DBRS Confirms Hertz Corporation’s Issuer Rating at BB, Trend Now Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB. The trend on all ratings has been revised to Stable from Negative. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The confirmation of the ratings and change in trend to Stable reflects DBRS’s view that Hertz has made substantial progress in the integration of Dollar Thrifty Automotive Group, Inc. (DTAG), including the conversion of counter, reservations and e-commerce systems, as well as back-office IT platforms. DBRS notes that the last major integration item is the conversion of DTAG’s fleet management system to the Hertz system, which DBRS expects to be successfully completed in 2014.

Importantly, the rating action considers that the expected synergies of the acquisition are beginning to be captured, positively impacting financial performance. Through expanding the presence of the Thrifty brand in Europe and adding Dollar and Thrifty to Hertz’s existing partnership agreements, Hertz has realized $100 million of revenue synergies in 9M13, and expects total revenue synergies of $300 million over the three-year period to year-end 2015. Cost synergies realized in the nine months to September 30, 2013 were $95 million of an expected $300 million in cost savings over a three-year period to the end of 2015. While cash flow leverage (total debt, including fleet debt, to last twelve month EBITDA) at 4.2x remains moderately higher than the pro-forma leverage of 4.0x at the closing of the DTAG acquisition, given the improved earnings and cash flow generation of the Company, DBRS considers the level of leverage as acceptable at the current rating level. Nevertheless, a return of leverage to pre-acquisition levels would be viewed favorably.

The rating confirmation also reflects Hertz’s strong franchise and leading global market position in the daily vehicle rental business, solid fleet management, well-managed liquidity and funding profile, and improving earnings profile. To this end, for the nine months ending September 30, 2013, Hertz had generated pre-tax income of $685.7 million compared to $529.7 million a year ago. Earnings have benefited from the Company’s investment in business lines whose revenues are less cyclical in nature than the commercial on-airport business. Amongst the investments is the expansion of Hertz’s off-airport business, increasing its presence in the leisure travel segment through the DTAG acquisition, entering the market for fleet management through its Donlen acquisition, and bolt-on acquisitions in the Company’s equipment rental subsidiary, Hertz Equipment Rental Corporation (HERC), that increase its market presence in less cyclical industries. Moreover, the trend considers DBRS’s view that industry fundamentals will remain favorable through 2014 supported by rationale pricing, good fleet discipline, a modest increase in travel volumes, and still solid residual values for used vehicles as demand continues to outstrip supply.

Ratings could be positively impacted by continued strengthening in earnings to levels more consistent with the strength of the franchise. Further, deleveraging of the balance sheet and maintaining access to funding at reasonable costs would also be viewed positively. Conversely, a sustained reduction in revenues and cash flow generation as a result of a weakening in the franchise, or a noteworthy decline in industry fundamentals could result in downward ratings pressure. Ratings could also be negatively impacted, if leverage was to increase materially or a sizeable loss was generated from the disposition of risk vehicles.

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

The principal applicable methodology is the Rating Finance Companies Operating in the United States. Other applicable methodology used include DBRS Criteria: Intrinsic and Support Assessments. These can be found at: https://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: Roger Lister
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 28 August 2012

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