DBRS Assigns Issuer Rating of B (high) to AvisBudget Group, Inc., Trend Stable

DBRS has today assigned an Issuer Rating of B (high) and a Senior Unsecured Debt rating of B to AvisBudget Group, Inc. (AvisBudget or the Company). The trend on all ratings is Stable. The ratings reflect the Company’s strong business franchise, its leading market position in the daily vehicle rental business, its financial flexibility derived from significant variable costs in the overall cost structure and the solid fleet management. The ratings also consider the continuing pressure on profitability, the thin capital base for the size of the balance sheet, and the reliance on wholesale funding markets.

AvisBudget’s strong business franchise is underpinned by its dual-brand strategy. The franchise combined with solid fleet management has allowed the Company to navigate through seasonal markets and various business cycles. The presence of the Budget brand, which has traditionally focused on the price conscious and leisure traveler, has afforded the Company the ability to protect market share in economic downturns, as travelers become more cost sensitive and trade down from the premium Avis brand.

The ratings also consider the solid operating and financial flexibility derived from the significant presence of variable costs in the overall cost structure. In the autumn of 2008, the deteriorating global economic environment resulted in reduced business and leisure travel volumes driving rental transaction volumes lower. This pressure on transaction volumes has continued for the first nine months of 2009, reducing overall revenue. To counteract the pressures on revenue, AvisBudget took steps to reduce excessive costs. Importantly, a sizeable portion of the Company’s annual operating costs are variable in nature, providing a degree of operating and financial flexibility to counter declining revenues. To this end, in the nine months ended September 30, 2009, AvisBudget, removed 18% of direct operating costs year-over-year by reducing average fleet size by 19% and extending the average age of the fleet. This ability to rapidly remove costs in response to declining transaction volumes demonstrates sound fleet management, which mitigates earnings pressure during periods of reduced economic activity.

The rating and Stable trend also consider pressured revenue and net income for the balance of 2009 and well into 2010, as travel volumes are expected to remain low and funding costs continue to be elevated. 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. These stabilizing factors, if continued, will relieve some of the earnings pressure.

The rating considers the recent actions by the Company to significantly improve the funding profile. AvisBudget has completed $2.85 billion of domestic fleet financing in three separate transactions. Importantly, the completion of these transactions removes a substantial degree of refinancing risk, given this represents a sizeable portion of the $3.5 billion of vehicle related debt maturities in 2010. 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 funding markets for its funding.

Leverage remains elevated, with corporate debt-to-equity of 8.2 times(x) at September 30, 2009. DBRS considers improving the capital base, including tangible equity, as a prerequisite for upward ratings migration. Further, the ratings consider the highly encumbered nature of the balance sheet. This is also factored in the notch differentials between the Issuer and Senior Unsecured Debt ratings.

The trend is Stable. While DBRS expects that AvisBudget’s near-term underlying performance will be under pressure, the presence of large variable costs within its cost structure provides the Company with sizeable financial flexibility to manage through 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.