DBRS Confirms Hertz Corporation at BB, Trend Revised to Negative

DBRS, Inc. (DBRS) has today confirmed the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB. The trend on the ratings was revised to Negative from Stable. The rating action follows the Company’s recent announcement that it is conducting a thorough review of its financial records for 2011, 2012 and 2013 following the discovery of accounting errors.

In a recent SEC filing, Hertz disclosed that, during its 1Q14 closing process, errors were identified related to the capitalization and depreciation of certain non-fleet assets, the allowance for doubtful accounts in Brazil, the allowance for uncollectible amounts with respect to renter obligations on damaged vehicles, and the restoration obligations at the end of facility leases. As a result, the Company will restate its 2011 financial statements. Given the errors that were discovered, the Company is conducting a thorough review of the financial records for 2011, 2012 and 2013. Additional adjustments to 2012 and 2013 financials may be required depending on the outcome of the accounting review.

The Negative trend reflects DBRS’s concern regarding the material weaknesses in the Company’s internal controls and procedures over financial reporting and the significant time and cost that will be required to strengthen these functions. The Negative trend also considers that, as the accounting review progresses, additional accounting issues beyond DBRS’s tolerance levels may be found. DBRS also notes that these issues are occurring at a time when the Company is advancing the spin-off of its Hertz Equipment Rental Corporation (HERC), which could potentially distract management from the core rental car business. DBRS also continues to monitor developments for possible consequences of these issues for capital, funding and liquidity. Further negative rating actions could occur should the adjustments be beyond DBRS’s expectations and have a material impact on the Company’s credit metrics that were considered in the current rating level. Negative rating pressure could also result from additional control, procedural or accounting weaknesses being discovered. Conversely, should the adjustments be within DBRS’s expectations and not have a material impact on the Company’s credit metrics for 2011-2013, and should no further material weaknesses be discovered, the trend could return to Stable.

Importantly, DBRS does not see these issues as impacting the Company’s leading global vehicle rental franchise, which is a key factor in the confirmation of the ratings. Further, DBRS views favorably the initial steps taken by Hertz to strengthen its accounting and finance departments, including the hiring of a new Chief Accounting Officer and a new head of Sarbanes-Oxley Compliance. Moreover, in the SEC filing, Hertz provided preliminary commentary on 1Q14 performance, which indicated that, while revenues were up across all three operating segments, overall financial results were broadly stable year-on-year, as the costs related to the accounting review and other unusual items offset the revenue expansion. For the remainder of 2014, DBRS sees Hertz as benefiting from favorable industry fundamentals, including modest pricing gains, good fleet discipline, improved travel volumes as consumer and business sentiment strengthens, and still solid residual values for used vehicles as demand continues to outstrip supply.

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).
These can be found at: http://www.dbrs.com/about/methodologies

[Amended on February 18, 2015 to reflect actual methodologies used.]

The primary 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: 19 March 2014

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