DBRS Confirms The Hertz Corporation at BB (low), Trend Changed to Stable

DBRS, Inc. (DBRS) confirmed the ratings of The Hertz Corporation (Hertz or the Company), including the Company’s Long-Term Issuer Rating of BB (low). At the same time, DBRS has revised the trend on these ratings to Stable from Negative. The Company’s Intrinsic Assessment is BB (low), while its Support Assessment is SA3.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects Hertz’s deeply entrenched global rental car franchise, underpinned by a strong presence in the U.S. on-airport and international markets, as well as a more moderately sized North American commercial fleet management and leasing business. Hertz’s improved fleet management capabilities, including an enhanced operating platform and solid vehicle mix have led to strengthening fleet utilization rates and provide for effective residual value risk management, all of which are supportive of the ratings. The ratings also consider the Company’s weak earnings generation capacity, high leverage profile, and significant level of secured funding which deeply encumbers the Company’s earning assets, limiting its financial flexibility. The change in trend to Stable from Negative reflects the Company’s improving profitability trajectory. Moreover, DBRS views positively, the withdrawal of Hertz’s Material Weakness designation from its audited financials, as the Company has established an effective framework for internal controls over financial reporting, benefitting operational risk. Finally, the Stable trend also considers the continuing traction gained by the overall transformation initiatives undertaken by the Company.

RATING DRIVERS
Sustained profitability, driven by solid revenue generation and sound fleet management, could result in positive rating implications. Conversely, a sustained negative trajectory in the Company’s profitability, driven by lower revenues and/or higher expenses indicating a weakness in the Company’s business fundamentals, or fleet mismanagement, could result in negative rating implications.

RATING RATIONALE
Hertz’s ratings consider its deeply rooted, highly recognized rental car franchise, underpinned by its top-level positions in both the U.S. on-airport and international markets. Overall, the Company has approximately 10,200 global corporate and franchise locations. Hertz’s brands are highly recognized, including its Hertz, Dollar and Thrifty car rental businesses, as well as its Donlen commercial fleet management franchise.

Overall, Hertz continues to make progress in its transformation initiatives to strengthen its operations and reestablish profitability. DBRS expects this transformation to continue over the medium term. Providing additional momentum, while slowing, the U.S. economy is still growing, and Hertz is benefitting from sound enplanement volumes, and healthy used vehicle values.

The Company’s transformation initiatives have benefited its bottom line. Indeed, Hertz’s revenue generation has improved, reflecting eight consecutive quarters of year-on-year (YoY) increases, primarily driven by revenue growth in the U.S. markets, spurred by higher transaction days, and solid vehicle utilization. Meanwhile, the Company’s expenses remain somewhat pressured by the additional costs associated with the ongoing transformation initiatives, including systems and technology related expenses. For 1H19, the Company reported a net loss of $105 million, improved from a net loss of $263 million for the same period, YoY. The lower loss primarily reflected growth in revenues in the U.S. segment and a 9% decline in depreciation expenses. It should be noted that the YoY improvement would have been larger, as the prior year period benefited from an income tax benefit of $51 million.

DBRS views Hertz’s fleet management and residual value risk as benefiting from its enhanced operating platform, solid vehicle mix, and favorable used vehicle values. The Company has modest exposure to automobile manufacturers, given the diversification by manufacturer and lower usage of program vehicles. Despite the significant exposure to travel volumes, Hertz partially mitigates this risk through revenues generated through its international segment, as well as its off-airport and commercial fleet management businesses. Furthermore, DBRS views operational risk as improved, given the withdrawal of Hertz’s Material Weakness designation, but somewhat elevated as the Company continues its transition to new operating platforms.

The ratings consider the highly encumbered nature of the balance sheet owed to the preponderance of secured debt, which is factored in the one notch differential between the Long-Term Issuer Rating and Long-Term Senior Debt ratings. DBRS views the highly encumbered balance sheet as potentially limiting Hertz’s financial flexibility, especially in stressful periods. In DBRS’s view, Hertz prudently manages the maturities of its corporate debt. The Company used the proceeds from the recent private issuance of senior unsecured debt due 2026, along with proceeds from a recent equity rights offering to redeem its senior notes maturing in October 2020, and in January 2021. With these actions, Hertz will have no material corporate debt maturities until 2021, which removes any intermediate term liquidity risks. As of June 30, 2019, the Company’s liquidity profile was comprised of $415 million of unrestricted cash and $397 million of available capacity under Hertz’s senior revolving credit facility. Furthermore, liquidity reflected $1.1 billion of net cash provided by operating activities for 1H19, which followed $2.6 billion for 2018.

DBRS considers the Company’s highly leveraged balance sheet as constraining its ratings. Leverage, as defined by total debt (including vehicle-backed debt)-to-last twelve months EBITDA, was a high 5.6x at 2Q19. That said, DBRS acknowledges that approximately 77% of debt outstanding is fleet-related debt and can be repaid as Hertz de-fleets following the seasonal peak in the spring and summer travel season.

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

The applicable methodology is Global Methodology for Rating Non-Bank Financial Institutions (November 2018), which can be found on our website under Methodologies.

The primary source 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.

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

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA