DBRS Confirms Hertz Corporation at BB, Stable Trend Following 2013 Results & Announced HERC Spin-off

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 is Stable. The rating action follows the Company’s announcement of its full year 2013 results and intention to spin-off its equipment rental business, Hertz Equipment Rental Corporation (HERC), in early 2015.

On March 18, 2014, Hertz announced that its Board of Directors had approved a plan to separate HERC in a tax-free spin-off to Hertz shareholders and that the Company has received a Private Ruling Letter from the Internal Revenue Service which allows Hertz to separate the businesses in a tax-efficient manner. As a result, Hertz will separate into two publicly traded companies. The two companies will be “Hertz”, comprised of Hertz, Dollar, Thrifty and Firefly rental car businesses as well as Donlen, a provider of fleet leasing and management services, and HERC. Hertz anticipates receiving a one-time net cash distribution of approximately $2.5 billion from the spin-off, which will be utilized to pay down Hertz debt and support a newly authorized $1.0 billion share repurchase program. DBRS notes that Hertz expects that a majority of the share repurchase will occur post-separation of HERC.

The confirmation of the ratings reflects DBRS’s view that the proposed separation will have no material impact on the Company’s strong franchise and leading global market position in the daily vehicle rental market, which are key factors underpinning the ratings. Indeed, there is little market overlap or cross selling opportunities between the businesses. Moreover, the separation should allow for management of both businesses to better focus and execute on their strategic objectives and operational performance. Although DBRS did view Hertz as benefiting from revenue and earnings diversification provided by HERC, this benefit did not provide material lift to the rating. Further, given the Company’s recent success in broadening its revenue base to be less reliant on U.S. corporate travel volumes, DBRS sees Hertz as being able to manage the loss of this revenue and earnings. DBRS notes for 2013, HERC accounted for approximately 14% of total revenues and 25% of adjusted pre-tax income.

DBRS views favorably the Company’s stated commitment to utilize a portion of the proceeds to deleverage the balance sheet. At December 31, 2013, DBRS-calculated cash flow leverage (total debt, including fleet debt, to EBITDA) was 3.9x.

Further supporting the ratings, Hertz reported record revenue and GAAP pre-tax income in 2013. Hertz generated pre-tax income of $663.1 million on revenue of $10.8 billion. Earnings continue to benefit from the Company’s investment in business lines whose revenues are less cyclical in nature than the commercial on-airport business. Further, the Company’s cost reduction initiatives and solid fleet management continue to support improving margins.

The Stable 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, execution of balance sheet deleveraging as planned post-separation while 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 Rating Finance Companies Operating in the United States (May 2008). The other applicable methodology is the DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2014). All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

[Amended on February 18, 2015 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: May 16, 2001
Most Recent Rating Update: December 19, 2013

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