DBRS Confirms Enterprise Holdings, Inc. at A (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Enterprise Holdings, Inc. (Enterprise or the Company), including its A (low) Issuer and Long-Term Debt rating. Concurrently, DBRS has assigned a Short-Term Instruments rating of R-1 (low) to Enterprise. The trend on all ratings is Stable. This rating action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The rating confirmation reflects the substantial business strength of Enterprise, which is underpinned by its leading market share in the home-city car rental market and top-tier position in the on-airport car rental market. Moreover, the ratings consider the Company’s considerable and resilient earnings power and sound balance sheet.

The Stable trend reflects DBRS’s view that Enterprise will continue to generate solid earnings while successfully absorbing rising vehicle costs to more normalized levels. Further, the trend considers DBRS’s view, that industry fundamentals will remain favorable supported by strengthening rental volumes as consumer and business confidence improves, positive pricing trends, good fleet discipline and residual values; which,, while softening from record levels, remain solid on a historical basis anchored by favorable supply and demand trends. Ratings could be negatively impacted, if leverage were to increase materially, particularly if related to a large acquisition. Furthermore, a sustained weakening in revenues and cash flows generation resulting from deterioration in the business or a noteworthy decline in industry fundamentals would be viewed negatively.

With approximately 6,000 neighborhood and airport locations within 15 miles of 90% of the U.S. population, Enterprise has a significant local market presence that is the foundation for its leading home-city and insurance replacement business. DBRS considers the strong off-airport business as providing Enterprise a competitive advantage over its industry peers as these markets tend to be less correlated with the U.S. economy and travel volumes than the traditional on-airport car rental market. As a result, these businesses afford the Company resilient and rather predictable revenue and earnings streams. Complementing the home-city business is the Company’s leading on-airport business, which operates under the Enterprise Rent-A-Car, National Car Rental (National) and Alamo Rent A Car (Alamo) brands. DBRS sees the Company’s tri-brand strategy as beneficial to the business allowing for differentiated market positioning and pricing while leveraging efficiencies of scale in the non-customer facing operations.

Seeking to enlarge its international presence and further strengthen the brand, Enterprise is strategically growing its international operations to complement its sizeable domestic business. DBRS views this long-term strategy positively as it will provide additional diversification to revenues, reduce the reliance on the U.S. market, and further enhance the Company’s ability to provide broad travel solutions for corporate customers. While any expansion into new geographic markets is accompanied with risks, in DBRS’s view, the recessionary environment, especially in Europe, adds increased risk to the successful execution of this strategy. Nevertheless, DBRS sees Enterprise as well-positioned to meet this challenge given management’s conservative and disciplined approach to integration, as evident with the Vanguard acquisition. Moreover, in certain markets, Enterprise is entering through franchising rather than opening company owned locations thereby reducing the required capital investment to expand. Further, the Company’s substantial earning power provides ample free cash flow, affording it the ability to capitalize on attractive opportunities to grow the business through small “bolt-on” acquisitions and ensure a well-executed integration.

DBRS considers Enterprise’s ability to generate strong and resilient earnings across all business lines as a key factor in the ratings. To this end, Enterprise has been profitable nearly every quarter since its inception in 1957, and importantly, was profitable every quarter during the recent financial crisis, despite an unprecedented decline in residual values and noteworthy weakening of travel volumes. However, similar to industry peers, the Company has recently experienced normalization in vehicle costs from historically low levels resulting in reduced profitability year-on-year, but still solid and at levels that remain the best in the industry. Fleet growth, higher cost per new vehicle as manufacturers maintain production discipline and lower margins realized on the disposal of fleet have been the primary contributors to the increase in fleet costs. Nevertheless, given Enterprises strong fleet management skills and leading market positions, DBRS sees the Company as successfully navigating the return of vehicle costs to more historical levels while maintaining sound earnings.

Enterprise maintains a conservative financial risk appetite. While the Company retains the residual value risk on the vast majority of its rental fleet, it has demonstrated an ability to dispose of these vehicles at favorable terms, even during times of significant weakness in the used vehicle market. This aptitude, combined with the strong operating model and leading market position, has allowed the Company to navigate through the seasonality of the daily car rental business and various business cycles, while maintaining solid profitability. DBRS sees potentially rising interest rates as having minimal impact on the Company’s near-term performance as the vast majority of the Company’s funding is fixed rate and long in duration. Further, Enterprise’s revenues are not linked to interest rates. Indeed, revenues tend to expand as interest rates increase as rising rates generally signal a strengthening economy which tends to lead to higher travel volumes and rental car transaction volumes.

Ample liquidity and a solid capital base provide the foundation for a sound balance sheet. Enterprise’s liquidity position is supported by solid levels of available corporate liquidity which is maintained at levels well in excess of upcoming debt maturities. Further, liquidity is supported by good levels of free operating cash flow. Debt maturities remain well-laddered with approximately 59% of outstanding debt, as of the end of April 2013, maturing in more than five years. Balance sheet leverage remains low and well-below industry peers, with debt-to-tangible equity of 1.4x at April 30, 2013. DBRS considers tangible equity as sufficient given the risk profile of the balance sheet, the strong earning capability and substantial cash flow generation.

St. Louis, MO-based Enterprise Holdings, Inc. is the largest vehicle rental company in the world by revenue, employees and size of vehicle fleet. The Company has company owned locations in North America, Ireland, the U.K., Spain, France, and Germany with franchise locations in Latin America, South America, Asia, Africa and various countries in Europe. Enterprise is owned by The Crawford Group, Inc., which is primarily owned by members of the Taylor family.

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: https://www.dbrs.com/about/methodologies

[Amended on June 27, 2014, to reflect actual methodologies used and the insertion of a necessary disclosure.]

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: 16 May 2001
Most Recent Rating Update: 9 April 2012

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