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”. Additionally, DBRS maintained the Company’s Support Assessment of SA3. As such, Avis Budget’s Intrinsic Assessment remains equalized to the Long-Term Issuer Rating at “BB”. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The ratings confirmation considers Avis Budget’s top-tier U.S. on-airport business and leading international franchise, underpinned by its sustained solid fleet management operations. Ratings also reflect the Company’s well managed liquidity profile and acceptable earnings generation. The ratings also consider Avis Budget’s modest capitalization and dependence on secured wholesale funding which encumbers the balance sheet potentially limiting financial flexibility during periods of stress. DBRS notes that the Stable trend reflects DBRS’s view that Avis Budget’s credit fundamentals will remain consistent over the medium-term, especially given continuing solid industry fundamentals.

RATING DRIVERS
A significant reduction in balance sheet leverage or sustained positive operating leverage could have positive rating implications. Conversely, a material deterioration in the Company’s liquidity position, a significant loss driven by fleet mismanagement, or a sustained decline in revenue generation, indicating a weakening franchise, could result in negative rating implications.

RATING RATIONALE
The ratings consider Avis Budget’s solid franchise, underpinned by its top-tier global vehicle rental business, including its large U.S. on-airport and off-airport franchises. Overall, the Company is one of the largest vehicle rental car companies in the world, with an extensive operating platform, including direct operations in 30 countries, and licensees in more than 150 additional countries. At September 30, 2018, Avis Budget has 11,000 global car and truck rental locations with an average rental fleet of more than 620,000. Importantly, the Company continues to strengthen its franchise by broadening its geographic diversification, including the 2018 acquisition of Turiscar Group, a Portugal-based commercial and leisure vehicle rental company, and the 2018 purchase of Morini S.p.A with vehicle rental services in northern Italy. Additionally, the Company remains focused on expanding its service offerings, including its ZipCar Flex service, and its connected car platform.

The Company’s earnings generation remains adequate. For 9M18, earnings increased 8% year-over-year (YoY) to $152 million, driven by modest positive operating leverage, with increasing revenues (up 4%) outpacing rising expenses (up 3%). Improved earnings reflected higher revenue contributions from both the Americas and International segments. Improved Americas segment revenue was driven by higher rental volumes, partially offset by a $6 million negative impact from currency exchange rate movements. Improved International revenues were driven by higher rental volumes and a $79 million benefit from currency movements. Meanwhile, the increase in Company-wide expenses reflected higher rental activity, greater investments in marketing, an increase in commissions, higher compensation costs, which were partially offset by lower per unit fleet costs in the Americas. DBRS notes that Avis Budget continues to invest in the franchise, including updates to its revenue management system, connected cars, its Zipcar platform, and accounting modernization.

The Company’s risk profile remains sound. Residual value risk continues to be well managed, reflecting positively on the Company’s sound fleet management platform, as well as its diversified set of automobile suppliers and models, and utilization of various vehicle disposition channels. Travel volume exposure is mitigated by the Company’s broadening revenue sources. Interest rates risk is managed through the use of interest rate swaps and other derivatives. Finally, operating risk is significant, especially given the Company’s reliance on information systems, including its reservation system, rental system, and data processing and information management systems. It is DBRS’s view that this risk is appropriately managed.

The Company’s funding profile is dominated by secured forms of wholesale funding, with the majority consisting of securitizations. With its highly encumbered balance sheet, financial flexibility is limited, especially during stressful periods. This level of encumbrance of the balance sheet is factored in the one notch differential between the Long-Term Issuer Rating and the Senior Unsecured Debt rating of Avis Budget. With Avis Budget’s significant exposure to the cyclical capital markets, liquidity management is an important key challenge for the Company. Overall, it is DBRS view that Avis Budget’s liquidity profile as sound and well managed.

Capital is modest and a constraint on Avis Budget’s ratings. Although balance sheet leverage improved YoY, it remains elevated, reflecting the Company’s low level of book equity and the asset intensive nature of the rental car business. However, when viewed on a cash flow basis, Avis Budget’s leverage continues to be within the range of its large vehicle rental peers. Overall, the Company maintains a tangible equity deficit, given its high level of goodwill and intangibles. As such, DBRS views Avis Budget’s loss absorption capacity, as limited. DBRS would view a more robust capital position as a positive rating factor.

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

The applicable methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 2018) and the DBRS Criteria – Rating Corporate Holding Companies and Their Subsidiaries (December 2017), 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: 1 December 2017

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

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

This is an unsolicited credit rating.

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