DBRS Places Avis Budget Group Inc. Under Review with Positive Implications; Issuer at B (high)

DBRS, Inc. (DBRS) has today placed 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”, Under Review with Positive Implications.

The rating action considers the improvement in Avis Budget’s operating performance since 2009. Indeed, as of September 30, 2012, Avis Budget was well on its way to its most profitable year (GAAP basis) since its separation from Cendant in 2006. The Company’s focus on growing volumes from more profitable channels, while reducing operating costs, has underpinned the improvement in performance and supported expanding margins. In addition, results have benefited from favorable industry fundamentals including higher travel volumes and a healthy used vehicle market. Moreover, the acquisition of Avis Europe in October 2011 has strengthened the revenue generating capacity of the Company. In the nine months to September 30, 2012, revenues grew 33% YoY demonstrating the transformational shift in the Company’s earnings power as a result of the acquisition.

The rating action considers the strengthening of Avis Budget’s already sound franchise as a result of the Avis Europe acquisition. In DBRS’s view, the acquisition enhances the Company’s well-established and highly competitive position in the global vehicle rental industry. Further, the acquisition affords Avis Budget access to higher growth emerging markets, and the ability to market dual brand solutions to global corporate accounts for their organization’s requirements. It also provides Avis Budget the opportunity to capture greater cross-border travel volumes. From DBRS’s perspective, the benefits of the strengthened franchise are flowing through to financial performance. The rating action also considers DBRS’s view that overall industry fundamentals will remain favorable supported by modest increases in travel volumes and still solid residual values for used vehicles as demand continues to outstrip supply.

In the review, DBRS will focus on Avis Budget’s opportunities to drive organic revenue growth from its enhanced franchise, as well as the Company’s plans to further improve operating efficiency, while managing rising fleet costs. The review will also consider the Company’s plans to utilize its improving earnings profile to strengthen capital and reduce leverage. Further, DBRS will consider Avis Budget’s liquidity position, as well as contingency plans put in place since the financial crisis that would enable the Company to withstand a stressed funding environment. DBRS expects to complete the review within the next three to four months.

DBRS’s rating action also considers the Company’s recent announcement that it will acquire Zipcar Inc. (Zipcar) for approximately $500 million in cash; however, the acquisition is not a key factor in the rating action. Zipcar is the leader in the car share industry with over 760,000 members and locations in 20 major cities in the U.S., Canada and Europe, as well as fleet placed on more than 300 college campuses. In DBRS’s view, Zipcar has built a well-respected brand, which is supported by market leading technology. DBRS considers the acquisition as a positive for Avis Budget, as it provides an excellent entry point into the growing car share industry, which DBRS sees as complementary to the Company’s traditional daily vehicle rental business. DBRS notes that Avis Budget intends to finance the transaction with incremental corporate debt issuance. As of September 30, 2012, pro-forma leverage (Total Debt-to-Last Twelve Months EBITDA) is 4.8x, up from 4.6x for Avis Budget on a stand-alone basis. Nevertheless, given the Company’s solid cash flow generation, the relative modest size of the acquisition and low integration risks, DBRS has tolerance for the slight increase in leverage. Further, DBRS notes that traditionally Avis Budget reduces leverage during the fourth quarter as the Company removes fleet heading into the slower winter season and repays fleet debt. As such, DBRS anticipates lower leverage at year-end 2012. The acquisition, which is expected to close in spring 2013, is subject to Zipcar shareholder approval and customary closing conditions.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States. Other applicable methodology used include DBRS Criteria: Intrinsic and Support Assessments. These can be found at: http://www.dbrs.com/about/methodologies.

[Amended on June 19, 2014, to reflect actual methodologies used.]

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: December 16, 2009
Most Recent Rating Update: March 26, 2012

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