DBRS Confirms Issuer Rating of Avis Budget Group, Inc. at B (high), Trend Stable

Today DBRS Inc. (DBRS) has confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), including its Issuer Rating of B (high) and Senior Unsecured Debt rating of B. Concurrently, to better reflect the corporate structure of Avis Budget, DBRS has assigned additional ratings, including an Issuer Rating of B (high) and Senior Unsecured Debt rating of B to Avis Budget Car Rental, LLC (Car Rental), the operating company and primary issuer of the Company’s corporate debt. The trend on all ratings is Stable. Today’s rating action follows the Company’s announcement of 4Q10 and full-year 2010 financial results.

The rating confirmation reflects the Company’s strong business franchise, improving financial performance, 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. Moreover, the ratings consider the leveraged position of the Company and reliance on wholesale sources for funding. Further, the improving industry fundamentals, which include increasing rental demand and volumes, solid pricing and improved market-wide access to funding, are factored into the rating confirmation.

DRBS sees Avis Budget’s strong business franchise as being 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 and the premium Avis brand catering to the premium and corporate traveler affords the Company multiple touchpoints with customers. Moreover, the brands enjoy complementary demand patterns, which the Company leverages by shifting fleet to meet demand, thereby enhancing fleet efficiency. Given the strengthening economic environment and corresponding improvement in travel volumes, DBRS sees the Company as well-placed to continue the positive momentum into 2011.

The ratings consider the positive trajectory in the Company’s financial performance. For 2010, Avis recorded net income of $54 million, its first profitable year since 2005. Importantly, corporate adjusted EBITDA increased to $410 million, a 69% improvement over 2009. Revenues increased slightly year-on-year to $5.2 billion, as pricing improved marginally, while ancillary revenues increased. However, these increases were partially offset by a small decline in volumes, as the Company continued its exit of less profitable rental channels. Moreover, the improving results were driven by the 320 basis point increase in EBITDA margins, which benefited from the healthy used vehicle market and cost containment actions implemented by management. Further, the large portion of annual operating costs, which are variable in nature, provides a level of operating and financial flexibility enabling the Company the ability to adjust its fleet size to meet changes in market demands. Reflecting this flexibility and the ongoing focus on removing excess costs, Avis Budget’s corporate efficiency has improved with direct operating costs representing 50.5% of revenues, a 90 basis point improvement from 2009.

The ratings consider the improving funding profile, which has been underpinned by the Company’s generally good access to the capital markets. In 2010, the Company issued $1.05 billion of senior unsecured debt and $1.3 billion of fleet-related debt. Importantly, the completion of the fleet-backed transactions removes a substantial degree of refinancing risk, given this represents essentially all of the 2011 vehicle-related debt maturities. Moreover, the Company has no corporate debt maturities until 2014. Nonetheless, the Company remains reliant on wholesale funding markets for its funding.

DBRS view the Company’s leveraged balance sheet as a negative factor in the ratings. However, the high proportion of fleet-backed debt in the debt stack provides a level of tolerance, given the flexibility in altering the fleet size and composition as discussed above. Also, DBRS notes $349 million of proceeds from 4Q debt offerings will be utilized to repay corporate debt should the DTAG acquisition not be completed, which would result in leverage (corporate debt-to-corporate adjusted EBITDA) commensurate with industry peers. Further, the ratings consider the highly encumbered nature of the balance sheet, which is factored in the notch differentials between the Issuer and Senior Unsecured Debt ratings.

In the autumn of 2010, Avis announced its intention to continue to pursue the acquisition of Dollar Thrifty Automotive Group, Inc. (DTAG) (Issuer Rating of B (high) by DBRS). The companies are cooperating with the regulatory review of such a combination; however, no definitive merger agreement has been signed. Given the absence of an executed agreement and the lack of additional key details regarding any proposed transaction, DBRS sees no rating impact at this time. Should an agreement be reached and regulatory approval granted, DBRS will review the impact of the acquisition on Avis Budget’s strong domestic franchise, balance sheet, future earnings generation ability, market position and fleet management. Nevertheless, should any potential acquisition materially increase balance sheet leverage ratings could be negatively impacted.

The trend is Stable, reflecting DBRS’s view that Avis Budget’s underlying performance will progress and the positive trajectory will persist as the Company focuses improving margins through good pricing discipline and cost cutting initiatives. Moreover, the Stable trend considers the expectation that funding costs will continue to improve as Company spreads normalize. Lastly, the trend reflects DBRS’s expectations that the positive momentum in the industry fundamentals will carry on into 2011, with the expectation that demand will sustain its positive momentum and the used-vehicle market remains favorable.

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 the DBRS website under Methodologies.

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Rating Committee Chair: Alan G. Reid
Approver: Alan G. Reid
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 16 December 2009