DBRS Comments on Avis Budget Group, Inc.’s 1Q11 Results, Unaffected at B (high), Trend Stable

DBRS Inc. (DBRS) has today commented that the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), including its Issuer Rating of B (high) are unaffected following the Company’s announcement of 1Q11 financial results. The trend on all ratings is Stable.

DBRS views Avis Budget’s results as demonstrating positive momentum across the franchise, the benefits of improving industry fundamentals and continuing strengthening of the funding profile. For the quarter, Avis Budget reported a pre-tax profit of $11 million compared to a pre-tax loss of $66 million a year ago. Revenue generation continued the recent positive trajectory. At $1.2 billion, revenue grew 7% year-on-year due to an increase in transaction volumes partially offset by a slight decline in pricing. Of significance, 1Q11 was the third consecutive quarter of positive year-on-year revenue growth. Furthermore, the Company’s results benefited from lower fleet costs which were helped by the still healthy used vehicle market. Fleet costs per unit were 11% lower year-on-year benefiting from strong used vehicle residual values and a $30 million of gains on disposal of fleet vehicles. Direct operating costs remain contained at 53% of total revenues unchanged from a year ago.

EBITDA adjusted to only include interest and depreciation expense related to the vehicle fleet and excludes restructuring and transaction related costs, increased to $83 million from $39 million a year ago. Importantly, for the third consecutive quarter all three operating segments reported year-on-year growth in adjusted EBITDA, illustrating the improving operating environment drive by improving rental demand. Indeed, despite unfavorable winter weather during the quarter, total car rental days increased 7%, evidencing the strengthening recovery in commercial and leisure travel and the strength of the Avis and Budget brands. Pricing, or time and mileage revenue per day, declined 1%, reflecting competitive pricing conditions, as the industry was slightly over-fleeted early in the quarter. Moreover, the slightly lower pricing reflects the shift in rental mix towards off-airport and leisure rentals where these rentals tend to have longer duration and lower pricing when compared to commercial rentals. Adjusted EBITDA margins grew by 330 basis points, driven by the lower fleet costs, reduced funding costs and cost containment actions implemented by management. DBRS views the quarter’s results as evidencing solid momentum across the franchise.

The funding profile is well-managed. During the quarter, Avis Budget amended the terms of its $2.05 billion vehicle-backed bank conduit facility reducing funding costs. Subsequent to end of the quarter, the Company expanded the capacity of its principal corporate revolving credit facility to $1.2 billion, while extending the maturity to 2016 and lowering borrowing costs. Further, in May 2011, Avis Budget issued $700 million of fleet backed debt which will refinance 2012 fleet debt maturities.

Notes:
All figures are in USD unless otherwise noted.

The principal 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
Approver: Alan G. Reid
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 23 February 2011