DBRS Confirms Avis Budget Group, Inc.’s Issuer Rating at BB, Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company) and its related subsidiary, including its Issuer Rating of BB. The trend on all ratings is Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings reflects the strength of the Avis Budget franchise, which is underpinned by its multi-brand strategy, top-tier market position in North America, and increasing international presence. From DBRS’s perspective, the Company’s diversity of revenue sources, underpin its resilient earnings generation capacity, and better positions the Company to withstand a cyclical downturn while maintaining appropriate operating results. The ratings also considers the Company’s fleet management acumen and well-managed liquidity profile. Ratings are constrained by the Company’s reliance on secured forms of wholesale funding and the leveraged balance sheet.

The Stable trend reflects DBRS’s view that Avis Budget will continue to generate solid, yet somewhat pressured, operating results in 2017. DBRS notes that industry fundamentals remain favorable, however, several challenges remain, including uneven global economic growth, declining used vehicle values, and the potential impact of future geopolitical events on both corporate and leisure demand.

In recent years, Avis Budget has strengthened the franchise by broadening its geographic operating footprint and diversifying its portfolio of brands. Further, management has sought to expand revenues from more profitable channels and improve operating efficiency. As a result of these actions, Avis Budget has become less dependent on North American travel volumes, while improving the resiliency of revenues. Indeed, International revenues for 9M16, represented approximately 30% of total revenues, compared to 15% for 9M09, despite headwinds from the stronger U.S. dollar. Meanwhile, off-airport revenues were also 30% of total revenues, up from approximately 19% in 2009. Overall, for 9M16, Avis Budget generated pre-tax income of $322 million, a 15% decline year-over-year (YoY), as increasing costs outpaced increasing net revenues.

The Company’s risk profile remains relatively stable. However, it is DBRS’s view that residual risk has increased given normalizing used vehicle values and the Company’s increasing levels of risk vehicles (those vehicles that do not benefit from a residual value guarantee from the manufacturer). Indeed, Avis Budget expects risk vehicles to comprise approximately 70% of total vehicles for 2017, up from 67% for 2016. The Company’s decision is driven by original equipment manufacturers (OEMs) increasing program vehicle costs, as compared to more subdued increases on risk car purchase prices. Importantly, and partially offsetting normalizing vehicle costs, the Company continues to utilize alternative sales channels for the disposition of risk vehicles, allowing it to capture a greater share of the normally higher retail sales price as compared to the wholesale auction channels. Meanwhile, other risks remain sound. Since the financial crisis, Avis Budget has broadened the number of OEMs and vehicle models in the fleet, reducing concentration risk. The greater fleet diversity by OEM also better protects the Company from a disruption to vehicle supply should any one manufacturer become financially distressed or face a prolonged work stoppage. While the expansion of risk vehicles in the fleet increases Avis Budget’s exposure to residual values, DBRS views the Company’s fleet management and use of program vehicles as prudent.

Liquidity continues to be well-managed and sufficient to meet upcoming requirements. Corporate debt maturities are manageable with no maturities until late 2017 ($250 million). Nevertheless, the Company’s reliance on vehicle-backed debt, which tends to have shorter durations than corporate debt, does introduce a degree of refinancing risk.

Avis Budget’s highly leveraged balance sheet continues to be a constraint on the ratings. At September 30, 2016, balance sheet leverage (debt-to-equity, including fleet debt) was a very high 29.5x, up from 22.5x at September 30, 2015, reflecting stock repurchases and higher debt. Importantly, DBRS notes that on a cash flow leverage basis, (DBRS calculated: Debt-to-last twelve months EBITDA) leverage was relatively stable from the comparable period a year ago at 4.5x (4.4x in 2015).

RATING DRIVERS
While upward ratings movement is unlikely over the medium-term, further improvement in the capital structure, specifically higher levels of tangible equity, reduced levels of outstanding debt and lower leverage may lead to positive rating momentum. Further, sustained improvement in operating performance accompanied by a notable reduction in the reliance on the North American on-airport market could have positive rating implications. Conversely, a sustained decline in revenue generation indicating a weakening of the franchise, or a material loss resulting from fleet mismanagement could result in downward rating pressure. Moreover, a deterioration in the Company’s liquidity position or a notable increase in leverage, may negatively impact ratings.

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

The applicable methodologies are the Global Methodology for Rating Finance Companies (October 2016) and DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company financials. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan
Rating Committee Chair: Michael Driscoll
Initial Rating Date: December 16, 2009
Most Recent Rating Update: December 4, 2015

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.