DBRS Places Ratings of Hertz Corporation Under Review Developing, Issuer at BB

DBRS Inc. (DBRS) has today placed the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB, Under Review Developing following the Company’s announcement that it intends to acquire Dollar Thrifty Automotive Group, Inc. (DTAG) (Issuer Rating of B (high) by DBRS) for approximately $2.1 billon.

In placing the ratings Under Review Developing, DBRS recognizes the positives that this acquisition could bring to the table, while also presenting certain risks. Further, DBRS notes that there are certain uncertainties regarding this potential transaction. For instance, a definitive merger agreement has not been executed and there is a chance that the final purchase price may ultimately change, especially if other potential suitors present counteroffers. Moreover, the proposed transaction is subject to customary closing conditions, DTAG shareholder approval and regulatory approvals. Nonetheless, should the deal progress and the final purchase price and financing composition become more certain, DBRS will complete its review assessing the impact on Hertz’s franchise, risk profile, capital structure and its earnings generation ability.

The Under Review Developing status reflects DBRS’s view that the potential acquisition of DTAG is a long-term positive for Hertz and will further strengthen the Company’s overall franchise. This transaction would combine two complementary businesses, Hertz with its strong presence in the premium and corporate travel segment and DTAG, with its solid position in the value-oriented leisure travel segment. Furthermore, DBRS sees very little overlap in the businesses and, with the successful completion of the proposed transaction, Hertz will gain immediate scale in the value-priced customer segment, in which it currently lacks a significant presence. As such, in the longer-term, DBRS sees the potential for upward ratings momentum should Hertz’s performance demonstrate that the Company is capturing the benefits of the transaction, while reducing leverage to historical levels.

Conversely however, DBRS sees potential risks in this transaction especially should the purchase price increase resulting in increased leverage, which in turn would weaken the Company’s financial profile, resulting in this transaction being less accretive. Furthermore, the review status also considers DBRS’s view that the upside potential discussed above may be muted should industry fundamentals deteriorate. These downside risks are factored into today’s rating action which also signifies that there is a potential for downward rating pressure. DBRS will continue to monitor the structure of the purchase, the actual level of net debt incurred, goodwill and the ultimate impact on leverage.

DBRS notes that, as with any acquisition, there are certain integration and execution risks involved in this proposed transaction. However, industry fundamentals are improving with strengthening rental demand, a healthy used vehicle market benefiting fleet costs and pricing discipline being maintained by industry participants. As a result, DBRS currently views the near-term earnings outlook for both Hertz and DTAG as positive increasing the likelihood of successful execution of the combination. Nevertheless, as discussed above, DBRS remains cautious regarding the sustainability of the economic recovery and the potential for a reversal of the positive industry trends. To this end, DBRS is concerned that should these industry trends reverse, Hertz’s ability to navigate a downturn could be at greater risk given the enlarged funding stack. DBRS notes that its rating for the Senior Subordinated Debt has been withdrawn as the securities have been paid in full.

DBRS will monitor developments and will provide comments in due course, as details of any definitive agreement become available.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our 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
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 4 October 2010