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

DBRS, Inc. (DBRS) has today confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company) and related subsidiaries, including its Issuer Rating of B (high) and Senior Unsecured Debt rating of B. The trend on all ratings is Stable. Today’s rating action follows DBRS’s annual review of the Company.

The rating confirmation reflects the Company’s sound business franchise, diversification of revenue and its leading market position in the on-airport vehicle rental market. The ratings also consider the Company’s solid fleet management and the financial flexibility inherent in the business. Furthermore, the ratings and the Stable trend consider the improving industry fundamentals and DBRS’s view that these fundamentals will continue to be favorable through 2012. These positive rating factors, however, are somewhat offset by the Company’s leveraged position as compared to book equity and the preponderance of wholesale and secured funding in relation to the balance sheet. Moreover, while underlying financial performance evidenced positive momentum in 2011, the ratings consider the recent run of weakened profitability.

Avis Budget’s sound business franchise is underpinned by its dual-brand strategy, which is a key consideration in the rating. 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 touch points with customers. Moreover, the brands enjoy complementary demand patterns, which the Company leverages by shifting fleet to meet demand, thereby enhancing fleet efficiency.

DBRS sees the recent acquisition of Avis Europe as further strengthening the franchise as it broadens the Company’s global presence particularly in faster growing emerging markets. As with any acquisition, integration risk is present. However, in this acquisition DBRS considers these risks as low given the companies share branding and operate on the same technology platform. Given the funding structure which did not result in a material movement in Avis Budget’s leverage metrics, DBRS did not view the acquisition as a negative to ratings. Nevertheless, given the increased earnings capacity gained from the acquisition, DBRS expects that Avis Budget will continue its efforts to reduce leverage going forward. DBRS will look for evidence that Avis Budget is capturing the benefits and synergies anticipated in the transaction while managing the modest integration risks.

Although Avis Budget reported a net loss of $29 million in 2011, the ratings consider the positive momentum in the underlying financial performance. Indeed, corporate adjusted EBITDA increased 52% year-on-year to $605 million, the highest in Company history. Revenues grew 14% year-on-year to $5.9 billion, reflecting the acquisition of Avis Europe. Excluding the acquisition, revenues were 7% higher on expanding transaction volumes partially offset by a slight decline in pricing. Given Avis Budget’s substantial franchise and market leading position, DBRS sees the Company’s ability to leverage these strengths into sustainable improvement in profitability as global travel volumes rebound as a key challenge over the medium-term.

The ratings consider the well-managed funding and liquidity profile, which has been underpinned by the Company’s demonstrated access to the capital markets. In 2011, the Company issued $682 million of corporate debt and $650 million of fleet-related debt. Importantly, Avis has pre-funded a large majority of the $1.9 billion of fleet-backed debt maturing in 2012 and has no corporate debt maturities until 2014. Nonetheless, given the preponderance of wholesale funding, which exposes the Company to disruptions in the capital markets, DBRS sees managing liquidity through the cycles as a key challenge.

DBRS considers the 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. Vehicle-related debt constitutes 63.5% of the funding stack at December 31, 2011. Given the nature of the industry which requires significant capital to invest and maintain fleet, DBRS is comfortable with a level of secured debt. However, while DBRS recognizes that fleet-backed debt provides lower cost funding, better matching of assets and liabilities, and flexibility to remove fleet and associated debt as demand fluctuates. Fleet-backed debt also has more refinancing risk as the duration of the debt tends to be shorter than unsecured corporate debt. Further, the ratings consider the highly encumbered nature of the balance sheet owed to the preponderance of secured debt, which is factored in the one notch differential between the Issuer and Senior Unsecured Debt ratings.

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 on improving margins through good pricing discipline, cost cutting initiatives, and improved funding costs. Lastly, the trend reflects DBRS’s expectations that industry fundamentals will remain favorable in 2012, with the expectation that demand will sustain its positive momentum and the used-vehicle market remains healthy.

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 company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: David Laterza
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 23 February 2011

For additional information on this rating, please refer to the linking document under Related Research.