DBRS Morningstar Confirms Enterprise Holdings, Inc. at ‘A’; Trend Revised to Negative from Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Enterprise Holdings, Inc. (Enterprise or the Company), and its related entity ERAC Canada Finance Company, including its Long-Term Issuer Rating of ‘A’. DBRS Morningstar has revised the trend for all long-term ratings of Enterprise and its related entity to Negative from Stable. The Short-Term Instruments rating of R-1 (low) at the Company and its related entity remain Stable. The Company’s Intrinsic Assessment (IA) is ‘A’, while its Support Assessment is SA3, resulting in Enterprise’s final ratings being equal with its IA. ERAC Canada Finance Company’s ratings are guaranteed by Enterprise and are also equalized.

KEY RATING CONSIDERATIONS
The ratings action and Negative trend reflect DBRS Morningstar’s view that the impact of the Coronavirus Disease (COVID-19) will create considerable headwinds for Enterprise, as well as its peers in the rental car sector. In confirming the Company’s ratings, DBRS Morningstar considers Enterprise’s strong rental car franchise and solid balance sheet fundamentals, including low leverage (Debt/EBITDA), solid liquidity, and a sound capital position. Meanwhile, the Negative trend reflects the evolving coronavirus related challenges faced by Enterprise and its peers, including the likelihood of significantly lower revenues over the near term due to increasing levels of travel restrictions.

Federal, state, and local governments continue to strengthen their efforts to reduce transmission of the coronavirus disease through intensifying travel restrictions. These restrictions have significantly curtailed aviation and automotive travel, severely pressuring both on-airport and off-airport rental volumes. Furthermore, with the significant level of travel restrictions and local stay-at-home directives, it is DBRS Morningstar’s view that the Company’s insurance replacement businesses will also be pressured, as reduced automotive travel volumes would correlate with lower automotive accident frequency. DBRS Morningstar notes that the full impact of the coronavirus is still unclear, including the severity of the disease, as well as its duration before it runs its course.

RATING DRIVERS
Given the Negative trend, an upgrade in the near term is unlikely. That said, if the United States makes noteworthy progress in controlling the coronavirus pandemic, which allows the economy to reopen, and the Company’s credit fundamentals and earnings generation start approaching pre-pandemic levels, the ratings could return to a Stable trend. Conversely, ratings could be lowered should the challenging operating environment created by the coronavirus pandemic become more prolonged than anticipated, leading to a sustained and meaningful reduction in rental days, vehicle utilization and revenues. Ratings would also likely be lowered should liquidity significantly weaken or if there is a sustained material increase in leverage.

RATING RATIONALE
The Company’s top-tier global franchise is underpinned by a highly seasoned management team with deep industry knowledge, and a strong fleet management platform, both of which should help mitigate the impact of the coronavirus related headwinds. Additionally, DBRS Morningstar is further comforted by Enterprise’s solid track record of successfully navigating through numerous economic downturns and national disasters.

DBRS Morningstar anticipates that Enterprise’s earnings generation will be severely pressured over the near term, especially as rental car volumes and fleet utilization contract due to the travel restrictions. Indeed, passenger air travel is down significantly, negatively impacting on-airport rentals and revenues. Meanwhile, the Company’s home-city business, which has traditionally been more resilient than the airport channel, is also being adversely impacted by the coronavirus pandemic. To offset the potential lower future revenues, Enterprise has initiated expense reductions, including furloughing employees.

Enterprise’s strong fleet management acumen is a factor in the ratings. Nevertheless, the challenging operating environment is having an impact. To counter the pressure from the precipitous decline in rental volumes, Enterprise has materially reduced capital expenditures on the purchase of new vehicles from the OEMs and begun to sell vehicles to right size the fleet to demand. However, with wholesale auction channels moving to virtual sales and states limiting retail auto sales to on-line only, used vehicle sales volumes have slowed meaningfully and used vehicle prices have started to soften.

The Company’s balance sheet fundamentals remain strong, including low leverage, a solid liquidity position, and a sound capital profile. We see these factors as providing Enterprise with a strong underpinning to absorb the coronavirus related headwinds. Enterprise maintains a strongly managed funding position that is diversified by funding type, currency and duration. Of note, the Company does not employ securitizations to fund its assets. As such, its high level of unencumbered assets provide considerable financial flexibility during periods of stress. Positively, debt maturities are well-spaced out with maturities covered by the Company’s sizable liquidity position. DBRS Morningstar notes that ratings assume the Company’s ability to maintain recurrent funding. Finally, the Company has historically displayed strong capital management with the owners refraining from drawing significant levels of capital during prior periods of stress or large acquisitions.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The applicable methodology is Global Methodology for Rating Non-Bank Financial Institutions (September 24, 2019), and DBRS Criteria: Guarantees and Other Forms of Support (January 15, 2020), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020), which can be found on our website under Methodologies & Criteria: https://www.dbrsmorningstar.com/search/?docTypes=methodology&sectors=2:10008:10011:10012:10093:10.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents. DBRS Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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