DBRS Comments on Hertz Corporation 2Q10 Results, at BB, Trend Positive

DBRS has today commented that the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB are unaffected following the Company’s announcement of 2Q10 financial results. The trend on all ratings is Positive.

Today’s comment follows Hertz’s earnings release indicating a pre-tax loss of $6.2 million for 2Q10 compared to pre-tax income of $30.7 million in 2Q09. Of note, the comparable period included a $48.5 million gain related to the buyback of Company debt. Excluding this one-time gain, the pre-tax loss narrowed 65% from the comparable period a year ago. Increasing direct operating and SG&A expenses resulting from the expansion of off-airport locations over the past twelve months, partially offset by an increase in revenues were the key drivers of the quarterly loss. Corporate EBITDA was up slightly to $281.4 million; however, excluding a $32 million one-time compensation benefit owed to temporary wage and select benefit reductions in 2Q09, corporate EBITDA increased 13.3%. For the quarter, total worldwide revenue increased 7.5%, excluding the effects of foreign currency movements, to $1.9 billion. The growth in revenues were primarily driven by increasing demand from corporate travelers in both U.S. and Europe, and solid growth in both the off-airport business and Advantage, the Company’s cost-conscious leisure travel brand acquired in 2Q09. Importantly, the Company’s core U.S. Rental Car business reported a record second quarter with $32.5 million of adjusted pre-tax income, driven by good revenue growth and lower fleet costs. Given the tepid economic recovery and the continuing weak demand for rental equipment, DBRS considers the results as illustrating solid underlying momentum.

Worldwide car rental revenue increased 10.0%, excluding the effects of foreign currency movements, to $1.6 billion for 2Q10. Importantly, revenue increased more than 9% in each of the U.S., Europe and Other International operations, demonstrating good momentum across the franchise. Rental rate revenue per transaction day (RPD) declined 0.1%, as leisure pricing was weak and commercial pricing remains pressured by competition. The slight decrease in pricing was more than offset by an 8.9% increase in worldwide rental transaction days; as corporate travel increased in both the U.S. and Europe, and the Company experienced solid demand growth in U.S. off-airport. Further, Hertz reported an 11.6% decrease in worldwide monthly rental car net depreciation reflecting the lower fleet acquisition costs, increasing utilization of non-auction sales channels, and the continuing robust used-vehicle market. The improved performance in worldwide rental car was offset by a 5.9% decrease, excluding the effects of foreign currency movements, in worldwide equipment rental revenues as pricing remained weak and demand, while showing early indications of stabilization, remains restrained.

Liquidity and funding remain solid. Hertz has successfully extended and laddered its maturity schedule, refinancing International fleet debt with issuances totaling EUR 1.02 billion while completing approximately $930 million of U.S. ABS fleet debt financing. Remaining maturities to be refinanced in 2H10 are minimal consisting of some international fleet financing. At June 30, 2010, corporate liquidity totaled $1.7 billion.

The Positive trend reflects Hertz’s announced definitive agreement to acquire Dollar Thrifty Automotive Group, Inc. (DTAG) (rated B (high) by DBRS). Given the recently proposed acquisition offer made to DTAG from Avis Budget Group, Inc. (rated B (high) by DBRS), DBRS continues to monitor developments regarding the potential sale of DTAG and may provide further commentary or take rating actions as developments warrant.

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.