DBRS Confirms Hertz at BB, Trend Negative Following Acquisition Announcement

DBRS, Inc. (DBRS) has today confirmed the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB. The trend on the ratings is Negative. Concurrently, the ratings have been removed from Under Review – Developing, where they were placed on May 16, 2011. This rating action follows Hertz’s announcement that is has entered into a definitive agreement to purchase Dollar Thrifty Automotive Group, Inc. (DTAG) for $2.6 billon. The acquisition is expected to close in 4Q12.

While DBRS considers the proposed transaction as a long-term positive for Hertz strengthening the Company’s overall solid franchise, the Negative trend reflects DBRS’s view that the acquisition entails certain near-term risks. DBRS is concerned that the Company is increasing leverage and weakening its financial profile at a time of heightened uncertainty about the strength of the global economy. The acquisition will be an all cash transaction supported by $1.95 billion in financing commitments. Hertz expects to finance through the issuance of unsecured corporate debt. In addition, Hertz will assume DTAG’s $1.5 billion of fleet-backed debt. As a result, pro-forma leverage (Debt-to- Last Twelve Months EBITDA) as of June 30, 2012 is 4.0x, up modestly from 3.6x on a Hertz stand-alone basis. Moreover, this increase in leverage reverses recent progress achieved by the Company in reducing its overall leverage. Further, DBRS notes that the proposed acquisition includes substantial integration risks including cultural, technology platforms and fleet management. However, given management’s track record of integrating other acquisitions and the complementary nature of the businesses, DBRS expects this risk to be well-managed.

The proposed acquisition combines 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. 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.

Hertz’s earnings generation ability will be enhanced, as the acquisition is expected to be earnings accretive upon closing. Furthermore, earnings generation capacity will benefit from the $160 million of cost savings from projected synergies over the next 24 months.

The proposed transaction is subject to customary closing conditions, a majority of DTAG shareholders tendering their shares, and regulatory approvals. Assuming a successful execution of the proposed transaction, DBRS will look for realization of the aforementioned benefits and synergies. Ratings will benefit from the Company’s ability to realize the benefits of the broadened customer base gained through this acquisition, while sustaining its strong global brand, and returning to a positive trajectory in strengthening the balance sheet. Conversely, should leverage remain elevated owing to weakened earnings generation indicating potential issues with integration, ratings could be lowered. Moreover, while not anticipated, should Hertz have difficulty in terming out the bridge loan signaling liquidity and funding stress could exert downward pressure on the ratings.

The rating confirmation reflects Hertz’s strong business franchise and leading market position in the daily vehicle rental business, good diversification of revenues, and solid fleet management. Moreover, the ratings consider the favorable industry fundamentals and DBRS’s expectation that industry fundamentals will remain positive through the remainder of 2012 and into 2013.

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

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 16 May 2011