DBRS Confirms Dollar Thrifty Automotive Group, Inc. at B (high), Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of Dollar Thrifty Automotive Group, Inc. (DTAG or the Company), including its Issuer Rating of B (high). Concurrently, the trend on all the ratings has been revised to Positive from Stable. This rating action follows DBRS’s annual review of the Company.

The rating confirmation reflects the Company’s sound business franchise, improved financial performance, and strengthened financial risk profile. Moreover, the rating confirmation considers the favorable industry fundamentals and DBRS’s expectation that industry fundamentals will remain positive through 2012. In revising the trend to Positive, DBRS recognizes DTAG’s positive earnings generation despite the uneven economic recovery and still recovering travel volumes. Indeed, during 2011, DTAG recorded net income of $159.5 million, which was 22% higher than the previous year and, importantly, the Company’s second consecutive year of record earnings. Further, the Positive trend considers DTAG’s strengthened balance sheet and improved financial risk profile. To this end, since the rating was assigned in 2010 the Company has been successful in removing all corporate debt and reducing leverage, as defined by debt (including fleet backed debt)-to-equity, to a respectable 2.3 times (x). Going forward, DBRS expects that upward ratings momentum would be possible should the Company continue the positive trajectory in revenue and earnings generation while maintaining solid market shares and a prudent balance sheet structure.

The ratings consider the Company’s sound business franchise that is supported by its well-established brands and a competitive position in the value-priced leisure travel market. DTAG has maintained stable market share through various business cycles including the most recent downturn, which, in DBRS’s view evidences the strength the franchise and the Company’s ability to defend its market position in an intensely competitive industry. Nonetheless, while DTAG continues to be successful in its niche, DBRS sees the Company’s narrow focus as limiting market share growth and revenue diversification.

DBRS views DTAG’s ability to maintain the positive trajectory in financial performance in an uncertain environment as a factor supporting the ratings and Positive trend. As noted above, in 2011, DTAG recorded its second consecutive year of record GAAP earnings. While revenues, at $1.5 billion, were up only 1% in 2011, earnings benefited from management’s cost reduction initiatives as well as the healthy used vehicle market and disciplined fleet management, both of which lowered vehicle expense. On an underlying basis, earnings were also a record for the second consecutive year. Indeed, corporate adjusted EBITDA increased 27% year-on-year to $298.6 million, which further evidences the positive momentum of the franchise. The Company benefits from the flexibility derived from the significant presence of variable costs in the overall cost structure and recent efforts to improve corporate and fleet efficiency. In 2011, direct operating and vehicle expenses were 66% of total revenue, improving from 84% in 2008, and comparing favorably to its industry peers.

DBRS views DTAG as having an improved financial risk profile. The debt stack has been reduced by approximately $1.0 billion since the end of 2007, while the Company’s equity base has been bolstered. As a result, debt-to-equity has improved to 2.3x at year-end 2011 from 11.9x at year-end 2008. Funding and liquidity remain solid and well-managed supported by good access to the capital markets. In 2011, DTAG completed $900 million of fleet-backed debt issuance largely pre-funding 2012 maturities. Importantly, as of year-end 2011, DTAG had no corporate debt outstanding while vehicle debt maturities were well-laddered and manageable. Nevertheless, the secured wholesale funding concentration is considered a weakness. The one notch differential between the Issuer Rating and the Senior Unsecured Debt rating reflects the dominance of secured debt in the debt stack.

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: Roger Lister
Initial Rating Date: April 22, 2010
Most Recent Rating Update: October 1, 2010

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