid growth in Specialty Equipment, EBITDA margins in the mid-40% range, and favorable secular growth in leasing vs. buying are the usual anchors for optimism on free cash flow and low leverage that support the credit profile.

The above chart frames the running performance of the equipment leasing equities vs. the S&P 500 since the end of 2019. The easy takeaway is that all 3 beat the S&P 500 over that timeline even as Herc Holdings took a beating today after its earnings.

United Rentals (URI) is a clear winner by a healthy margin on its exceptional growth trajectory fueled by M&A and heavy reinvestment (see Credit Snapshot: United Rentals 4-1-25, Credit Crib Note: United Rentals 11-14-24). URI’s stock jumped higher by almost 9% with its earnings report last week as its buyback guidance was increased. URI equity is higher by around 17% the past month including today’s weakness.

Ashtead and its Sunbelt unit have lagged URI in relative terms after a great decade of expansion (see next chart), but Ashtead is still ahead of the broad market (see Credit Snapshot: Ashtead Group 7-21-25). Herc Rentals (HRI Holdings) was pummeled today after its earnings report with the stock off by over -17% as we go to print. That continues a volatile history. Even with that effect. HRI has had a good run across this latest cycle.

As we cover in our Herc Rentals single name work, we have been negative on the credit story given HRI’s rating in the BB tier and the post-deal leverage and execution risk (see Credit Snapshot: Herc Holdings 4-23-25, Herc Rentals: Swinging a Big Bat 2-18-25, Credit Crib Note: Herc Rentals 12-6-24). Herc will be an adventure, but if they lag, they could just as easily end up owned by one of the Big 2. URI’s market cap is over 13x that of HRI.

With 7% handle new issue coupons in a very tight market and a distinctive industry profile in portfolio context, it was easier to get comfortable with Herc new issue bonds in its recent M&A refinancing in June. That was a matter of price, and the deal was placed as a single B tier value at the time. The rating agencies have certainly given Herc Rentals (HRI) a lot of credit for executing on a balance sheet repair program.

As we have covered in the past, the equipment leasing industry has demonstrated its lower business risk profile over and again and the cash flow flexibility and low leverage of URI especially should earn more benefit of the doubt at this point for across-the-board IG ratings on URI unsecured debt.

The above table offers a broader review of the equity returns for some notable manufacturers of capital goods combined with the Big 3 equipment leasing companies (URI, Ashtead, Herc). We set the return timeline at Friday close, and we should flag that HRI is now at just worse than -34% YTD (-17% for HRI so far on the day) as the market reacts to the HRI earnings release. The table above also details the S&P 500, the Industrials ETF (XLI), and the Equal Weight S&P 500 (RSP).

The comp chart shows equity returns across a range of time horizons. We line up the companies, ETFs and benchmarks in descending order of YTD total returns. URI certainly distinguishes itself in the group over a range of time horizons and notably over 5 and 10 years as well as before and after COVID. Ashtead also posted a very strong 10 years but has faced more headwinds in recent years.

The aspect of the table above that might be a surprise to some is how well so many of the equipment manufacturers have done YTD. Some of the names are global in scale and some more US-centric. As the recent asset returns highlight, the Industrial ETF (XLI) has been a very solid performer as the conviction runs high that the most damaging trade war risk will be averted (see Footnotes & Flashbacks: Asset Returns 7-27-25). That scenario has clearly worked well for optimists as the in-substance capitulation of the EU and Japan drives home (they of course will not frame it that way). Those outcomes with the EU and Japan do not bode well for the size of the Canadian and Mexico seat at the table.

The above table highlights the steady growth of the core rental business with URI rental revenues almost doubling off the COVID lows. The total revenue line highlights the activity in the fleet with the recurring sale of equipment and reinvestment in fleet expansion via capex or acquired fleet.

The simple way to look at the plan from a financial risk perspective is that URI grows its asset base faster than its debt whether it is “buying EBITDA” via M&A or investing heavily in fleet growth via capex. The balance sheet has become stronger even while returning cash to shareholders. URI’s results and the market reaction to their strategy have been impressive. The only ones moving slowly are the credit rating agencies.

The URI story has been one of ongoing expansion of its fleet, broadening of its equipment categories and geographic clusters, and achieving a level of diversification that all adds up to lower portfolio risk in the classic sense.

URI was a major beneficiary of the fiscal support and industry trends that cut across mega projects in infrastructure, data centers, energy (notably LNG), power, semis, and the upside from theoretical reshoring/re-industrialization. Reshoring hopes includes major industries on the other side of protectionism (pharma, metals/mining, auto capacity redeployment from Mexico and Canada, etc.).

The mid to high 40% handle EBITDA margins have been consistent, but URI is seeing some mild compression YoY in 2025. A 45%+ margin leaves a lot of room for capex and capital allocation flexibility and to fund buybacks and dividends as noted in the cash flow chart detailed further below.

The above table highlights the segment trends with Specialty generating higher margins than the General Rentals mix but both segments generating record revenue run rates. Specialty rental revenues climbed by 14% YoY for 2Q25 and by 17.6% in 1H25.

The above table underscores the strong balance sheet of URI with the past two years ending comfortably below 2.0x leverage as organic deleveraging on rising EBITDA continues to be a hallmark of URI. The longer-term financial trends show URI’s ability to grow its revenue, cash flow and asset base at a rate well in excess of growth in debt. For one frame of reference, URI’s total asset base has increased by over $10 bn since 2019 while total debt has risen by less than $2 bn. Leverage of 1.8x is down sharply from 2.6x in 2019.

As we see in the URI stock performance since 2019 captured earlier in this note, the post-COVID expansion has seen URI grow its business meaningfully by capex, reinvestment and acquisition. High margins are sustainable, and URI has regularly demonstrated its ability to allocate free cash flow in a balanced fashion to reward shareholders and protect credit quality.

The resilience of URI’s financial risk profile has been demonstrated across a TMT bubble that burst only a few years after URI’s IPO, a housing bubble meeting an even worse fate, a systemic bank crisis that saw the longest recession since the Great Depression, a pandemic, and the first major inflation cycle in 4 decades that triggered an aggressive FOMC tightening. That is more than a real world stress test for the industry, but it also speaks to the resilience of a US economy that is larger and more diverse than ever despite myriad policy risks and trade tensions.

The above table frames the scale of acquisitions, stock buybacks, and dividends across time. URI can line up a $1 bn acquisition as a matter of routine and easily fund them with ABL lines and unsecured bonds in whatever combination they choose and even do 100% unsecured bonds up front. Along the way, URI just keeps throwing off free cash flow.

When URI buys a major equipment leasing operation, it is always good to keep in mind a hefty base of EBITDA and some more product and customer diversity come along with cross-selling opportunities (in both directions) in those deals.

The double-digit billions of dollars of deals across the decades and successful track record make the acquisition line in the chart above a positive for equity holders and neutral for bondholders. URI has gained such a reputation in M&A that when Herc stepped in front of URI on the HEES deal, the more immediate assumption was that HRI must have overpaid. HRI needed to make a move to play catchup, and that was a separate factor.

The above table details the moving parts of operating cash flow, capex, and how that flows into free cash flow. The history is very reassuring for lenders and equity stakeholders. The very high EBITDA margins in equipment rental come with the asterisk that there is an embedded capex need to sustain that revenue base. The level of replacement and maintenance capex vs. growth capex is not as transparent as it used to be, but there is no changing the intrinsic competitive advantage of being able to purchase on such a scale. URI can realize superior utilization of the assets with captive labor cost leverage in areas such as fleet maintenance and repair. They also can manage the fleet size through a deep secondary market for used equipment, again highlighting financial flexibility.

See also:

Credit Snapshot: Ashtead Group 7-21-25

Credit Snapshot: Herc Holdings 4-23-25

Credit Snapshot: United Rentals 4-1-25

Herc Rentals: Swinging a Big Bat 2-18-25

United Rentals 4Q24: Strong Numbers Set the Table 2-2-25

United Rentals: Bigger Meal, Same Recipe 1-14-25

Credit Crib Note: Herc Rentals 12-6-24

Credit Crib Note: United Rentals 11-14-24

Ashtead 4Q23/FY 2023 - Company Comment 6-14-23

• In a very busy week for homebuilder reporting, Taylor Morrison (TMHC) posted up a reasonable quarter in industry context including higher volumes that more than offset lower prices and generated higher home sales revenues. Then again, the lower orders at TMHC reinforce the housing sector pressures we have heard about in other earnings calls.

• We still see TMHC well positioned to be investment grade on the balance of factors, but the balance sheet progress has been slowed in the capital allocation balancing act. Inventory remains more than triple total homebuilding debt, and the cash flow resilience has a lot of risk-mitigating value for bondholders during a period of cyclical debate.

• The macro crossroads for homebuilders right now is a cyclical slowdown that could feed more optimistic mortgage rates and yield curve scenarios that would give the housing sector the lift it needs if mortgage rates retrace to the 6% area seen with the Sept 2024 easing.

• The flip side of the favorable mortgage rate scenario is any tariff-driven inflation or stagflation would take a negative toll. Any setback in housing would need portfolio context since a curve steepening or stagflation bout flows into a lot of portfolio line items and a broader repricing of credit risks. Homebuilders have the intrinsic cushion of inventory liquidation that generates cash flow in slowing markets.

The above chart frames TMHC against some other bellwether BB tier homebuilding bond issuers – KB Home (KBH) and Tri Pointe (TPH). TMHC is a name we have had a positive view on and still do in peer group context (see Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25, Credit Crib Note: Taylor Morrison Home Corp 5-20-24).

TMHC is a solid high BB tier composite and remains well positioned even though the builders are heading into a soft patch as covered in our housing sector macro commentaries and single name work (see links at bottom). TMHC has 3 index bonds with relatively short maturities (2027, 2028, 2030) and 5% handle coupons.

The above table details the operating results for TMHC with the headline numbers showing higher home closing revenues for 2Q25 and 1H25. Financial services revenue is also higher for both 2Q25 and 1H25. As we detail in the next chart, TMHC posted higher volumes in 2Q25 but slightly lower ASPs.

The wind down of the peak period in 2025 will see the housing sector turn on pricing strategies and mortgage rates. The homebuilders – like the potential existing home sellers – need to make a decision on pricing to clear the market and push transaction volumes higher. Many potential buyers (first time or move-up) are waiting for a clear read on where mortgage rates will head in the broader market whether that UST move is tied in part to the fed or to the broader economic and inflation impacts (tariffs, etc.) on the 10Y UST that drives 30Y mortgage rates.

The above table digs into the three geographic segments and related metrics. The homebuilders tend to be more creative in how they classify different regional segment breakdowns. The “East” for TMHC is heavy on Florida metro areas and also includes Atlanta and Charlotte. “Central” includes the major Texas metros plus Denver and Indianapolis. The “West” includes Southern California, the Bay Area, Sacramento, Las Vegas, Phoenix, and Seattle as well as Portland.

As a reminder (see Credit Crib Note: Taylor Morrison Home Corp 5-20-24), TMHC made its big expansion push with the acquisition of AV Homes in 2018 and William Lyon (announced 2019, closed Feb 2020). Those deals took TMHC into the upper tier of builders (note: you see the jump in revenue above and assets below from 2019 to 2020).

For the 2Q25 quarter, we see favorable volume trends in the East with closed homes higher and a decline in orders. For Central, closed homes also rose but orders declined more sharply. The West was “flattish” in closings but also down in orders. The TMHC metrics across regions is a reminder that the timing of community openings and the use of incentives and pricing strategies is still a “quarter-in, quarter-out” battle.

For the 2Q25 numbers in the most recent report, the East gross margins declined from 26.3% to 23.7% for the 3 months. The Central segment saw 2Q25 gross margins drop from 25.3% to 21.9%. The West held in better with segment gross margins rising from 20.8% to 23.1%. For six months, the East decline was more muted at 26.6% to 25.2% while the Central numbers saw a decline from 25.7% to 23.1%. The West weighed in with a rise in gross margins from 20.4% to 23.3%. In industry context, these are good margins and higher than the 2019-2021 levels at TMHC.

The above table updates the balance sheet history, and we see assets more than doubling from 2017 on the AV Homes and William Lyon acquisitions as well as on organic growth and steady investment that ran alongside the ZIRP years and a range of housing trends covered in other commentaries. The seasonal downtick of cash with the inventory build and buybacks is not significant at this point.

The above table breaks out some book value leverage metrics and asset coverage ratios we like to use to frame the relative balance sheet comfort zone in a slowdown. The ratio of owned inventory to net debt of 3.6x is solid and especially when you consider that any slowdown or defensiveness around inventory levels can drive house/lot liquidation and generate more cash flow. It also typically leads to slower growth plans or an outright decline in land spend and development outlays.

The total inventory to total homebuilder debt ratio of 3.4x is also quite strong even if nowhere near the much higher multiples seen with high BBB and low A tier builders. TMHC bonds trade more like a BBB tier corporate issuer than a BB for good reason.

The above table gives a simple view of some key cash flow lines with the main one for TMHC being its relative scale of buybacks across time since the last fiscal year before COVID. For some context on the rate of buybacks in 2025, TMHC indicates the company will buy back at least $350 mn in shares relative to an equity market cap of $6.0 billion (7-25-25). That is a relatively aggressive buyback at just under 6% of market cap (note: TMHC does not pay a dividend).

Housing sector:

New Home Sales June 2025: Mixed Bag 7-24-25

Existing Home Sales June 2025: The Math Still Doesn’t Work 7-23-25

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

Homebuilders:

PulteGroup 2Q25: Still-Lofty Margins see a Mild Fade 7-23-25

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

• Pulte (PHM) continues to post some of the best gross margins in the peer group at 27%, down from the 2022 peak of 30% but still well ahead of pre-COVID levels. Average selling prices held in well in the upper quartile of the major public builders but net new orders faded with backlogs running lower as we have seen frequently with the major builders.

• PHM was quite clear it was planning for continued sector weakness and would slow land spend, reduce start rates, and focus on selling down excess spec inventory. That reflects the intrinsic working capital and operational flexibility that makes homebuilders safer in the credit realm than high fixed cost manufacturers or commodity-driven issuers.

• In terms of credit quality, Pulte still deserves to be moved up into the single A tier with NVR and D.R. Horton on the balance of its financial metrics, profitability performance, and balance sheet strength (see Credit Snapshot: PulteGroup 5-7-25, Credit Crib Note: PulteGroup 8-11-24).

The above chart frames price returns of PHM stock vs. Lennar for a useful comp given the very different strategies employed by Pulte vs. the #1 homebuilder based on revenue. We also include the S&P 500 for a broad market benchmark as well as the Homebuilder ETF (XHB) for the trailing 1-year period. The homebuilder pain set in during 4Q24 after a stretch of leading performance by the XHB over the trailing 1-year ending in Sept 2024.

The high margin focus of PHM contrasts with the “even-flow” and “price to sell” strategy used by Lennar to keep inventory turning and in theory maximizing cash flow for buybacks and helps manage supplier costs and relationships (see Lennar 2Q25: Bellwether Blues 6-20-25, Credit Snapshot: Lennar (LEN) 4-15-25, Credit Crib Note: Lennar Corp (LEN) 1-30-25). The idea is that keeps LEN cash flow cranking up. The high margin players such as Pulte and luxury homebuilder Toll Brothers have held in better in the stock market across this rough patch (see Credit Snapshot: Toll Brothers 5-5-25), so LEN’s long game approach has not won the short-term stock performance contest.

The above table updates the income statement trends for the most recent fiscal quarter ending in June (2Q25 for PHM). We are seeing revenue softening with PHM expecting more of the same market conditions ahead. PHM margins have been solid in peer group context at 27%, and PHM is guiding to 26% handle home sales gross margins for the 3Q25 and 4Q25 periods. The goal is to trim spec inventory down into a target range of 40% to 45% of production by year end from 47% at the end of 2Q25.

The wildcard will remain mortgage rates and the usual underlying variables debate that plays out on the screen each week (see Footnotes & Flashbacks: State of Yields 7-20-25). The yield curve anxiety around the Powell vs. Trump battles go beyond easing and lower short rates since disarray in the bond markets and the potential for Trump and Bessent to be on the wrong side of the tariff inflation debate would lead to UST curve steepening even with the front end easing. That would hit mortgage rates.

The above table updates the running weakness in volumes (closing and orders) with ASPs for PHM actually ticking higher in 2Q25 and YTD just as we saw in FY 2024. The 2Q25 ASP of $559K is in line with the $560K to $570K PHM expects in 3Q25 and 4Q25 and for the full year. The community count is expected to be 3% to 5% higher by year end.

Orders have faded in 2025, and that is not unusual in big builders reporting during 2025 as the backlogs broadly are running down. Some of the smaller public builders in growth mode are heading higher, but generally we see weakness in orders YoY as a common trend in 2025. As we cover in a segment closing chart further below, weakness in Florida and Texas, which are two massive housing markets, have not been offset by other regions even though the Midwest and Northeast performed well enough in 3Q25.

Among the items addressed on the earnings call, PHM continues to estimate a cost of $5,000 per unit for tariff costs in addition to incentive costs over 8% of gross sales vs. 6.3% in 2024. Both incentives and tariffs are still drags in 2025. In terms of tariffs, PHM sources around 20% to 25% of its lumber from Canada and the rest from the US. PHM cited the back half of 4Q25 for when tariffs would be hitting harder and continuing into 2026.

The segment earnings table above highlights the importance of Florida and the Southeast with Texas a high volume but lower earnings segment. Texas has by far the lowest ASP at $383K in 2Q25 while Florida was running at $551K. As is typically the case, the West at an ASP of $693K is a pricey segment but the Northeast leads in ASP at $770K for 2Q25 and $756K for 1H25. The West and Texas saw the steepest declines in YoY in new orders in the quarter.

The above table updates the closing volumes and the mix by regional segment with the Northeast by far the smallest and Florida the highest. West and Southeast are in the next tier. Among headwinds PHM cited was some softer performance from the move-up segment that carries higher margins.

The balance sheet of Pulte is exceptionally strong just based on the significant multiple of total debt seen in the inventory/debt ratio at 8.9x and the net debt % cap of 2.8%. Total homebuilding debt of $1.6 bn is dwarfed by the asset side of the equation. With higher margins and steady growth (PHM expects to grow by 5% to 10% longer term), that financial health in turn translates into an equity market cap of close to $22 bn. That is a favorable vote from the market proxy on very hefty asset coverage in the PHM credit story.

The cash flow generation strengths of the major builders and the aggressive capital allocation policies around buybacks is now “a given” for investors with the large public builders. Pulte is no different with its $1 billion-plus run rate YTD after $1.2 bn in 2024. In terms of cash flow deployment, during 1H25 PHM invested $2.5 bn in land acquisition and development and is on a path to $5 bn for the full year. PHM could see downward adjustments in 2H25.

Housing sector:

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

New Home Sales May 2025: Slip and Slide 6-25-25

Existing Homes Sales May 2025: Sequential Stronger, YoY Weaker 6-23-25

Homebuilders:

D.R. Horton 3Q25: Material Slowdown Still Good Enough 7-22-25

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

• The market justifiably has been anxious about the housing cycle and homebuilder expectations, but a big week for major builder earnings is already demonstrating the financial resilience even in the face of high single digit declines in revenue. We had D.R. Horton and Pulte on the screen today with steady sequential margins, resilient cash flow and constructive guidance that eases some anxiety even if volume and pricing are down YoY for DHI.

• Closing volumes for the quarter beat the high end of guidance. Forward revenue guidance for FY 2025 was tightened and raised on the low end. Buybacks estimated for FY 2025 bumped higher from $4.0 bn to a range of $4.2 bn to $4.4 bn with dividend guidance flat at $500 mn. The capital allocation offers a fresh reminder of the exceptional cash flow fundamentals of the major builders.

• Orders were flat for the June quarter (3Q25) while home closings were down by -4.1% YoY. The homebuilding gross margin of 21.8% was flat sequentially but down YoY from 24.0%.

• Balance sheet liquidity and leverage remains extraordinary for a low A tier issuer with homebuilding inventory 12.5x net homebuilding debt. The stand-alone entities separate from the homebuilding operations are also stand-alone borrowers where the credit is not guaranteed by the homebuilding subsidiaries (see Credit Snapshot: D.R. Horton 4-28-25 , Credit Crib Note: D.R. Horton (DHI) 8-8-24, D.R. Horton: Credit Profile 4-4-23). That adds some extra asset protection value to the DHI bond story, but the consolidated leverage is quite low regardless.

• This week will also see other major builder earnings and more signals on the housing markets from NVR, Taylor Morrison (TMHC), Meritage (MTH), M/I Homes (MHO), and Century Communities (CCS).

The above stock price return series frames the punishing stock price action for the homebuilders after leading the trailing 1-year return through the end of Sept 2024. As national scale bellwethers and industry leaders, DHI and LEN served as a housing sector proxy and underperformed the broader market and Homebuilder ETF (XHB), which also includes some major suppliers.

We cover the key drivers in our housing sector and single name research (see links at bottom), so we won’t revisit much of that here. In a “price x volume” business, volumes have been going the wrong way but pricing is also now struggling. The mix asterisk (region, product tier) is intrinsic to any time series on average selling prices, but the pressure has been forming for a while now.

The worry over a flagging consumer has been a recurring theme despite some constructive data points such as retail sales last week. Stubbornly high mortgage rates, materially higher home prices vs. that seen in the pre-COVID period are among the easy items to check off as drivers of the revaluation of homebuilder equities. Affordability strain remains a constant.

From a credit quality vantage point, however, the credit profile of the builders remains very much intact with strong balance sheets, exceptional asset coverage, and cash flow fundamentals that arguably deserve higher ratings even if the housing cycle keeps turning down.

The above table updates a cross-section of key financial and operating metrics. We see volumes and average selling prices lower in 2025. DHI has one of the lowest ASPs among the major builders (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25).

Gross margins in 3Q25 (June quarter for DHI with its Sept FY) came in better than expected despite all the challenges and remains above pre-COVID levels even if well down from the post-COVID peak of 2022 (28.7%). Orders and backlog are down through 9M ended 6-30-25 even if orders flattened out in 3Q25 vs. 3Q24.

The above table updates the “consolidating” segment disclosure across the various DHI business lines including Forestar (land and lot development), rental building operations (single family and multifamily), and financial services. Separate from this disclosure is the geographic segment details for the homebuilding operations, but that awaits the 10Q. The business line segment disclosure above show how all business units have seen declining pretax earnings in 2025.

Volume has been going the wrong way for the industry as well as DHI, and we see 3 of 6 geographic segments moving lower to an overall decline on total closings. Some regions have been more resilient than others.

The above table updates the key balance sheet lines and underscores the solid liquidity and substantial excess asset coverage even just looking at inventory lines vs. total debt. DHI’s market cap is in excess of $40 billion and compares favorably relative to DHI’s low net debt and total debt numbers.

We highlight that the non-homebuilding debt is not guaranteed by the same homebuilding subsidiaries that are guarantors for the homebuilding debt/bonds. Each of the other business line units – Rental, Forestar, Financial Services – are stand-alone credits that support their own debt.

The above table updates the operating cash flow data along with some of the major moving parts of the working capital lines and capital allocation trends. We see the impressive level of stock buybacks and dividends. The stand-alone cash flow of the homebuilding operations is also highlighted at the bottom of the table. That massive base of free cash flow helps bondholders sleep at night even if the market faces a more notable downturn as inventory gets liquidated and translates into cash flow generation.

Housing sector:

Housing Starts June 2025: Single Family Slips, Multifamily Bounces 7-18-25

New Home Sales May 2025: Slip and Slide 6-25-25

Existing Homes Sales May 2025: Sequential Stronger, YoY Weaker 6-23-25

Homebuilders:

KB Home 2Q25: Negative Industry Trends Keep Coming 6-25-25

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

See also:

Credit Snapshot: Ashtead Group 7-21-25

Footnotes & Flashbacks: Credit Markets 7-21-25

Footnotes & Flashbacks: State of Yields 7-20-25

Footnotes & Flashbacks: Asset Returns 7-20-25

Mini Market Lookback: Macro Muddle, Political Spin 7-19-25

Retail Sales Jun25: Staying Afloat 7-17-25

June 2025 Industrial Production: 2Q25 Growth, June Steady 7-16-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

Mini Market Lookback: Tariffs Run Amok, Part Deux 7-12-25

Mini Market Lookback: Bracing for Tariff Impact 7-5-25

Payrolls June 2025: Into the Weeds 7-3-25

Employment June 2025: A State and Local World 7-3-25

Asset Return Quilts for 2H24/1H25 7-1-25

JOLTS May 2025: Job Openings vs. Filling Openings 7-1-25

Midyear Excess Returns: Too little or just not losing? 7-1-25

Credit Trend: Stable

Summary Credit Profile:

We have always been very comfortable with Ashtead credit quality since its BB tier days when it was a 2L bond issuer. Since those days, the #2 equipment leasing company continues its slow and steady rise up the credit tiers into IG with BBB3 composite credit ratings and an unsecured bond stack (only the ABL line is secured). Those credit ratings could easily be higher based on low leverage, impressive financial flexibility (notably in capex) and free cash flow generating ability, a stellar track record across multiple cycles including two crisis backdrops, and low overall business risk.

The favorable credit attributes are intertwined with intrinsic capital allocation flexibility of gross capex vs. net capex after sales of equipment and fleet management actions. The high EBITDA margins and favorable secular demand for leasing in the “lease vs. buy” decision has allowed Ashtead to grow faster than the equipment markets across the decades. The healthy free cash flow has been tested across some very extreme cyclical moves the past 25 years including a credit crisis and a pandemic. Ashtead pushed right through those cycles and kept on expanding.

The best comp for the overall credit story is industry leader United Rentals (see Credit Snapshot: United Rentals 4-1-25, Credit Crib Note: United Rentals 11-14-24) with the main differences between the two being URI’s much more aggressive, big-ticket acquisitions over the years than what was seen at Ashtead (Credit Crib Note: Ashtead Group plc 11-21-24). The distant #3 player making a push to close the gap is Herc Holdings (HRI), but HRI falls well short of Ashtead (Sunbelt) in scale and breadth of operations. HRI is materially riskier than United Rentals and Ashtead in credit quality as it makes a debt-financed push into transformative acquisitions (see Credit Snapshot: Herc Holdings 4-23-25, Credit Crib Note: Herc Rentals 12-6-24).

Relative Value:

Ashtead has 9 unsecured bonds in the BBB tier of the IG index that generally trades wide to the BBB tier industrial composite, so it has been a good credit value relative to BBB tier issuers with greater cash flow volatility and those that evidence more exposure to a high fixed cost base serving cyclical end markets. That includes autos and cap goods and multi-industry manufacturing issuers.

Ashtead presents lower business risk than companies with high commodity-based exposure (metals/mining, upstream oil and gas) and issuers that lack the demonstrated flexibility of Ashtead to make rapid adjustments during cyclical turns or a shifting macro backdrop. Numerous companies and industrial subsectors have materially lower profit margins, weaker balance sheets, and less cash flow resilience than Ashtead.

Some companies remain better known in the IG market, but Ashtead will get better name recognition as it keeps growing and changes its listing to the NYSE. Ashtead equity has returned almost 7x the S&P 500 since the start of 2006 and doubled the S&P 500 the past 10 years.

Business Risk:

We consider the business risk profile of the equipment leasing companies as low given the short lead time in fleet expansion (new equipment orders) or reduction (selling used equipment). The intrinsic cash flow resilience of the business is bolstered by some supportive attributes: broadly diversified exposure by region, location clusters generating a competitive edge in a highly fragmented industry (Ashtead cited 3600 rental companies), an extraordinarily diverse range of equipment types serving construction markets, and a wide range of industry verticals outside the core construction markets. The very broad array of individual customers minimizes counterparty risk.

Ashtead is the #2 player in an industry that demonstrated secular growth in equipment leasing vs. owning. The increasing complexity of equipment and challenges staffing personnel with the proper skill sets adds to the cost of ownership for its customers. Operational flexibility for customers is improved by leasing as equipment problems are immediately resolved and major mechanical problems quickly addressed whether equipment is replaced or repaired.

The branch geographic clustering strategy supports service quality and cross-selling strategies and especially with longer term mega projects. Equipment leasing consolidation has created an industry structure where the Big 2 (United Rentals and Ashtead) comprise over a quarter of the North American market.

Tariffs:

The primary threat from tariffs is the cost of capital goods equipment as prices could rise from material costs (steel, aluminum, copper, etc.) even if made in the US. Of course, tariffs on a wide range of equipment sold by US trading partners will also cost more to a US buyer. The blanket tariffs on entire nations and trading blocs, and the components used in manufacturing equipment could undermine demand if end market weakness and costs migrate higher.

The silver lining on equipment costs is that a potential customer might see equipment pricing as one more reason to look to leasing for their equipment needs in the “buy vs. own” decision process. That said, the tax bill offers incentives on capex with the trade-off being the use of balance sheet capacity or current cash flow that might not fit into financial planning – notably for small business lines.

The North American and US-centric operations offer some shelter from the supplier chain chaos. The UK operation is at least outside the EU trade clash risk. The more macro-based risk from tariffs is the fear of cyclical pressure on consumers and industries from tariff fallout and threats of economic contraction in fixed asset investment or stagflation that would dial back mega projects or undermine the reshoring theme. Impaired trade flows into the US for equipment also could have the effect of sustaining a robust used equipment market.

Profitability:

As highlighted in the charts below, Ashtead boasts extremely high EBITDA margins in the mid to upper 40% range for equipment rentals across the cycles. While those margins come with an asterisk for reinvestment needs to sustain the cash flow and revenue growth via replacement capex, the margins remain impressive after any historical and theoretical replacement capex. The high margins allow ample room for growth capex and shareholder enhancement from free cash flow. Ashtead has multiple pathways to sustain high margins as well as growth via bolt-on acquisitions and sustained growth capex.

The growth has been very strong across the post-COVID cycle with stimulus and a wide range of infrastructure programs and targeted project development with fiscal support (notably EVs, alternative energy) driving multiyear megaprojects with extensive equipment needs. Some projects such as power, LNG, semis, and data centers will have longer tails than others that are getting dialed back (EVs). Key drivers of secular growth include expansion of specialty equipment while general tools remain an anchor for revenue and cash flow.

We have looked at these moving parts in our commentaries on United Rentals as the industry leader along with Ashtead and Herc. Those three are expected to control as much as 50% of the market in the future. The lead players have also cited pricing and fleet size discipline as a strength. The nonresidential real estate and industrial verticals are extensively covered on conference calls and the same for construction market macro data, but the growth is tailing off as we saw in 4Q25 and FY 2025 capex guidance for spending in FY 2026.

Revenue and profitability are steady, but the next leg up in revenues awaits clarity on the pace of some fading mega projects (e.g. EVs) and to what extent those are offset in other major categories (data centers, government infrastructure, reshoring and onshoring). Bolt-on acquisitions are the more obvious path to growth if organic growth slows down.

Balance Sheet:

The basic realities of high EBITDA margins and steadily growing revenue is that the growth allows Ashtead (like URI) to keep growing both sides of its balance sheet while keeping leverage very low on an historical basis and relative to EV multiple valuations. That is a very attractive luxury for bondholders and shareholders alike in preserving credit quality while rewarding shareholders.

The high EBITDA run rates, high margins, and healthy free cash flow also allow Ashtead to shift capital allocation strategies over to bolt-on acquisitions and buybacks when less growth capex is more appropriate. Tapping the brakes is where Ashtead is now as fiscal 2026 unfolds. Typically, with Ashtead and United Rentals we see redeployments of discretionary cash flow in such markets to share buybacks and tactical acquisitions. We saw that in 2020-2021 as detailed in the charts. Then the post-COVID boom kicked in and the array of “mega projects” drove soaring rental capex in FY 2023 (note: FY 2023 with April 30 FY is mostly calendar 2022) and FY 2024.

SELECT TABLES

Rental revenue in a temporary plateau, margins steady.

Historical segment format shows growth, segment margins down from peak.

New segment format adopted in 2025 reflects equipment categories.

Capex planning and free cash flow drive shareholder rewards as swing factor.

Very strong balance relative to free cash flow, capex flex, and EV multiples.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”

• KB Home (KBH) joins Lennar with a fresh set of numbers from a November fiscal year reporting company (May 31 2Q25), and the news does not get better with lower deliveries (-11.4% for 2Q25), lower revenues (-10.5%), lower unit orders (-13.4%), and lower unit backlog (-23.8%). The cycle is bringing a weak peak season for homebuilders. (see Lennar 2Q25: Bellwether Blues 6-20-25).

• KBH guidance for FY 2025 has been trimmed with the 2Q25 release from the 1Q25 numbers showing the upper end of the range lowered by $500 mn for revenue to $6.5 bn, the upper end of range for gross margins from 20% to 19.4%, and the ASP upper range is down by a slight $5K to $490K.

• Average selling prices ticked higher in total for 2Q25 to $488.7K from $483K with 2 geographic regions higher and 2 lower as KBH’s lead operating region (the West at 31% of deliveries, 43% of homebuilding revenues) posted an increase in ASP to $682K from $669.6K. KBH makes for an interesting focal point with its higher price mix vs. the public sector peer group and heavy West Coast presence (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25).

• For financial metrics, KBH saw debt leverage move higher while the guidance reinforced the broader trend of gross margin compression and higher SG&A ratios as volumes slide and expenses get tweaked. With KBH guidance, we see more confirmation of builders tapping the brakes on land investment and development outlays.

• KBH’s cash flow and liquidity profile remains solid as working capital management takes a turn into a more defensive posture on cyclical softening.

The KBH results are broken out in brief, summarized form above before we dig into the weeds further below. The sharp declines in revenue and earnings for 2Q25 and 1H25 are self-evident and continue the setbacks we have seen across bellwether names. KBH gives us a window on recent trends for the top 10 and has a high West Coast presence. We will get the heavier slate of names in the June quarter earnings reports, but the color from two bellwethers with a May quarter (LEN, KBH) have not been pretty.

The above chart frames the post-2019 stock performance of KBH vs. Tri Pointe (TPH) and Taylor Morrison Home Corp (TMHC) who all live in the BB credit ratings tier and have major operations in the West. As shown in the chart, KBH has lagged TMHC and TPH across the post-COVID housing cycle.

Below we add to the peer comps and see KBH has also lagged some of the other BB tier names such as Century Communities (CCS) and M/I Homes (MHO) as well as some broader benchmarks recently. Across the LTM period, KBH is 4 off the bottom while TMHC has been a winner vs. peers. Homebuilders broadly have struggled since the end of 3Q24 when they are running near #1 in our benchmark/ETF rankings. The Homebuilder ETF (XHB) was at the top at the end of 3Q24 (see Footnotes & Flashbacks: Asset Returns 9-29-24). That has been quite a fall since then.

The time horizons for homebuilder equity returns have been an unusual story given how well many performed across the inflation cycle and ensuing tightening that sent 30Y mortgages above 8% by fall 2023. The Hi-Lo range of 200 bps on 30Y mortgages since late 2023 did not derail homebuilders but generated strong headwinds for existing home sales that created opportunities for the more flexible incentive mix and design alternatives for homebuilders.

The builders ran very strong across 2024 and then went into a slide in 4Q24 that has worsened the past 6 months as captured above in the trailing 6-month time horizon. We are seeing that in the start of the 2Q25 reporting season with a wave of guidance ahead for the June quarter reporting companies.

The above table provides the broader mix of financial and operating metrics, and the negative trend is clear enough with homebuilding revenues down, financial services revenues lower, a decline in key volume lines (deliveries and orders), and sharp reductions in gross profits also bringing lower margins, lower pretax income, and lower net income. The trends are consistent with what the market is hearing from other major builders.

The fact that Average selling prices (ASPs) are higher is another challenge to affordability optimism with mortgage rates and monthly payment pressures still a fact of life. We cover the deliveries and ASP lines by geographic region in other charts below, and the overall ASP total always comes with the asterisk of regional and community mix.

The above table updates the housing gross profit and gross margin trend line. While margins are clearly going through a compression stage for many major builders right now from the outsized peaks of 2022 (subject to fiscal years and the mix of built-to-order vs. spec), the margins are still running ahead of pre-COVID levels for most. For KBH, the gross margins are heading back to 2019 levels. That is a setback but certainly not a major erosion of profitability in longer term context.

The term often used across industries from periods of outsized price action or moves in select metrics is “normalization.” The theory that the homebuilding industry is returning to “normal” margins will get put to the test in 2H25 and into 2026 with the consumer cycle softer and the effects of tariffs on materials (lumber, gypsum, aluminum, steel) as moving parts.

The cyclical trends could flow into the UST curve, mortgage rates, and the demand side for new homes. The usual macro variables to sort out across economic cycles are troubling at this point (notably job and income trends), and the homebuilders will still have the favorable factor of demographic demand and a shortage of housing and notably in the “affordable” tier. Demand weakness is here and mortgage rates will be a key driver, but the threats to the credit quality of homebuilders are still low.

The above table updates the volume trends for deliveries in total and by geographic segment. All four regions posted YoY declines in 2Q25 while the West shows a minimal decline for 1H25.

KBH gave some airtime to the distortions in recent years of its legacy Built-to-Order (BTO) business model as the sharp declines in the existing home sales market prompted numerous traditional BTO builders to shift the mix to more spec inventory. The volatile mortgage rate movement made move-in ready homes more important in the mix and got more companies focused on closing the delivery gap with a 60-day timeline typical of existing home sales. That 60-day topic was mentioned by KBH on its earnings call in the context of its built-to-order evolution.

The benefits of lower build times are numerous, including a more compelling selling proposition for customers purchasing a build-to-order home relative to the 60 days it typically takes to complete an existing or speculative home purchase. Better inventory turns and monetizing our assets quicker. We are continuing to rely on our long-standing trade relationships with our even flow production to ensure that we have the crews necessary to get our homes built.

The 60-day timeline was wholly embraced by some builders as a core strategy (see Credit Snapshot: Meritage Homes (MTH) 5-30-25), but KBH is still about BTO as a functional strategy at 60% to 70% of its mix at this point as cited in its 2Q25 presentation. Longer term, BTO has averaged 70% to 75% of the mix. The key for KBH is to reduce building cycle times, which was a focal point on the earnings call.

The ASP details in the above table always offer a stark reminder of the wide range in home prices across regions. The $488.7K was up YoY but guidance for FY 2025 has been reduced on the high end of the range to $480 to $490K at 2Q25 from $480 to $495 at 1Q25. That ASP guidance is a minor change. The mix and incentive shifts can generate more tweaks along the way.

KBH provides customer mix details for those buyers that KBH finances with half being first time buyers with solid credit profiles (743 FICO scores) with an average household income of $136K. Average down payments were around 16%.

The balance sheet trend was the worst part of the 2Q25 metrics update from our vantage point with Total debt % Capitalization and Net debt % Cap both notably higher from 2023 and 2024 levels. KBH cites 30% total debt as a reasonable target vs. the current 32.2% for total debt leverage and 28.4% net debt to cap. That leverage is not especially high by their standards but it is a sharp move from 2023-2024. The adverse trend line in leverage and weaker operating metrics would logically take credit ratings upgrades off the table.

The asset coverage metrics such as “inventory/debt” and “cash + inventory/debt” are steady as of 2Q25 as noted in the table with 3.1x inventory/total homebuilding debt and 3.3x for “cash + inventory.” These remain near the upper end of the range over the 2019 to 2Q25 timeline. Liquidity ended the quarter well positioned with approximately $1.2 bn ($309 mn cash, $882 mn unsecured revolver availability).

In an unsurprising move, KBH indicated it would be lowering its land spend and development outlays with some reallocation to stock buybacks. As a frame of reference, KBH spent $1.4 bn in land development and fees in 1H25 after $2.8 bn in FY 2024. For 2Q25 alone, KBH spent $513 mn on land acquisition and development. That magnitude of land/development outlays offers a reminder of the intrinsic flexibility of homebuilders to adjust working capital to cyclical realities.

In the current backdrop, KBH faces weaker markets vs. expectations and that has pressured margins and will bring more incentives ahead. KBH is adequately positioned in inventory even as the peak selling season is framing up as a disappointment. The buyback program has been steady across time with 30% of shares repurchased since late 2021. The current buyback authorization is $450 million.

See also:

Footnotes & Flashbacks: Credit Markets 6-23-2025

Footnotes & Flashbacks: State of Yields 6-22-2025

Footnotes & Flashbacks: Asset Returns 6-22-2025

Mini Market Lookback: FOMC Spoke Clearly, Iran and Trump up next 6-21-25

KB Home:

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

KB Home: Steady Growth, Slower Motion 9-26-24

Credit Crib Note: KB Home (KBH) 7-9-24

KB Home: Wraps Industry Rebound Year, Exiting on Upswing 1-14-24

KB Home: Credit Profile 6-24-23

Housing sector:

Existing Homes Sales May 2025: Sequential Stronger, YoY Weaker 6-23-25

Home Starts May 2025: The Fade Continues 6-18-25

New Home Sales April 2025: Waiting Game Does Not Help 5-23-25

Other Homebuilders:

Lennar 2Q25: Bellwether Blues 6-20-25

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

Toll Brothers: Rich Get Richer 12-12-24

PulteGroup 3Q24: Pushing through Rate Challenges 10-23-24

Lennar: Bulletproof Credit Despite Margin Squeeze 9-23-24

Credit Crib Note: PulteGroup (PHM) 8-11-24

Credit Crib Note: D.R. Horton (DHI) 8-8-24

Homebuilders: Updating Equity Performance and Size Rankings 7-11-24

Credit Crib Note: NVR, Inc. 5-28-24

Toll Brothers: A Rising Tide Lifts Big Boats 5-23-24

Credit Crib Note: Taylor Morrison 5-20-24

PulteGroup: Strong Volumes, Stable Pricing 4-24-24

D.R. Horton: Ramping Up in 2024 Despite Mortgages 4-19-24

D.R. Horton: Credit Profile 4-4-23

• “Definitely not crashing but it just continues to cool…well documented softness of the spring selling season…definitely softened or continues to soften…a descending market…it’s a very different environment today than what we’ve been through for the past 3 years…we are in an industry going through a bit of an industry recession” are some of the management comments that capture the flavor of 2Q25 commentary.

• Lennar saw mixed delivery volumes by region for 2Q25 and lower total ASPs on deliveries that contributed to continued gross margin compression patterns for 2Q25 and YTD 1H25. LEN saw 2 of the geographic segments post higher deliveries while 2 regions declined for an overall total that rose by +2.2%. The mix shift and lower ASP translated into a -6.7% decline in delivery dollar value for 2Q25. A similar pattern was evident for 1H25.

• New orders (units) ticked higher YoY for 2Q25 and the same for 1H25 with dollar value lower and total average new order ASPs materially lower.

• The net effect has been a continuation of lower gross margins for LEN as the company sticks to its business model and game plan of focusing on cash flow and trading off margin for pace and even flow production.

• LEN’s balance sheet remains exceptionally strong with Total Homebuilding Debt % Capitalization at 11.0%, up from FY 2024 (11-30) at +7.5%. Cash no longer exceeds debt, and Net Debt % Cap rose to +6.7% from the net cash position at FY 2024 which generated a -9.4% net leverage metric. The leverage also factors in the moving parts from the Millrose Properties (ticker MRP) capital contributions and spin-off (see Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25, Credit Crib Note: Lennar Corp (LEN) 1-30-25).

Lennar has not won over as many shareholders as it might have hoped with its distinctive business plan and the innovative REIT strategy for lot/land development. As we have been covering in our single name work and housing sector commentaries, homebuilder equities have been hit hard since a very impressive run through Sept 2024 that made the builder groups one of the best performing industry groups across the equity markets. They have since morphed into one of the worst performers in the trailing 1-year and YTD returns (see Footnotes & Flashbacks: Asset Returns 6-15-25).

Homebuilder equities have been on a downward ratchet since the end of 3Q24 as we highlight below in the time horizon equity returns table. That does not undermine the core cash flow dynamics and exceptionally strong asset coverage, but the fundamental revenue and earnings story is under pressure and more of the credit analysis will be migrating over to the cash flow statement and the moving parts of inventory liquidation relative to new starts and investment.

Homebuilders have the luxury of a high variable cost mix that generates cash on slowdowns. Inventory gets liquidated even as unit sales decline and revenue and earnings weaken. That is a favorable credit quality distinction from the BBB heavy mix of manufacturing issuers in the BBB tier with high fixed costs and who operate in the same broader economic cycle.

The table above is not a pretty one for builders with 13 of 14 homebuilders in negative range for the trailing 1-year (only Taylor Morrison positive) along with the Homebuilder ETF (XHB) that includes the major suppliers. For the 6-month timeline, we see all negative while 3-month sees Toll Brothers positive (barely).

We see more divergent results over trailing 2 years and 3 years with much better relative returns for many of the industry leaders. The period across the tightening and now easing cycle included a wide range of UST curve moves and shifts in slope that we look at in our weekly State of Yields publication (see Footnotes & Flashbacks: State of Yields 6-15-25). That includes a 200 bps Hi-Lo range in 30Y mortgages just from the fall of 2023.

Operating results highlight margin pressure…

The staggered fiscal year-end dates used by the major builders run from Sept 30 and each month after that through December 31. That steady release mix gives even more color and recent updates. The trends remain net negative. This all comes during a period of sustained high mortgage rates, tariff worries (with related disinformation), some tangible softening of the consumer broadly, and continued caution from new and existing home buyers. We get macro releases each month on starts, existing home sales and new home sales beyond the large publicly traded players. The trends in 2025 signal more pressure on demand requiring adjustments to price and steady use of incentives.

Lennar as one of the Big Two bellwethers…

Just on scale and geographic breadth, Lennar tells a broad story for the industry (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25). The short form version of the performance and guidance for Lennar looks like the following:

• Lennar is sticking to its even flow operating model: As we have discussed in our Lennar research (see links), LEN maintains a steady discipline of balancing sales and starts. To the extent its pace expectations are off, the company keeps pushing with price and incentives to keep the machine going and will make adjustments in planning as necessary. That has been evident in the relatively greater pressure LEN margins and lower ASPs net of incentives. The reality is that the market is cooling as management clearly stated on its call.

• Guidance calls for margin stabilization in 3Q25: Gross margin of 17.8% (18.0% adjusted for purchase accounting) is projected to stabilize “subject to market conditions.” The guidance for deliveries would mark a modest increase of just over 2% YoY but LEN’s current ASPs are already below the 3Q24 ASP of $422K. The mix shift to the South Central regional segment is a major factor in the lower ASPs (TX, OK, MO, KS, AR).

• Average sales prices eroding: LEN expects a continued decline in ASPs ahead to $380K - $385K for 3Q25 from $389 in 2Q25. For context FY 2024 was $423K ASP and the peak year was $480K in FY 2022.

Volumes: Lennar’s even production model brings an asterisk

The above chart frames the regional mix for deliveries in 2Q25. The volume was up in total with 2 up and 2 down of the 4 main market groupings. Lennar has a habit of moving around its segment mix by states across the timeline, but the table captures the recent trends. The biggest increase was in the lowest ASP segment.

Average Sales Prices (ASPs) feeling the pressure of the business model

The wide range of the ASPs across regions is old news, and the gap between South Central at $244K and the West at $604K for 2Q25 is a reminder that it is a big country with big differences in the cost of living. The main takeaway is that all 4 geographic segments are down in ASP YoY in 2Q25 and 1H25 after the same for FY 2024. The fact that LEN moves its prices to keep the even production strategy rolling is showing up in the ASP and the expectation for another decline in 3Q25.

LEN balance sheet has been busy recently…

The LEN balance sheet story remains very strong in BBB tier context even if there is much less balance sheet liquidity. The changing profile of the balance sheet is a clear fact along the lines in the table above. The shift is part of the “asset light strategy” that the company has been discussing in detail across time and into 2025.

We have covered the spin-off of the Millrose Properties (MRP) REIT in earlier commentaries (see Credit Snapshot: Lennar (LEN) 4-15-25, Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25). The MRP spin-off entailed a major distribution of assets and had the effects reducing inventory and cash. In addition LEN accounted for the spin as a major reduction in retained earnings with the $4.8 bn deduction from retained earnings under GAAP (thus the major reduction in stockholders’ equity since FY 2024 seen above).

The steady stock buybacks by LEN across time also have the effect of reducing stockholders’ equity and flowing into book value leverage. LEN repurchased another $517 million after maintaining a very high rate of buybacks across time as we have covered in our credit commentaries. From 2021 to 2Q25, LEN repurchased $7.8 bn in shares. Despite all that activity, the total homebuilder debt % capitalization was still only 11.0% and net debt/cap at 6.7%. As we have covered in past commentaries, debt % cap is much more relevant to assessing homebuilder risk than debt/EBITDA. We agree with the banks on this one.

We also include the usual asset coverage metrics we look at using inventory and “cash + inventory.” While those are down from the pre-MRP spin-off the coverage is still quadruple the total homebuilder debt.

Into the soft housing cycle

The tightening cycle that kicked in during March 2022 to peak mortgage rates in fall 2023 highlighted the impressive working capital management skills of the major homebuilder bond issuers as the cash flow remained impressive. Even if just managing starts vs. deliveries more prudently makes it a very different industry than what was seen in the 2004-2006 bubble.

The move to a greater reliance on options has mitigated balance sheet risk for most homebuilders. The industry used some of the NVR toolbox even if not following NVR’s avoidance of land development entirely. The industry now has a playbook that had worked quite well for NVR in the crisis (see Credit Crib Note: NVR, Inc. 5-28-24). LEN took an innovative step in this area with the creation of the Millrose Properties REIT to reduce balance sheet risk and be more asset light.

The pressure in this current market combined the effect of mortgage rates, high prices, and affordability setbacks (monthly payments) with a more defensive consumer sector that will also see builders facing higher material costs.

Tariffs will remain another headwind – direct and indirect…

We have discussed tariff risks in the single name and housing sector commentaries, and the main point is that material costs will rise (notably lumber but also aluminum from Canada, steel from everywhere, and gypsum from Mexico, etc.). Tariffs are intrinsically negative for the goods targeted and for the consumer (even if companies let the NAHB do the complaining for them). We have that “debate” in other commentaries. There is no “debate” on who writes the check to customs for the tariffs. It is the buyer. Anything else is disinformation from tariff fans.

The homebuilders have a lot of room to make tariff adjustments and lay off some of the costs on trade partners and customers as they adapt their designs and pricing strategies. The main overriding threat will still be consumer weakness on any exacerbated cyclical pressures tied to tariffs and unsettling developments on health care costs or other household budget inflation setbacks (gasoline, vehicles, apparel, etc.). That will cause buyers and lenders alike to pull back for their own reasons. Stagflation would be the worst outcome.

In portfolio context, stagflation would bring a very crowded boat of industries with problems. Homebuilders will present less risk than higher fixed cost manufacturers. As noted earlier, builders at least can look to variable costs and inventory liquidation in generating cash flow.

See also:

Footnotes & Flashbacks: Credit Markets 6-16-25

Footnotes & Flashbacks: State of Yields 6-15-25

Footnotes & Flashbacks: Asset Returns 6-15-25

Mini Market Lookback: Deus Vult or Deus Nobis Auxilium 6-14-25

Lennar:

Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Lennar: Cash Flow and Balance Sheet > Gross Margins 3-24-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

Lennar: Bulletproof Credit Despite Margin Squeeze 9-23-24

Housing sector:

Home Starts May 2025: The Fade Continues 6-18-25

New Home Sales April 2025: Waiting Game Does Not Help 5-23-25

Existing Home Sales April 2025: Soft but Steady 5-22-25

Other Homebuilders:

Credit Snapshot: Meritage Homes (MTH) 5-30-25

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

Toll Brothers: Rich Get Richer 12-12-24

PulteGroup 3Q24: Pushing through Rate Challenges 10-23-24

KB Home: Steady Growth, Slower Motion 9-26-24

Credit Crib Note: PulteGroup (PHM) 8-11-24

Credit Crib Note: D.R. Horton (DHI) 8-8-24

Homebuilders: Updating Equity Performance and Size Rankings 7-11-24

Credit Crib Note: KB Home 7-9-24

Credit Crib Note: NVR, Inc. 5-28-24

Toll Brothers: A Rising Tide Lifts Big Boats 5-23-24

Credit Crib Note: Taylor Morrison 5-20-24

PulteGroup: Strong Volumes, Stable Pricing 4-24-24

D.R. Horton: Ramping Up in 2024 Despite Mortgages 4-19-24

D.R. Horton: Credit Profile 4-4-23

Credit Trend: Negative

Summary credit profile:

Hertz (HTZ) has always been a tough one, so it takes more words. The very weak and highly encumbered balance sheet of Hertz, the negative EBITDA run rate, and cash flow bleed leave HTZ as a CCC tier unsecured credit. A key variable, apart from the peak season travel period ahead, is where used car residual values will trend in 2025 to mitigate the run rate of losses. After a brutal 2024 for depreciation per unit per month (“DPU” is in substance a cash expense for car rental operators), HTZ needs relief and is targeting $300 DPU after $539 global DPU in FY 2024. This is no small challenge after $588 DPU in the Americas RAC segment in 2024 and International at $331 (note: International has more traditional program car exposure).

A challenging call at this point is how tariffs and seasonal fleet management downsizing will dovetail with used car values and better remarketing performance. The tariff pressures will push new vehicle prices higher, and the theory is the affordability challenge on prices and financing rates will in turn bolster used car demand on affordability. It is clear we will not see a replay of the post-COVID 2021-2022 residual windfall, so there is no easy solution ahead for the grim financial metrics at Hertz.

The seasonal fleet replacement cycle and purchasing process for the 2026 season promises to see fleet costs high as tariffs fully roll in. The electric vehicle overhang will at least be largely behind Hertz. Depreciation per unit (“DPU”) could remain stubbornly high with new car prices as HTZ strives to hit the $300 DPU mark (see Depreciation section below). Recovery of DPU and financing costs in rental rates determines EBITDA margins.

Hertz will require a banner summer to avoid more chatter around an inevitable realignment of its balance sheet and more distressed exchange risks. Historically, more than half of EBITDA gets generated in the peak summer travel 3Q period, so the stakes are high for a good travel season and steady upside scenarios in used vehicle residuals.

The downside scenario in credit quality is that HTZ bondholders could be exposed to a distressed bond exchange to salvage a functional financial profile for shareholders. The EV/EBITDA multiples are a challenge to make a case for meaningful equity value without less corporate debt (non-fleet debt) and a lot more EBITDA in positive range. As we detail in the tables below, non-vehicle debt has soared and EBITDA is deeply negative.

The dagger for Hertz credit quality was $2.5 billion in share repurchases ($3.1 bn in total repurchases 2021-2022) while also derisking the private equity investors. That restarted the game clock on a highly leveraged Hertz at a time of booming residuals and exceptionally low DPU. Unfortunately, Hertz once again made very aggressive moves in fleet mix that backfired (this time EVs). Fleet mix setbacks are part of a pattern seen in 2014-2016 during the first major bout of volatility of HTZ stock and bonds that included a shocking rate of senior management turnover with a high single digit CEO count including 4 before filing Ch 11 (see Credit Crib Note: Hertz (HTZ) 5-14-24, Not Your Father's Hertz 2-7-23).

The HTZ performance scores face the problem that Avis offers an easy comp to use as a frame of reference across the same market conditions. That comparison does not go well for HTZ, who failed to sustain its credit quality before and after the HTZ Chapter 11 while Avis navigated the chaos quite successfully (see Credit Snapshot: Avis Budget Group 4-9-25). That leaves the equity markets in a position where the shareholder can ask “If I want to play on car rental fundamentals, I can invest in Avis and not have to take the credit risk.” (Note: IG-rated industry leader Enterprise is private).

Relative value:

Hertz unsecured bonds are trading at quasi-distressed levels and have been volatile for a reason. We see HTZ unsecured as equity-like risk (as in high-risk equity) facing too many uncertain variables ahead. The good news for 1L bondholders (12.625% of July 2029) is that bond offer equity-like returns just in cash income at slightly over par. The 1L layer is protected from our vantage point. The 13%-15% area yields on unsecured include a discount from par of over 30 points on the unsecured 2029s. HTZ will need a very strong 3Q25 and some additional support from positive trends in used vehicle residuals to improve the symmetry for HTZ bondholders.

Buying Hertz unsecured has been a good strategy when matters are at their worst, and that is not the case at this point in the face of material uncertainty for the automotive production chain. Near term used vehicle residual upside is positive given auto affordability strains, but the 2026 and beyond story is much trickier for fleet replacement costs. The abysmal equity performance of HTZ since the end of 2021 and immediate reversal of its credit profile so soon after emerging from Chapter 11 tells us that unsecured debt exchange risk is material given the interest of fashioning a balance sheet that can restore rational EV multiples for stockholders.

The history of Hertz has been unkind at various points to both bears and bulls. The franchise has substantial value as the Chapter 11 process highlighted, but the strategic execution and financial risk management at Hertz across the past decade has been awful. M&A and fleet planning has seldom gone right since 2014 and external factors (notably COVID) and liability management (lien baskets, lender flexibility, distressed exchange risk) have underscored the volatility of Hertz.

As a reminder, the 2020 collapse of HTZ bonds saw a 26 area CDS auction on the way into a competitive bidding battle that brought bondholders a “par plus” recovery and a return to equity holders. In other words, history has some hard lessons on making the call on HTZ credit quality. A very successful Chapter 11 process (filed May 2020, exit June 2021) now sees HTZ yet again mired in semi-distressed status coming off a period of massive growth in debt, cash flow bleeding, another spike in structural subordination risk, some major fleet strategy setbacks, and a few more changes in senior management. That comes after a decade of such turmoil.

Rough history:

Addressing Hertz quality in today’s market without a look back would not be prudent. Many of the same operational themes get reiterated by a string of management teams with modest variations across a decade of remarkable management turnover before and after Chapter 11. The takeaway from that history is one of consistent fleet management setbacks when it deviated too much from industry norms, overpriced debt-financed acquisitions (notably Dollar Thrifty in 2012), and an inability to compete effectively against Enterprise and Avis.

The Big 3 of daily car rental are essentially in the same business of buying new vehicles, renting them, and managing a remarketing process that hopefully allows for resale yields in line with their residual value estimates. The goal is for DPU and interest costs to be built into car rental pricing along with a respectable margin. All three rental operators (not including the large German operator Sixt growing its US presence) buy cars from the same OEMs and operate in many of the same US daily rental markets and locations (on and off airport). Enterprise built its base of fleet operations in insurance replacement before embarking on a multi-decade growth plan in daily rental (including acquisitions of Alamo and National). Despite the similarity in services, asset base and operating profile, the performance across the three has been very different.

The asset protection and franchise value of HTZ is in the eye of the beholder and what various parties see as the future of integrated mobility (sounds fancier than “car rental”). The buzz around EV fleet management that was a topic in 2020-2021 has lost its luster at this point, and policy actions in Washington look to further dim prospects for such EV fleet management strategies and aspirations. Meanwhile, AV fleets of scale are a long way off.

The history of Hertz cuts across LBOs, IPOs, mixed ownership by OEMs (notably Ford), private equity, and activist investors driving shareholder enhancement pressure across time. In the case of Carl Icahn, he had dumped his holdings at a multi-billion-dollar loss. The history of the major car rental operators is that they always attract private equity capital and activist shareholders, and current times are no different. That at least says something about how investors see the potential of car rental. Private, family-owned Enterprise remains the envy of the industry with IG ratings and high margins.

Business risk:

As we covered in our Avis Credit Snapshot, Avis Credit Crib note, and Avis Credit Profile, the business risk in car rental is high with used car residuals quite volatile in recent years. The timing of new vehicle supply-demand imbalances create higher risks for both the cost of fleet and for residuals on the vehicles. Car rental operators need to get an economic return through prudent rental pricing that captures all the relevant costs. Avis (ticker CAR) has been a problem frame of reference for HTZ with CAR’s superior profitability performance and balance sheet management.

HTZ added to its problems with a major, heavily advertised bet on EVs and the high-risk residual profile in that product segment. That was clearly a failed strategy. Some past revenue talking points from various management teams sought to bolster equity valuation multiples with growth business line strategies such as EV and AV fleet management. Those have been wiped off the checklist – at least for now. HTZ gives a lot of air time to its fleet management and used car retail progress, but that is a very competitive business line as hammered home by Carvana, CarMax and the Big 6 public dealers such as #1 Lithia with its digital buildout (see Credit Snapshot: Lithia Motors (LAD) 3-20-25, Credit Crib Note: Lithia Motors 9-3-24).

Depreciation as a cash expense:

Depreciation of revenue earning vehicles jumped from $701mm in 2022 to $2.04 bn in 2023 and then $3.6 bn in 2024. The reality of vehicle depreciation as a cash expense for the car rental companies highlights the web of connections between supply-demand balance for new and used vehicles and what it means for rental car rates (pricing) and the cash expenses over fleet cycles from new vehicle purchase to remarketing of used fleet. The COVID collapse in travel volume, the post-COVID rebound in used cars, the spike in new vehicles costs and now the relative weakness in residual values seen in the plunge in used EVs all made for a wild ride that required balance sheet flexibility and financial resilience that HTZ lacked.

The idea of looking at DPU as a cash cost takes a shift in perspective since the car rental operation essentially “owes” the vehicle funding entities the cash costs of the vehicles and financing expenses. That is why vehicle depreciation gets deducted to arrive at Corporate EBITDA.

Profitability and tariffs:

It is almost impossible for forward EBITDA not to materially improve given the scale of the depreciation setbacks and vehicle impairment in 2023-2024. Those are behind HTZ. Hitting the $300 DPU target will not be easy, but the $1500 Revenue per Unit (RPU) goal is clearly doable (see tables).

The tariffs that are sufficiently damaging to the auto sector could actually benefit HTZ near term by bolstering used car demand and driving residual values higher. That said, HTZ will be paying a higher price in future vehicle replacement cycles when seasonal fleet cycle risks will again climb. Exceptionally poor results have set back HTZ dramatically since emerging from Chapter 11. That reality is evident in the charts below with -$1.54 billion EBITDA in FY 2024 and -$325 million in 1Q25 for EBITDA. That 1Q25 result follows negative EBITDA of -$567 million in 1Q24.

Balance sheet:

HTZ now takes great pains to call itself “asset-heavy” after years of billing itself as an “asset-light” tech-based service company before its COVID trip to Chapter 11. For purposes of asset protection, corporate-level bondholders are in fact lenders to an asset-light company while fleet funding entities are “asset heavy.” The vehicle funding entities function in substance as a “funding company within a car rental company.” Those various asset heavy entities lease the vehicles to an asset-lite car rental operator.

Negative EBITDA makes leverage metrics of little value in terms of financial risk assessment at this point while the funding vehicles and fleet facilities are heavily overcollateralized. As noted earlier, the layers of debt and liens and structural subordination create equity-like risk in HTZ unsecured bonds. The need to sustain RCF availability is critical for Letters of Credit (LOC) to meet the overcollateralization requirements (“credit enhancement”) in the ABS financings. As of 1Q25, those LOCs totaled $913 mn and used both the First Lien RCF and the Term Loan C.

As detailed in the charts further below, HTZ is once again carrying an overleveraged balance sheet with negative EBITDA and high exposure to uncertain fleet dynamics in 2025-2026. Gross non-vehicle debt reached a high at 1Q25 with a highly encumbered balance sheet across the First Lien RCF, Term B loans, Term C loan, and First Lien Senior Notes as detailed in the cap structure charts.

During 2024, the First Lien RCF required a parent guarantee as HTZ was adding more 1L debt to its mix (e.g. First Lien Senior Notes, Exchangeable Notes). Changes in structure such as that are part of using what financial flexibility is available, but that is also a worrisome sign for the unsecured layers. The banks are the ones over the wall, so defensive actions matter. The RCF also has been drawn to the tune of $800 mn by the end of 1Q25 vs. $175 mn at 12-31-24.

The incremental obligation for a make-whole decision favoring some of the Chapter 11 bondholders adds another obligation of around $340 mn to settle the recent legal setback (including a potential 1^st lien note that would add to the subordination risk profile). That was detailed in the 1Q25 10-Q and some recent 8-K filings in 1Q25. As of the publishing date for this note, we have not seen final terms. That court decision on bondholder claims against Hertz post-Chapter 11 received substantial attention in distressed debt circles and legal commentary. The post-Ch 11 bondholder settlement is smaller in overall context of the balance sheet story at Hertz but does add another source of strain on the financial profile

Vehicle funding debt:

Fleet ABS is a very well-established market. The structure was not designed for a pandemic, however. The requirements of the car rental operation to fund the auto ownership costs of the fleet funding entities (essentially depreciation + funding costs) during COVID turned the fleet into the “world’s most expensive parking lot” as travel shut down. The vehicle funding requirements would have crippled HTZ and bled out its cash and set off ABS amortization events and a cascading crisis in used car values and other loans structures for other entities. Reason and smart bankers/lawyers prevailed to prevent that.

The need to maintain certain ABS metrics (overcollateralization) and fleet funding requirements are supported by vehicle values and LOC lines from the corporate bank facilities. The failure of Hertz to have adequate lien room and LOC lines available in 2020 was one of the factors that sent HTZ into Chapter 11 while Avis survived on its financial flexibility.

The history of the HTZ descent into bankruptcy is a longer one and includes threats by HTZ to essentially challenge the foundation of ABS lease structures (car-by-car vs. master lease) in 2020 and potentially cause a collapse in the used car markets. That was a story in brinkmanship with lenders, but also reminds us to factor in the intertwined nature of the vehicle and non-vehicle debt. As covered in other commentaries, Hertz made too many mistakes along the way in debt-financed M&A, fleet decisions, and buybacks that left it unable to take the stress caused by COVID. That was in contrast with Avis, and that frame of reference is still unfavorable.

SELECT TABLES

The EBITDA run rate is still deep in the red after a brutal 2024.

Americas RAC segment haunted by ugly DPU in 2024 on EV problems.

International RAC segment downsized from pre-COVID but less fleet risk.

Balance sheet stretched by high non-vehicle debt facing negative cash flow.

HTZ is again heavily encumbered with inadequate unsecured alternatives.

Vehicle debt since before Ch.11 tells a complex story on funding range.

A hectic 2021 cap structure realignment and excessive shareholder rewards in 2021-2022 reflect overconfidence.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”

Credit Trend: Stable

Summary credit profile:

The mix of financial and operating variables paint a picture of a stable low BBB tier name with plenty of cyclical questions still ahead on where mortgage rates will trend with the UST curve steepening. At this point, MTH is moving further into peak selling season with a freshly printed bond deal, recent BBB3 composite ratings, and reaffirmed guidance for 2025. MTH offers a good track record in its distinctive strategy with 100% spec and a 60-day guarantee “sales pitch” that sent it to #5 in the homebuilder ranks based on units. MTH has been busy in the bond markets in 2024-2025 with new issue IG term debt, a convertible bond, and an extension/increase in the unsecured, undrawn credit agreement.

MTH is well positioned to deal with most scenarios ahead. If builders face an old fashioned downturn (economic contraction not stagflation), then in theory mortgage rates and affordability should benefit and MTH will adjust land spend, pricing actions will evolve, and pace will likely trump price. MTH will keep running its inventory strategy and 60-day guarantee plan that has allowed it to effectively compete vs. the “resale” market (existing home sales).

MTH ended 2024 at around 90% entry level orders (92% entry level % average communities), so the sensitivity of monthly payments and exposure of its core customer base is high. The past two years included a +200 bps Hi-Lo range in mortgages rates, and the MTH results were still quite strong. MTH has been tested, and they delivered. The stagflation scenario will test all industries, but homebuilders can adjust more rapidly than most in the context of the BBB and BB industrial universe.

Relative value:

We don’t see an abundance of 10-year paper in the homebuilders. We see some longer dated bonds in higher quality low A/high BBB credit tiers, but the sector overall is still characterized by below-market coupons and shorter maturities with so much issuance during the ZIRP and QE years. MTH is in the “distinctive middle” with a BBB3 tier unsecured bond composite rating on the cusp. Most major IG builders carry higher ratings (DHI, NVR, LEN, PHM). The current coupon on its 2025 vintage issue ($500 mn of 5.65% due March 2035) is currently around +170 bps (various sources). That 2035 bond offers a coupon over 100 bps above the BBB tier composite coupon and offers spreads materially wide to the BBB tier Industrial composite OAS of around +113 bps.

We see MTH as a good core BBB name in broader BBB context with the intrinsic financial flexibility of homebuilders and favorable demographic outlook supporting demand. MTH will face the same modest cyclical pressures and mixed signals we are seeing with builders in 2025, but MTH offers more resilience in the downturn and contraction scenarios that offer lower risks that what can be crafted for BBB commodity and manufacturing names in similar cyclical dynamics. A strong balance sheet, inventory liquidation and land spend flexibility, and the potential for lower rates in a routine contraction (i.e. not stagflation) is a differentiator.

Business risk:

We have discussed the relatively lower business risk profiles in our other credit commentaries on homebuilders where we highlight the ability to adjust land spend and liquidate inventories to generate cash in slower markets. That resilience applies to MTH although that comes with the caveat that they have a less liquid mix in their real estate asset coverage with a higher relative inventory of land/lot development vs. finished homes and homes under construction.

That inventory mix variable is a qualified reservation on relative business risk vs. peers since that 100% spec, 60-day delivery strategy (using realtors in the process) is distinctive in the peer group. The strategy has been successfully executed, and MTH has been picking up market share based on units (see Homebuilder Rankings: Volumes, Market Caps, ASPs 5-28-25). MTH has more exposure to mortgage rates than some of the BBB and upper BB homebuilder peers given their price tier and target customer mix at the entry level. Their ample land/lot supply gives them flexibility to cut land spend quickly in an economic contraction scenario.

Tariffs:

MTH has been like other homebuilders in being understated about the tariff threat, but the trade groups have been clear that such a tax on materials (lumber, aluminum, steel, copper, etc.) and major durables such as appliances will raise the cost for builders. Material costs can also flow into higher prices on finished lots, so overall tariffs are by definition a bad thing for builders as well.

The NAHB published an updated commentary on tariffs last month (see NAHB: How Tariffs Impact the Home Building Industry, NAHB Members Cite Impact of Tariff Uncertainty on Home Building ). Most builders do not want to get into discussions of trade partner burdens (making their suppliers eat more of the cost) or too much talk of pricing power or design strategies (“less house for their dollar”) to mitigate the impact. The variable cost heavy nature of the builders will allow them to design and price a house economically even if it comes at the cost of “some give” in gross margins.

Profitability:

The homebuilding market is currently facing somewhat of a stall as we saw in 1Q25 earnings season and guidance. For MTH, the 1Q25 period saw guidance reaffirmed from its 4Q24 release, and that was uncommon in the peer group. MTH is hanging its hat on investment and double-digit growth in community count in 2025. As the company said on its 1Q25 earnings call: “it's more about the community count growth that's driving our full year guidance than it is about us assuming that the market is going to get better.”

The reality of the broader YoY trend is that volumes (closings) were down. Average sales prices were down, and orders (units and dollars) were down. Gross margins were down with home closing margins down to 22.0% in 1Q25 from 25.8% in 1Q24 after 24.8% in FY 2024. We have seen plenty of gross margin erosion across the peer group from incentives, pockets of price weakness, mix shifts, and less operating leverage from SG&A. MTH is not underperforming and part of a broad trend. It should be noted the 22% handle margins are a few points above 2019 when home closing margins posted an 18% handle.

Balance sheet:

MTH has been busy on the liability management front in 2024 and 2025 with refinancing and extension of bonds via unsecured notes and a convertible issue. MTH also grew and extended its undrawn unsecured credit facility with $910 million now due in June 2029. MTH issued a new convertible during May 2024 with the $575 million use of proceeds to refinance debt and build cash: “increased our available sources for land spend, dividends, and share repurchases.” As cited in Relative Value above, MTH issued $500 mn of 10Y bonds to pad its liquidity cushion and continue to grow its community count. Land spend was 86% of the capital allocation in 1Q25 with the remainder allocated to share repurchases (8%) and dividends (6%).

Net debt leverage ticked higher into 1Q25 (13.7%) from 4Q24 (11.7%), up from 1.9% at FY 2023. MTH is now more aggressive to fund expansion, but net debt/cap of only 13.7% is strong and worthy of IG ratings. The asset coverage we like to look at (e.g. inventory as a multiple of total debt and net debt) offers a very substantial cushion to bondholders as detailed in the charts below. The undrawn credit agreement has a leverage ratio test of less than 60% and MTH currently is at 11.8% under that definition. That leaves a lot of room for cyclical disappointment.

SELECT CHARTS

Feeling the gross margin squeeze like most builders.

Closing volumes and ASPs biased lower but orders are rising.

Both sides of balance sheet growing. Development inventory mix is higher vs. peers.

Leverage rising off the 2023 lows but well below 2019.

Cash flow deployment focused on land and growth.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”

• Every now and then it is useful to step back and see where the various industry players rank relative to one another, so we do that exercise for some of the largest public homebuilders.

• We line them up by volumes (deliveries, closings, contracts, settlements or the term of choice for those builders), by market capitalization for the public builders (excludes M.D.C.), and by average selling prices (ASPs).

• There is little in the way of surprises, but this cyclical sector is getting more investor focus at this point in the cycle as sellers/buyers wrestle with high mortgage rates, supply-demand imbalances, and a major shortfall in housing supply relative to demographic need.

• Homebuilding is one of a handful of industries that define the consumer sector and which (along with autos), is one of our favorite sectors to watch for a sea level gut check on how household economics and consumer financial risk appetites are framing up.

The above chart details the market caps of 16 public builders lined up from highest to lowest. The top 5 are the only large cap names, and we see 6 more in this list in the small cap bucket (using $2 bn as a demarcation line for “small cap”). The chart offers one more reminder of the scale of the largest builders vs. the peer group. We include the bulk of the publicly traded builders from the combined IG and HY index. There are more private than public in HY.

The above chart lines up the builders by units whether the builder chooses closings, deliveries, or a related metric (contracts, settlements). The unit volumes obviously tie into the Average Sales Prices (ASPs) for a home sales revenue line, but there were a few interesting details in the ranking such as Meritage at #5. The rankings of names such as Dream Finders (DFH), Century Communities (CCS), and M/I Homes (MHO) might surprise some.

The Average Sales Prices (ASPs) run across a wide range from luxury segment leader Toll Brothers on top to the #1 Homebuilder by units (DHI) at under $400K and 3 off the bottom. We were looking at Meritage, M/I Homes, and Century Communities, and we thought this list was worth generating. Dream Finders Homes (DFH) is another one less visible in the credit markets with a single HY index bond, and it is positioned just below the middle of the pack for ASP as well as volumes.

Housing:

Existing Home Sales April 2025: Soft but Steady 5-22-25

Home Starts April 2025: Metrics Show Wear and Tear 5-19-25

New Home Sales March 2025: A Good News Sighting? 4-23-25

Homebuilders:

Credit Snapshot: PulteGroup (PHM) 5-7-25

Credit Snapshot: Toll Brothers 5-5-25

Credit Snapshot: D.R. Horton (DHI) 4-28-25

Credit Snapshot: Lennar (LEN) 4-15-25

Credit Snapshot: Taylor Morrison Home Corp (TMHC) 4-2-25

KB Home 1Q25: The Consumer Theme Piles On 3-25-25

Toll Brothers 1Q25: Performing with a Net 2-20-25

Credit Crib Note: Lennar Corp (LEN) 1-30-25

D.R. Horton: #1 Homebuilder as a Sector Proxy 1-28-25

KB Home 4Q24: Strong Finish Despite Mortgage Rates 1-14-25

Toll Brothers: Rich Get Richer 12-12-24

PulteGroup 3Q24: Pushing through Rate Challenges 10-23-24

KB Home: Steady Growth, Slower Motion 9-26-24

Lennar: Bulletproof Credit Despite Margin Squeeze 9-23-24

Credit Crib Note: PulteGroup (PHM) 8-11-24

Credit Crib Note: D.R. Horton (DHI) 8-8-24

Homebuilders: Updating Equity Performance and Size Rankings 7-11-24

Credit Crib Note: KB Home 7-9-24

Lennar: Key Metrics Still Tell a Positive Macro Story 6-20-24

Credit Crib Note: NVR, Inc. 5-28-24

Toll Brothers: A Rising Tide Lifts Big Boats 5-23-24

Credit Crib Note: Taylor Morrison 5-20-24

PulteGroup: Strong Volumes, Stable Pricing 4-24-24

D.R. Horton: Ramping Up in 2024 Despite Mortgages 4-19-24

D.R. Horton: Credit Profile 4-4-23

Credit Trend: Stable

Summary credit profile:

LAD has posted steady growth as the #1 franchise dealer with a heavy reliance on M&A as part of its rapid expansion over the past cycle, including $8.3 bn in deals since 2019. LAD has materially grown both new and used unit volumes. LAD has been expanding in multiple growth areas such as digital retailing and more recently captive finance (not to be confused with the Finance and Insurance revenues of their franchise dealers). For more background history, see Credit Crib Note: Lithia Motors (9-3-24).

While the consumer cycle and tariffs justifiably get the most attention in autos lately, the franchise dealer issues will be more about working capital management, floor plan mix, and coordinating with their manufacturing partners (OEMs) to minimize the tariff disruptions while sustaining volumes. The dealers are much less exposed than the supplier-to-OEM chain to financial damage from tariffs. Among the challenges in 2024 for LAD were weaker same-store profitability metrics and higher leverage, but trends improved in 1Q25 during a strong pre-buying period ahead of tariffs. For now, the factors net out to “stable” credit trends as LAD gets more selective in M&A.

Relative value:

LAD bonds trade tight for the BB tier as a consumer cyclical retail operation with a big M&A appetite, but LAD is comfortably wide to the BBB tier with LAD bond spreads in the midrange between the BBB and BB composite OAS levels. LAD has the appeal of being a safer HY consumer play in a tier of the credit markets where the word “retail” has a jaded history. The variable cost structure (low fixed costs) make LAD distinctive in the broad auto category in terms of its tariff risks.

LAD has 3 index bonds as a BB2 composite in short to intermediate maturities with below market coupons (4.625% of 12/27, 3.875% of 6/29. 4.375% of 1/31). LAD attracts crossover investors from the BBB tier since auto retail and services present lower business risk than high fixed cost auto suppliers and OEMs. Reliable cash flow and replacement cycles combined with the very high margin Parts & Service revenue to support profits across the cycles. LAD’s captive finance operations are off to a good start as a profit growth business line, but asset quality trends merit scrutiny if the consumer sector weakens.

Business risk:

LAD presents an above average business risk profile vs. auto retail peers such as AutoNation (AN) and Penske (PAG) based on LAD’s aggressive M&A program and heavy investment in digital retail and used cars. In the “long game,” those investments put LAD ahead of the curve, and the post-tariff market will give used vehicle operations some renewed growth opportunities. Auto dealers present less financial risk in a downturn than suppliers and OEMs with their high fixed cost exposure.

For credit risk (in contrast to equity valuation challenges), the variable-cost-heavy nature of dealer inventory and the ability to adjust brand and model selection gives auto retail much greater flexibility to adjust brand and model mix to the eventual auto tariff reality. One important element is how the Japan and South Korea trade talks play out. Closely monitoring dealer trends and stress points for some of the more import-dependent brands will be a challenge, but the largest base of US-produced vehicles in the “import brands” (“import” as in not legacy Detroit 3) will be something the Big 6 public dealers will be able to adjust to without creating major financial risks. That sure does not mean it will be easy.

The heavy investment in used vehicle operations offer some mitigating factors for LAD in what is likely to be a fresh round of consumers shifting back toward used vehicles as tariffs put upward pressures on new vehicle prices. That is a silver lining side effect for used auto retail from the otherwise damaging tariff actions. The used car business will see higher prices and solid demand based on affordability, but it comes at a cost to new vehicle volumes. As the #1 new vehicle retailer, the ability to leverage captive trade-in vehicles can be a sourcing advantage for used inventory even as LAD leverages their increasingly developed digital capabilities and omnichannel strengths to compete with CarMax and Carvana in that space. Captive auto finance earnings in new and used will allow for some earnings differentiation vs. franchise dealer peers.

Like some other auto retailers, LAD has expanded in the UK. The long-term strategy targets growth and market share, and LAD is pulling away from franchised dealer peers across multiple avenues of expansion. M&A, international, and captive finance bring more execution challenges, and the tariffs and consumer cycle will offer a fresh round of tests in making these strategies work.

Tariffs:

In reviewing the mix of risk factors from auto tariffs on new vehicles and parts/suppliers, there are a lot of variables at work. For auto retail, the overriding worry is same store volume weakness on price impacts. The earnings calls and trade press commentary have been voicing the view that the dealers are much better positioned and their partnership with the OEMs will make for an orderly process for auto retail. That is a low bar to clear given how challenging the market will be for the auto suppliers and OEMs.

The net effect is that tariffs are negative for “anything auto” even if just on the uncertainty and morphing (and often inconsistent and even reversible) policy actions. While tariffs and the relative exposure to manufacturing material cost changes (steel, aluminum, copper, possibly semis and electronics) will drive the “cost of sales” line higher for suppliers and OEMs, the end result is still somewhat of a moving target (including for domestic content and allocated parts tariffs for US-produced transplants).

The clear trend for margins will be negative in manufacturing while retail volumes could suffer on price increases. The SAAR forecasts from the dealers seem to run in a 1-million unit range with midpoints generally showing 16 handles. All parties still need a lot more input ahead on trade and tariff negotiations.

The effects in the end will be very much dependent on the policies and actions of the OEM partners, who have a vested interest in the health of their dealer network. Attempts to recoup tariff costs via selling prices will tie into numerous other factors including “cost sharing” with supplier chains, OEM support and dealer/customer incentives.

The brand/model diversification story has its limits and the mix of US-manufactured “import brands” can vary by dealer. The same is true for the component mix using imported, high value-added parts (e.g. engines, transmissions). The content mix and where the vehicle was produced can vary for the leading import brands across the Japanese, South Korean, and German OEMs. Many import models also source parts and vehicles from Mexico and Canada.

For 1Q25, the leading brand revenue mix for LAD included Honda at #1 (13% of brand revenue) Toyota #2 (11%), Ford #3 (10%), BMW/Mini at #4 (9%), and Stellantis (legacy Chrysler/Ram/Jeep) at #5 (8%). Legacy Domestic was 25% in total. The Japan and South Korea talks are dragging on, and the bigger EU battle will come later with pharma tariffs. As a frame of reference, the UK “deal” (more like a “loose, incomplete framework”) was a de facto tariff-based quota for UK autos.

Profitability:

Given the M&A history, same-store metrics are more useful at the operational level. The M&A driven growth is impressive, but the same store adjustments also help tell the story in traditional retail metrics fashion. LAD same store profitability struggled in new vehicles in 1Q25 with the other business lines showing favorable same store trends. Same store unit volumes were positive for 4Q24 and FY 2024 and for new vehicle revenues, but same-store gross profits growth was negative. We break those out in the charts below. The sticker shock in new and used vehicles since 2019 is evident in the price details in the charts below. Now the tariff impact could add to that.

The record total revenue is a testament to LAD market share ambitions and capturing more value across the service chain including Aftersales (“Parts and Services” a common term for that unit), finance, used vehicles, and building out digital operations. As a reminder, the “mid-term” goal is $40 bn to $50 bn in revenues and long-term goal is $75 bn to $100 bn. That implies a lot of M&A over time for an industry leader with only around 1% market share of “total new and used.” LAD is targeting 5%. The industry is very fragmented, so it is about M&A timing, volume growth new vs. used, OEM support, and pricing.

Operating profits peaked in FY 2022 with the boom in used cars and despite the tightening cycle. Adjusted EBITDA has been in a narrow range from a high of just under $2 bn in 2022 in the peak earnings years to $1.6 bn in FY 2024. We highlight the exceptionally profitable, high margin parts and services business line (“Aftersales”) in the charts below and the clear potential to grow the captive finance business. That diversification and less volatile earning streams also serve to reduce business risk across time. The aftersales business has pricing power to pass through tariff costs on parts.

Balance sheet:

LAD has a more complicated business mix and balance sheet profile, so the analytical framework needs some tweaking including adjustments for floor plans and nonrecourse debt which LAD breaks out in detail each quarter. Adjusted net debt to EBITDA was 2.47x at 1Q25 vs. 2.31x at 1Q24. That compares to 2.56x at FY 2024, which was higher than 1.83x in 2023. The Net debt/Adj. EBITDA bank line covenant max is 5.75x. The target range is 2x to 3x. The leverage low was in 2021 at 1.1x, half the 2.2x back in 2018. Adjusted EBITDA in 2024 was down by -8.4% to $1.62 bn on an adjusted basis ex-finance. For 1Q25, adjusted EBITDA was up by 17.1% YoY vs. 1Q24 while LTM EBITDA for 1Q25 was down slightly (-4.7%) YoY.

The cash flow chart below tells a simple story of the very high rate of acquisitions as LAD pursues its growth plan. An important point is that LAD has articulated ambitions for investment grade credit ratings with that interest sharpened by the goal of capturing more of the auto value chain with DFC and seeing that translate into LAD’s valuation multiple.

We again emphasize that the captive finance operations of Driveway Finance Corp should not be confused with the Finance and Insurance (F&I) operations of the dealers. The greater margin for LAD by using its captive capability has been covered in earnings calls. DFC financing is one more menu item for customers and dealers. The F&I business line is one of the lead profit generators for LAD at over 25% of gross profits. DFC is reshaping the balance sheet with more nonrecourse debt and ABS usage ahead.

Driveway Finance Corporation (DFC):

DFC continues to post rapid growth in average managed receivables in 1Q25 as origination grew by over 26% YoY in the pre-tariff rush to $4.1 bn. That came after flattish origination volumes in FY 2024 vs. FY 2023. DFC posted higher penetration rates of 13.7% in 1Q25, up from 11.6% in FY 2024, 11.0% in 2023, and 10.2% in 2022. The long-term goal is 20% penetration rates.

As detailed in the chart below, loan performance and quality metrics are favorable with FICOs rising again to 744. The 2.1% net credit losses in 1Q25 were down from 2.5% in FY 2024 and 2.3% in 2023 and are comfortably under the allowance for losses of 3.1%, which has remained in a steady narrow range since DFC ramped up after 2021.

SELECT CHARTS

Steady M&A-driven growth in a low margin, fragmented business.

The revenue mix highlights the rising share of used vehicles this cycle.

Same store metrics are important given LAD’s very heavy M&A history.

Profit mix underscores the leading contribution of Aftersales and F&I services.

The balance sheet shows steady growth in assets and debt on M&A.

The use of cash tells the story with M&A leading across the cycle.

Captive finance ramp-up shows profitable, prudent growth to capture value.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”

Credit Trend: Stable

Summary credit profile:

As the #3 homebuilder in the US behind D.R. Horton and Lennar, Pulte (PHM) historically was able to boast “industry-leading gross margins” as evidence of its operating strengths. For financial risk, PHM posted a cash hoard now just slightly below homebuilding debt. Net debt % cap of 2.8% at 1Q25 and total debt leverage of 11.8% run alongside a $1.2 bn unrestricted cash level as the peak selling season unfolds. Cash + inventory of 8.7x debt drives home an impressive cushion of asset protection. The high margins, low leverage, balance sheet liquidity, and asset coverage metrics make for a single A tier profile that has lagged at the agencies (see Credit Crib Note: PulteGroup 8-11-24).

PHM has an impressive track record across the deep recession following the systemic crisis, housing sector downturn, the COVID turmoil, and the 2022-2023 tightening cycle and related spike in mortgage rates. Like most builders, they are entering a period of weaker volumes in 2025 and will see some margin pressure (modest in PHMs case). Even with the credit metrics stabilizing overall, PHM should be up in the single A tier alongside D.R. Horton and NVR.

Relative Value:

As noted, Pulte should follow the recent D.R. Horton and NVR upgrades into the single A tier of the index. They have minimal refinancing needs, but they have a more interesting mix of higher coupon bonds beyond 2030 given some legacy call-protected bonds issued in the early 2000s. PHM is less risky than numerous single A tier names if rational metrics and consistent business risk standards are applied relative to fixed cost-intensive industrial and cyclical issuers. We like the higher coupon bonds in the PHM mix with 2032 to 2035 maturities for income and credit stability.

PHM has 4 bonds in the index with 3 of the bonds (7.875% of 2032, 6.375% of 2033, 6.0% of 2035) issued early in the millennium that carried strong make-whole protection and are currently at par-plus levels. Those bonds have seen some wild times along the trail as PHM navigated the housing bubble and ensuing sector collapse (Pulte and Centex merged in 2009 in an all-stock deal). We see those bonds as worth holding tight in 2025 for the home stretch. They are solid and safe income holdings. If they are ever available in secondary markets, they are easy to get comfortable with in terms of credit risk even if builder equities take a beating.

The 7.857% bond was carrying a very high premium (13 points to start May 2025) that puts an asterisk on relative value, but that bond is not one for owners to worry about regardless of where the cycle heads. PHM also has a short $251 mn bond due in March 2026, so refi needs are minor near term.

Business Risk:

PHM still is very involved in land development but has posted exceptional results while doing so. Some of the theoretically riskiest markets since the housing bubble were seen in recent years on rising mortgage rates, but most builders pushed right through. PHM’s ability to navigate such a market is clear in the earnings and cash flow trends. PHM is well positioned across product tiers with 60% in Move-up (38%) and Active Adult (22%) with 40% first-time for FY 2024. The Del Webb brand has always ranked among leaders in the Active Adult (55+) space.

The working capital management flexibility and strong balance sheet of Pulte makes this a very safe name in the context of the BBB tier industry mix. That is notably the case vs. high fixed cost manufacturers and commodity exposed names. PHM is also well positioned vs. peers exposed to the homebuilding sector (suppliers or builders).

Tariffs:

Most of the homebuilders downplay the tariff threat on their earnings calls, but their voices are heard through their trade groups. The NAHB has made it clear that tariff-related cost pressures will have an adverse impact on their business in the form of direct costs and in terms of cyclical anxiety and the willingness of homebuyers to transact. The NAHB has offered ample details on tariff headwinds including material cost increases tied to country or product-specific tariffs on Canada (lumber, aluminum. steel) and Mexico (gypsum). Tariffs on a wide range of components/supplies from Asia also factor in.

The builders can work with their trade partners to share the burden and can mitigate the cost impact in their design and pricing decisions. Major builders are critical downstream customers for suppliers and can offer long-term reliable, recurring annual revenues. That means leverage at the negotiating table on which costs are “shared” (“eaten by”) trade partners. For the builders, the monthly mortgage payment strain, together with rising materials and labor costs, make for tough trade-offs with pricing and incentive programs which also weigh on gross margins.

Profitability:

The trend line in early 2025 is clearly showing some cyclical weakness, and Pulte is feeling some mild pressure on its margins from a higher level while still beating homebuilder peers (margin convergence with Toll Brothers at the top of the group). With average selling prices of $570K, PHM is in the upper quartile of the major builders as ASPs increased in 1Q25 after rising in FY 2024. The reality in 2025 so far is that closings, net orders, and backlogs are all lower, so the slowdown in housing is here for PHM also. As detailed in the charts below, gross margins peaked in FY 2022 at over 30%, but current margins remain well above pre-COVID levels. PHM is guiding to 26% handle margins for FY 2025.

Segments are mixed by regions with 3 of the 6 geographic segments posting lower earnings in 1Q25. That comes after FY 2024 posted 4 higher and 2 lower. The numbers can vary based on community counts and regional working capital management. Consumer sector health, sentiment surveys, and potential pressure from tariffs are all on the short list to monitor for housing sector headwinds. Mortgage rates have swung in a 200 bps range since fall 2023, so that is a wildcard in affordability with very favorable demographics still the main positive factor in homebuilding that mitigates downside risk.

Balance sheet:

Excess balance sheet liquidity relative to debt and impressive inventory coverage of total debt tells a clear story of low financial risk. The strong leverage measures of 2.8% net debt to cap and “cash + inventory” coverage of 8.7x debt comes despite PHM’s aggressive stock repurchase activity and steady dividends. PHM no longer sets a target leverage range and will use free cash flow and capital allocation priorities as a guide in its debt levels.

Cash flows and capital allocation:

High land investment, stock buybacks, and a rising dividend did not deter PHM from lowering its total homebuilding debt by over 40% since 2019 as PHM’s net income tripled and stock buybacks quadrupled. That makes for a good credit story when capital allocation can be so favorably balanced across lower debt and higher shareholder rewards.

During 2024, PHM allocated around $5.3 bn to land acquisition and development. For 2025 the expectation is for a decline to $5.0 bn, but they emphasize that can go higher or lower subject to market conditions. For stock buybacks, PHM has a lot of room to maneuver after $300 mn in 1Q25 with authorization as high as $1.9 bn. That would dwarf historical buybacks. With over $20 bn in market cap, a 5% buyout rate would be in line with some larger peers. At a 7% buyback, that would be higher than the peak buyback of FY 2024 of $1.2 bn.

Select Charts

High end of the peer group in gross margins in a record 2024.

1Q25 sees rising ASPs but closings, orders, and backlog all lower.

Mixed segment earnings with Florida way out in front.

Segment volume peaked in 2024, mixed but declining in 2025.

Minimal net leverage, impressive asset coverage, high cash vs. debt.

Capital allocation still favors heavy stock buybacks.

DISCLAIMER

As disclaimers always say, these are just our opinions, and we are not giving anyone investment advice nor do we consider the application to their unique or distinctive portfolio needs or risk appetites. We use what we believe to be reliable sources from company reports, financial filings, event webcasts, and transcripts among other information sources. We routinely read and consult reputable industry and trade literature. We consult a range of data sources on bond prices including those that detail recent trades. When considering the impact of tariffs, we can assure you that we do not rely on Donald Trump. We actually know “the buyer pays.”