DBRS Upgrades Avis Budget Group Inc.’s Issuer Rating to BB (low), Trend Stable

DBRS, Inc. (DBRS) has today upgraded the Issuer Rating of Avis Budget Group, Inc. (Avis Budget or the Company) and its related subsidiaries to BB (low) from B (high). Concurrently, the Company’s Senior Unsecured Debt rating was upgraded to B (high) from “B”. The trend on all ratings is Stable. This action removes the ratings from Under Review with Positive Implications, where they were placed on January 16, 2013.

The ratings consider the strength of the Avis Budget franchise, which is underpinned by its dual brand strategy and leading position in the on-airport market. Today’s rating action also reflects the improved earnings of Avis Budget and the expectations that future profitability will be at a level more commensurate with the strength of the franchise. Further, the Company has utilized the expansion of operating cash flow generation to reduce leverage. Liquidity and funding have strengthened and the Company has made significant progress in diversifying its supplier base while improving fleet optimization.

The Stable trend reflects DBRS’s view that Avis will generate solid earnings while successfully navigating rising vehicle costs and interest rates. Further, the trend considers DBRS’s view that industry fundamentals will remain favorable supported by rationale pricing, good fleet discipline, modest increases in travel volumes, and still solid residual values for used vehicles as demand continues to outstrip supply. Ratings could be positively impacted by sustained growth in earnings, improvement in leverage and continued access to funding markets at reasonable costs. Ratings could be negatively impacted, if leverage were to increase materially, particularly if related to a large acquisition. Furthermore, prolonged deterioration in revenues and cash flow generation resulting from a weakening of the franchise or a noteworthy decline in industry fundamentals would be viewed negatively.

From DBRS’s perspective, the favorable trajectory in operating performance, including record results in 2012, is evidence that initiatives implemented by Avis Budget have been successful. For 2012, Avis reported pre-tax income of $300 million, up from $36 million in 2011. Results benefited from the acquisition of Avis Europe as well as from organic means reflecting the Company’s focus on growing volumes in higher margin channels including small and middle market business, inbound travel, and specialty and luxury rental. Going forward, DBRS will look for continued growth from these channels, as well as the Company’s ability to capitalize on opportunities to grow and strengthen Budget’s market share in Europe. Cost reduction actions taken by the Company have improved efficiency supporting margin expansion. Corporate EBITDA margin improved to 10.9% in 2012, the highest level since 2002. DBRS sees the revenue diversification gained from the Avis Europe acquisition along with the aforementioned actions taken by the Company as better positioning the Company to sustain profitability through various cycles.

DBRS views Avis Budget’s funding and liquidity as improved supported by good access to funding markets and strengthening operating cash flow. Moreover, DBRS sees the Company as better positioned to withstand a stressed funding environment given the more balanced maturity profile of its funding. At March 31, 2013, liquidity stood at $4.1 billion, which was more than sufficient to cover upcoming maturities and fund the temporary increase in the fleet to meet peak season demand. However, DBRS notes secured funding accounted for 78% of total funding at the end of March 2013. As a result, the balance sheet is highly encumbered, which is factored in the one notch differential between the Issuer and Senior Unsecured Debt ratings. Importantly, balance sheet leverage (debt-to-equity) has improved to 12.8x at year-end 2012, a notable improvement from 29.3x at year-end 2009. The improvement reflects solid earnings retention and the repayment of corporate debt. DBRS notes on a cash flow leverage basis (Debt-to-EBITDA) leverage has improved to 3.9x at year-end 2012, and is in line with peers. DBRS anticipates that Avis will continue to utilize its solid cash flow generation ability to reduce leverage.

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 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: William Schwartz
Initial Rating Date: December 16, 2009
Most Recent Rating Update: January 16, 2013

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