DBRS Upgrades Enterprise Holdings, Inc.’s Long-Term Issuer Rating to ‘A’; Stable Trend

DBRS, Inc. (DBRS) upgraded the long-term ratings for Enterprise Holdings, Inc. (Enterprise or the Company) and its related entity ERAC Canada Finance Company, including its Long-Term Issuer Rating to ‘A’ from A (low). At the same time, DBRS confirmed the Short-Term ratings of Enterprise and its related entity. The trend on all ratings is now Stable. Furthermore, the Company’s Support Assessment remains at SA3. As such, the Company’s Intrinsic Assessment is equalized with the Long-Term Issuer Rating. ERAC Canada Finance Company ratings reflect the guarantee from Enterprise.

KEY RATING CONSIDERATIONS
The upgrade reflects Enterprise’s long track record of strong operating and financial performance. The Company’s earnings capacity has been resilient with returns consistent with an ‘A’ rating per DBRS’s rating methodology. Enterprise’s strong and resilient performance has been accomplished through various cycles, including economic downturns, industry over-fleeting, and shifting customer preferences in vehicle types. Ratings also reflect strong balance sheet management, demonstrated by the Company’s consistent low use of balance sheet leverage. The Stable trend reflects DBRS’s expectations that Enterprise’s credit fundamentals will remain solid over the medium term. Further, the Stable trend considers that global rental car demand will remain solid given expectations for firm global economic growth which should underpin sound enplanement volumes and good leisure travel volumes. The trend also reflects DBRS’s expectations that used vehicle values are likely to gradually moderate as 2019 progresses.

RATING DRIVERS
Given the ratings upgrade, DBRS views additional positive rating actions over the medium term as unlikely. Nonetheless, a sustained increase in earnings generation capacity while maintaining strong credit fundamentals, and/or enhanced revenue diversification, could have positive rating implications. Conversely, deterioration in the Company’s market position, especially in the home-city business, missteps in fleet management leading to sustained pressure on earnings generation capacity, or a sizable increase in leverage, could have negative rating implications.

RATING RATIONALE
The ratings consider Enterprise’s strong global rental car franchise, which maintains leading market shares in the U.S. home-city and U.S. on-airport markets. The Company’s strong franchise is underpinned by its three global brands, Enterprise Rent-A-Car, Alamo Rent A Car, and National Car Rental, with each brand catering to a specific market segment. The franchise also has a moderately sized truck rental business, which has evidenced solid sustained growth over the last few years. Overall, the Company has approximately 1.5 million vehicles and 10,000 global locations.

Enterprise’s resilient earnings capacity is an important factor in the ratings. The Company’s earnings ability is driven by the revenues derived from its home-city business, which is the largest contributor to the top line. Importantly, the home-city revenues tend to be less correlated to the general economy and travel volumes than the on-airport business. Enterprise also maintains the leading on-airport car rental business, which includes an international business, enhancing revenue diversification. Finally, the Company continues to maintain good cost controls, benefiting its bottom line.

Enterprise’s conservative management team manages its risks appropriately. Management has been able to draw from its deep industry knowledge to aptly navigate its fleet capacity and corresponding residual value exposures through a number of business cycles, including economic slowdowns and periods of industry over-fleeting. DBRS considers the Company’s fleet management capabilities as a key strength and differentiator from its industry peers. The Company utilizes several disposition channels to remarket and dispose of its vehicle fleet to attain the best price possible, including local franchise dealers and independent dealers, retail networks, and auction houses. Enterprise’s broad set of disposition channels contributes to the Company’s ability to consistently generate gains on the disposition of vehicles. Finally, the Company manages interest rate risk well. Exposure to short-term interest rate movements remains moderate, as funding is primarily fixed rate.

Enterprise has a strong funding profile and soundly manages its liquidity position. Unlike the other large rental car companies, the Company’s funding profile is entirely comprised of unsecured funding. This funding is well-diversified by channel and currency. With its substantial pool of unencumbered assets, Enterprise has a high level of financial flexibility, especially during periods of stress. Importantly, funding maturities remain well-spread with more than half of total outstandings maturing in more than five years.

Enterprise’s capital position remains solid, especially when taking into consideration its risk profile. The Company maintains strong capital retention, given its resilient earnings capacity. Positively, the owners have exhibited a disposition to forego material dividends during periods of stress or large acquisitions. Overall, Enterprise’s leverage remains sound, and considerably lower than its large rental car peers. Specifically, at the end of the Company’s fiscal year (July 31, 2018), its debt-to-equity was 0.8x, down from 1.1x at the end of FY2017.

Notes:
The applicable methodology is the Global Methodology for Rating Finance Companies (November 2017), and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018).

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, CFA, Vice President, US Non-Bank FIG – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: May 16, 2001
Most Recent Rating Update: July 10, 2018

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.