DBRS Comments on Avis Budget Group, Inc.’s 2Q13 Results; Unaffected at BB (low), Trend Stable

DBRS, Inc. (DBRS) has today commented that the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), including its Issuer Rating of BB (low), are unaffected following the Company’s announcement of 2Q13 financial results. The trend on all ratings is Stable.

For 2Q13, Avis Budget reported a net loss, on a GAAP basis, of $28 million compared to net income of $79 million, a year ago. Excluding early extinguishment of debt, restructuring charges and acquisition costs, Adjusted EBITDA was 35% lower YoY at $164 million. The lower results primarily reflect higher North American vehicle costs in the quarter. Normalization in residual values from extraordinarily strong levels in the comparable period a year ago resulted in North American per unit fleet costs to increase 60% YoY. DBRS notes that this normalization was expected and that residual values have stabilized since May 2013, and remain at healthy levels on a historical basis. As such, DBRS expects full year 2013 vehicle costs for Avis as increasing from 2012 levels, but remaining manageable. Further, DBRS comments that in the Company’s European operations the fleet is 70% program vehicles insulating the Company from the still soft residual values in Europe. Despite the loss for the quarter, DBRS sees positives in the underlying business including solid revenue growth in both the North American and International segments and continued progress in integrating recent acquisitions.

Revenue generation continued its positive trajectory with 2Q13 representing the twelfth consecutive quarter of YoY growth in revenues. Indeed, revenues were 7% higher YoY at $2.0 billion, primarily due to the Zipcar acquisition and higher volumes. By segment, North American revenues were 9% higher reflecting the Zipcar acquisition as well as 2% volume growth and pricing gains driven by a 4% increase in leisure pricing. DBRS notes that volume growth was underpinned by volume expansion in the Company’s more profitable segments which outpaced overall volume growth. International revenues increased 5% primarily due to higher volumes underpinned by Budget’s expanding presence in the European value segment and solid growth in Latin America Asia-Pacific supported by the acquisition of Apex Car Rentals in October 2012. While both Avis and Budget brands reported YoY pricing gains in Europe, overall International pricing declined modestly YoY reflecting the continued shift in transaction mix due to the significant growth of the Budget brand in Europe. For the quarter, Truck Rental generated $102 million of revenue, essentially flat from a year ago as a solid 9% increase in pricing largely offset a 7% reduction in the fleet as the Company repositions the business to improve profitability. Overall, DBRS sees the solid revenue expansion as demonstrating that the Company’s focus on driving business from more profitable channels and increasing Budget’s presence in Europe are positively impacting financial performance.

Controlling operating costs remains a key focus of Avis. Excluding vehicle costs, Avis maintained solid operating efficiency with direct operating costs and selling, administrative expenses relatively stable YoY at 64% of total revenues. Operating efficiency has benefited from early realization of Zipcar cost synergies and continued reduction of European fixed costs as the Company streamlines and centralizes operations.

In July, Avis announced it had acquired Payless Car Rental, the sixth largest car rental company in North America, for approximately $50 million in cash. In acquiring Payless, Avis Budget gains a strong position in the deep-value segment of the car rental industry. Payless, which generates approximately $80 million in annual revenue, will continue to operate as a separate brand. DBRS sees this bolt-on acquisition as an overall positive for Avis as it provides the Company with a position in a fast growing segment of the market while supporting Budget’s mid-tier brand and providing Avis with further opportunities to improve fleet efficiency.

Liquidity remains solid and well-managed. At June 30, 2013, available corporate liquidity totaled a sound $1.8 billion. Positively, Avis Budget continues to proactively address the higher cost funding in its capital structure, which should benefit earnings in upcoming quarters. During 2Q13, the Company redeemed all $124 million of the outstanding 9.625% senior notes due 2018 and a $100 million of its floating rate notes due 2014. Further, Avis refinanced its existing $900 million term loan borrowings due 2019 with a new $1.0 billion term loan also due in 2019, but at a borrowing spread that is 75 basis points (bps) lower. Subsequent to quarter-end, Avis amended its principal corporate revolving credit facility, extending the maturity by two years to 2018, increasing the capacity to $1.65 billion from $1.5 billion, and lowering the interest spread by 75 bps.

Regarding capital, Avis announced that its Board of Directors authorized a share repurchase of up to $200 million, with the expectation that $50 million of common stock will be repurchased during the remainder of 2013. DBRS notes that the Company has not changed its target leverage ratios. Given the improved earnings generation profile of the Company and the relatively modest level of the buyback, DBRS views the share repurchase program as acceptable and credit neutral.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]