DBRS Confirms Hertz Corporation’s Rating at BB, Trend Stable

DBRS has today confirmed the Issuer Rating of Hertz Corporation (Hertz or the Company) at BB. The trend on all ratings remains Stable. The ratings reflect the Company’s strong business franchise and leading market position in the daily vehicle rental business, its sizeable variable cost structure and its solid fleet management. The ratings also consider the ongoing pressure on profitability, the highly leveraged position and the reliance on wholesale funding markets.

The strong business franchise, combined with solid fleet management has allowed Hertz to navigate successfully through seasonal markets and various business cycles. However, beginning in the latter part of 2008 and into 2009, profitability and revenue generation have been pressured by the weakened general economic environment in the U.S. and Europe. For the nine months ending September 30, 2009, Hertz reported a loss of $124.0 million compared with a profit of $10.9 million a year ago. Declining rental transaction volumes pressured revenue, with the Company’s Car Rental segment experiencing a 16.9% decline year-on-year in revenues. To counter this, Hertz leveraged its sizeable variable cost structure by reducing its rental fleet by 9.2%, thereby removing significant costs and effectively reducing a level of earnings pressure. For the nine months ended September 30, 2009, direct operating expenses declined 19.4% from a year ago. Rental transaction volumes have begun to stabilize, albeit at lower levels, while pricing improved, especially in the leisure travel segment. Further, improving used-vehicle markets has resulted in increasing residual values, reducing the near-term risk of additional losses associated with the disposal of non-program vehicles. Nonetheless, DBRS anticipates that earnings will remain under pressure for the balance of 2009 and well into 2010, as travel volumes are expected to remain depressed and funding costs continue to be elevated.

DBRS considers the acquisition of Advantage Rent-A-Car (Advantage) by Hertz, as a long term positive for the Company, as it provides Hertz with an established brand in the price-oriented customer market. Moreover, the acquisition enables Hertz to retain customers who during periods of economic downturns replace premier brands with lower cost substitutes. Given the size of the Advantage transaction, downside risk to this transaction is very limited, yet the upside adds to the overall franchise strength.

The rating considers the funding profile, which has improved with the closing of the $2.14 billion fleet debt refinancing and the recent issuance of $1.2 billion of asset-backed notes. These transactions reduce refinancing risk, given they account for a significant portion of the $4.2 billion 2010 vehicle related debt maturities. Further, funding pressure is mitigated by the Federal Reserve’s recent decision allowing rental car ABS financings as eligible assets under its Term Asset Liquidity Facility (TALF), which is now slated to continue until March 31, 2010. Nonetheless, the Company remains reliant on wholesale markets for its funding.

The Company’s highly leveraged position is factored into the ratings. however the high proportion of fleet-related debt in the debt stack provides a level of tolerance, given the flexibility in altering the fleet size and composition. Further, the equity offering and private placement completed earlier this year reduced leverage. Importantly, DBRS believes this transaction demonstrates the strength of the franchise and the Company’s ability to access capital during difficult market conditions. Finally, the ratings consider the highly encumbered nature of the balance sheet which is factored into the one notch differential between the Issuer and the Senior Unsecured Debt ratings.

The trend is Stable. Although DBRS expects that near-term underlying performance will be under a level of pressure, the presence of large variable costs within its cost structure provides Hertz with significant financial flexibility to adjust its business for the economic cycle. Further, the Stable trend reflects the more recently stabilized operating environment and the reduced level of refinancing risk.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our website under methodologies.

This is a Corporate (Financial Institutions) rating.