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

DBRS, Inc. (DBRS) confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company) and its related subsidiary, Avis Budget Car Rental, LLC, including the Company’s Long-Term Issuer Rating of “BB”. Concurrently, DBRS assigned a Support Assessment of SA3, which results in the Company’s Intrinsic Assessment to be equalized to the Long-Term Issuer Rating at “BB”. The trend on all ratings is Stable.

The ratings consider Avis Budget’s solid global franchise, including a top-tier U.S. on-airport business, a sound off-airport franchise and a good-sized truck rental business. Importantly, the Company’s international business, which represents approximately 31% of total revenues for 9M17, provides diversity to the top line. Moreover, the Company’s deep industry knowledge and sound fleet management operations benefit its well-managed liquidity profile. Ratings also consider Avis Budget’s pressured earnings generation, as well as its reliance on secured forms of wholesale funding, and leveraged balance sheet, which limits financial flexibility and constrains the Company’s ratings.

The Stable trend reflects DBRS’s expectation that Avis Budget’s operating performance will remain acceptable over the medium term, underpinned by solid industry fundamentals, including the strengthening global economies and appropriately sized and re-balanced fleets, especially in the U.S. markets, which better match customer demand. Partially offsetting, DBRS expects that used vehicle values will moderate, as the bump-up in demand, due to the recent hurricanes, recedes. Brexit could also prove to be a headwind to the Company’s bottom line.

The Company has a strong franchise with a significant global reach underpinned by more than 11,000 locations in more than 180 countries. The franchise operates with a multi-brand strategy, including Avis, its premium brand, Budget, its value brand, Payless and Apex, its two deep value brands, and Zipcar, its car share service. The Company also has a truck rental operation called Budget Truck, which operates through a network of 1,000 dealer operated and 480 company operated locations. Importantly, the separate brands provide for differentiated positioning, servicing and pricing, but share non-customer facing functions such as administrative and operational functions, including fleet management, sales and finance.

It is DBRS’s view that the large rental car companies in the U.S. have right-sized their fleets, establishing the proper mix of vehicles and trim levels to better meet customer demand, which should benefit future pricing and ultimately the Company’s bottom line, which has been pressured by higher expenses, especially higher vehicle related costs. Indeed, Avis Budget reported favorable pricing in 3Q17 in the Americas segment. However, the Company did report lower pricing internationally. Importantly, the Company remains focused on expense reduction initiatives, including a decrease in headcount, as well as process efficiencies, to improve the bottom line.

Overall, the Company maintains a sound risk profile and manages its risks appropriately. Avis Budget maintains a broad base of vehicle suppliers to mitigate concentration risk. Moreover, the wide base of suppliers and vehicle models reduces the Company’s risk of loss on deterioration of residual values due to a specific issue with a manufacturer or model. Despite its large component of risk vehicles, the Company intends to acquire more program vehicles, which should somewhat moderate residual value risk. Similar to its peers with significant on-airport operations, Avis Budget is reliant on travel volumes, which results in the Company being exposed to external risk that may disrupt the travel industry. To mitigate this exposure, Avis has taken a number of steps to broaden its revenue base to dampen any earnings impact from a travel slowdown. Although the Company’s debt is exposed to interest rate risk, it is highly manageable, especially given the moderate level of variable rate debt (LIBOR based) on its balance sheet. Finally, the Company relies significantly on information systems, including reservations, rental, data processing and information management systems, to conduct its day-to-day operations. As such, a failure of a major system could result in lost reservations, disruption to the Company’s ability to manage its fleet, and slow rental transaction processing resulting in lower revenues and earnings. It is DBRS’s view that the Company’s operating risk is adequately managed.

Avis Budget’s funding profile has not changed materially. The Company continues to significantly rely on the securitization markets to fund its vehicle fleet. The high level of securitizations somewhat limits Avis Budget’s financial flexibility, given the high level of encumbered assets on its balance sheet. DBRS notes that refinancing risk is above average, given the traditionally short duration of rental car-backed ABS. As such, it is vital for the Company to maintain a suitable liquidity profile. Overall, DBRS views Avis Budget’s liquidity as appropriate and well-managed.

On a cash flow basis, Avis Budget’s leverage falls within the range of the larger rental car companies. However, on a balance sheet basis, the Company’s leverage is high, reflecting its low level of book equity relative to the size of the balance sheet. DBRS views Avis Budget’s tangible equity deficit, which is driven by a high level of goodwill and intangibles, as a negative factor considered in the rating. DBRS sees the Company’s ability to absorb losses in the event of a significant economic downturn, as limited. Finally, DBRS would view an increase in tangible book equity as a positive rating factor.

RATING DRIVERS
Material improvement in the Company’s capital structure, including higher levels of tangible equity, and lower balance sheet leverage may lead to upward rating pressure. Moreover, improved diversity, reflecting a notable decline in the Company’s reliance on the U.S. 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. Additionally, a deterioration in the Company’s liquidity position or a material increase in leverage, may negatively impact ratings.

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

The applicable methodology is the Global Methodology for Rating Finance Companies (November 2017) and the DBRS Criteria – Rating Holding Companies and Their Subsidiaries (December 2016), which can be found on our website under 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.

Lead Analyst: Mark Nolan, Vice President, Non-Bank Financials – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 5 December 2016

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not 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 in connection with this rating action.

This is an unsolicited credit rating.