DBRS Comments on Dollar Thrifty’s 2Q11 Results, at B (high), Stable

DBRS Inc. (DBRS) has today commented that the ratings of Dollar Thrifty Automotive Group, Inc. (DTAG or the Company), including its Issuer Rating of B (high) are unaffected following the Company’s announcement of 2Q11 results. The trend on all ratings remains Stable.

For the quarter, DTAG reported net income of $42.5 million, up slightly from the comparable period a year ago. On an underlying basis, excluding movement in fair value of derivatives and merger related expenses, DTAG reported pre-tax income of $43.4 million for the quarter, 3% lower than 2Q10. Revenues were broadly stable to a year ago at $395.1 million as an increase in rental volume was largely offset by a reduction in pricing. Earnings benefited from the Company’s cost control efforts. Despite an increase in fleet and transaction days, direct vehicle and operating expenses declined slightly year-on-year to $239.8 million. Fleet costs continue to be well-managed and benefiting from the healthy used vehicle market. Vehicle depreciation per unit for 2Q11 totaled $188 per month, 3% lower than a year ago. The lower per unit depreciation costs were owed to a decrease in the base depreciation rates on the fleet reflecting the current strength of the used vehicle market partially offset by the lower gains on sale of risk vehicles. DBRS considers DTAG’s 2Q11 results as solid demonstrating the resilient earnings ability of the franchise and the benefits of improving industry fundamentals.

Results were also impacted by the Company’s decision to defer fleet disposition which lowered gains on sales of vehicles. During the quarter, DTAG disposed of 10,500 fewer vehicles than the year ago quarter, as the Company increased fleet hold period to mitigate the risk of any potential disruption to the supply of vehicles due to the disaster in Japan, while having sufficient fleet to meet increasing demand. As a result, gains on the sale of vehicles totaled $17.8 million in the current quarter compared to $27.5 million in 2Q10. While DBRS recognizes the impact to earnings, DBRS views this decision as prudent further illustrating DTAG’s solid fleet management acumen.

Corporate adjusted EBITDA, excluding merger-related expenses, of $82.3 million, the quarter was 1.5% higher than a year ago, on higher margins. Corporate adjusted EBITDA margin was a very solid 20.5% despite lower gains from vehicle sales and pressure on pricing. Total vehicle rental revenue was flat to 2Q10, as an increase in rental demand was offset by lower pricing. Transaction days increased 3%, demonstrating the rebound in travel volumes as corporate and consumer confidence recovered somewhat from recessionary lows. However, pricing, revenue per day, was down 3.4% from a year ago reflecting competitive pricing conditions, as the industry cautiously held on to the fleet to protect against potential vehicle supply.

DBRS views DTAG’s liquidity and funding profile as solid supported by good access to the capital markets. During the quarter, DTAG repaid and terminated its Canadian financing facility utilizing a portion of the Company’s substantial cash position. Further subsequent to quarter end, DTAG completed a $500 million asset-backed medium term note issuance at a lower cost than a majority of the Company’s existing financing sources. Moreover, DTAG announced that it intends to repay all of its outstanding corporate debt totaling $143 million by year-end. Near-term maturities are manageable with only a $150 million variable funding note due in the last six months of 2011.

Finally, DBRS notes that DTAG continues to work with Avis Budget Group, Inc. (Avis Budget) and Hertz Corporation (Hertz) regarding regulatory approval for a merger with either company. However, at this time no definitive merger agreement has been signed between DTAG and either Avis Budget or Hertz. DBRS will continue to monitor the regulatory process and will comment or take rating action should events warrant.

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 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: 22 April 2010
Most Recent Rating Update: 1 October 2010