DBRS Confirms Enterprise Holdings, Inc.’s Issuer and Senior Debt Ratings at A (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Enterprise Holdings, Inc. (Enterprise, EHI or the Company), including it’s A (low) Issuer Rating. Concurrently, DBRS has confirmed the Company’s Short-Term Instruments rating of R-1 (low). Further, the Guaranteed Senior Notes rating of ERAC Canada Finance Ltd. are confirmed at A (low), reflecting the guarantee from Enterprise Holdings, Inc. 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 overall strength of Enterprise’s franchise, which is underpinned by the Company’s leading market position in both the U.S. on-airport and home-city markets, as well as its growing international presence. Further, the ratings consider the substantial and resilient earnings generation capacity afforded by the franchise. The Company’s sound fleet management capabilities and strong balance sheet management also support the ratings. These considerations are balanced by the challenge of sustaining revenue growth in a slow growth economy. Moreover, DBRS sees managing the impact of normalizing used vehicle values on operating performance as a key challenge. However, DBRS does not view this challenge as unique to Enterprise, but rather a challenge for all financial institutions with exposure to the residual value of automobiles whether through ownership, like EHI, or leasing.

The Stable trend considers DBRS’s expectation that EHI will continue to generate sound returns and margins through fiscal year 2016, despite uncertainty in the global economy, normalizing used vehicle values in the U.S., and the potential for higher interest rates. The Stable trend also considers DBRS’s view that industry fundamentals will remain mostly favorable supported by growing rental demand as consumer and business confidence strengthens, positive pricing trends, and moderating residual values; which should remain solid on a historical basis anchored by still favorable supply and demand trends.

While DBRS sees the Company as appropriately rated, notable revenue generation expansion combined with a greater share of revenues from overseas operations would be viewed favorably. Conversely, the ratings could be negatively impacted by a sizeable impairment charge on the value of the vehicle fleet as a result of mismanagement of residual values, a marked increase in leverage, or a weakening of the liquidity position. Furthermore, a sustained weakening in revenues and cash flow generation resulting from a deterioration in the Company’s market position, especially in the home-city business could have negative rating implications, given the relative importance of this business to the Company.

DBRS considers Enterprise’s ability to generate strong and resilient earnings through various cycles as a key factor in the ratings. For fiscal year 2015 (year ending July 31st), the Company reported record results on good revenue expansion across both the on-airport and home-city markets. DBRS considers the market leading home-city business as providing Enterprise a competitive advantage over its industry peers as this business tends to be less correlated with the U.S. economy and travel volumes than the traditional on-airport car rental market. As a result, the home-city business, which generates nearly two-thirds of total Company revenues, is the foundation of the Company’s 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 considers the Company’s tri-brand strategy as benefiting the business by allowing for differentiated market positioning and pricing, while leveraging efficiencies of scale in non-customer facing functions.

Enterprise has continuously demonstrated sound fleet management through both business and economic cycles, which is an important consideration in the ratings. Indeed, the Company has a robust fleet management system that allows the Company to adjust the fleet size and mix to meet shifts in demand in local markets. Further, Enterprise maintains an extensive field staff that continuously monitors local market conditions for used vehicle values, including by make, type, and trim level, which affords the Company the ability to dispose of vehicles in the market that will garner the best financial result, and is a key contributor to the Company’s ability to consistently generate gains on the disposition of vehicles. Moreover, Enterprise’s operational flexibility to move vehicles between the on-airport and home-city markets, and between brands leads to strong utilization rates supporting earnings.

From DBRS’s perspective, Enterprise maintains a strong and well-managed balance sheet. Funding is diversified by channel, currency and duration with the majority of funding maturing in more than five years. Positively, funding is predominately fixed rate limiting Enterprise’s exposure to short-term interest rate movements. Liquidity is well-managed with sufficient available liquidity (after covering outstanding commercial paper) to cover maturing senior debt maturities for nearly the next 24 months. Leverage continues to be maintained at very low levels that are well-below industry peers. At July 31, 2015, debt-to-equity was 1.2x.

Also, today DBRS has changed the description of the Enterprise Holding’s long-term ratings on its website to Issuer Rating and Senior Debt ratings from Issuer and Long-Term Debt rating to better reflect the capital structure of the Company.

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

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2015). Other applicable methodologies include the DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2015) and DBRS Criteria – Guarantees and Other Forms of Explicit Support (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

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: Roger Lister
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 31 October 2014

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