DBRS Morningstar Places Hertz Vehicle Financing II LP Securities Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) placed the following classes of securities issued by Hertz Vehicle Financing II LP Under Review with Negative Implications:

--Series 2013-A, Class A rated AAA (sf)
--Series 2013-A, Class B rated AA (sf)
--Series 2013-A, Class C rated A (sf)
--Series 2013-A, Class D rated BBB (sf)
--Series 2015-3, Class A rated AAA (sf)
--Series 2015-3, Class B rated A (sf)
--Series 2015-3, Class C rated BBB (sf)
--Series 2016-2, Class A rated AAA (sf)
--Series 2016-2, Class B rated A (sf)
--Series 2016-2, Class C rated BBB (sf)
--Series 2016-2, Class D rated BB (sf)
--Series 2016-4, Class A rated AAA (sf)
--Series 2016-4, Class B rated A (sf)
--Series 2016-4, Class C rated BBB (sf)
--Series 2016-4, Class D rated BB (sf)
--Series 2017-1, Class A rated AAA (sf)
--Series 2017-1, Class B rated A (sf)
--Series 2017-1, Class C rated BBB (sf)
--Series 2017-1, Class D rated BB (sf)
--Series 2017-2, Class A rated AAA (sf)
--Series 2017-2, Class B rated A (sf)
--Series 2017-2, Class C rated BBB (sf)
--Series 2017-2, Class D rated BB (sf)
--Series 2018-1, Class A rated AAA (sf)
--Series 2018-1, Class B rated A (sf)
--Series 2018-1, Class C rated BBB (sf)
--Series 2018-1, Class D rated BB (sf)
--Series 2018-2, Class A rated AAA (sf)
--Series 2018-2, Class B rated A (sf)
--Series 2018-2, Class C rated BBB (sf)
--Series 2018-2, Class D rated BB (sf)
--Series 2018-3, Class A rated AAA (sf)
--Series 2018-3, Class B rated A (sf)
--Series 2018-3, Class C rated BBB (sf)
--Series 2018-3, Class D rated BB (sf)
--Series 2019-1, Class A rated AAA (sf)
--Series 2019-1, Class B rated A (sf)
--Series 2019-1, Class C rated BBB (sf)
--Series 2019-1, Class D rated BB (sf)
--Series 2019-2, Class A rated AAA (sf)
--Series 2019-2, Class B rated A (sf)
--Series 2019-2, Class C rated BBB (sf)
--Series 2019-2, Class D rated BB (sf)
--Series 2019-3, Class A rated AAA (sf)
--Series 2019-3, Class B rated A (sf)
--Series 2019-3, Class C rated BBB (sf)
--Series 2019-3, Class D rated BB (sf)

In a commentary published on March 18, 2020, DBRS Morningstar discussed some of the challenges facing the rental car sector and concluded that despite these challenges, the outlook for rental car asset-backed securities (ABS) performance remained stable. In a subsequent commentary published on April 21, 2020, the outlook for the rental car ABS sector was revised to negative. The primary reason cited for the revised outlook was that the rapidity and severity of negative developments related to the Coronavirus Disease (COVID-19) that have directly affected the rental car business were observed to be greater than originally anticipated.

In a commentary titled “Global Macroeconomic Scenarios: Implications for Credit Ratings” published on April 16, 2020, DBRS Morningstar explains its belief that in a Moderate Scenario coronavirus will most likely be contained in Q2 2020, resulting in a gradual relaxation of restrictions, thus enabling most economies to begin a gradual economic recovery in Q3 2020. However, negative developments in the travel and tourism and automotive sectors have been particularly damaging to The Hertz Corporation’s (Hertz or the Company; rated CCC (high), Under Review with Negative Implications, by DBRS Morningstar) rental car business, resulting in the present rating actions.

The rating actions by DBRS Morningstar are based on the following analytical considerations:

1. Nonessential business closures have limited the Company’s ability to reduce fleet commensurate with demand, adversely affecting fleet utilization. As a result, company liquidity has been and may continue to be impaired due to requirements in their ABS financing arrangements whereby lease payments are required on vehicles regardless of their revenue or nonrevenue producing status.

2. The information about the extent of the impact of coronavirus on Hertz’s rental car operations to date, which was shared with DBRS Morningstar by the Company.

3. Provisions in ABS financing documents, which cover a substantial portion of the Company’s fleet, specify that incremental credit enhancement be provided based upon certain mark to market and disposition proceeds test. While there is a time lag associated with the likely impact of these tests, based upon DBRS Morningstar’s evaluation of the potential impact of these tests in the upcoming months, the negative impact on the Company’s liquidity could be significant.

4. The failure or inability to adjust the credit enhancement as indicated under the ABS financing documents, combined with potential deterioration in the used vehicle market beyond original expectations, could result in losses upon disposition for nonprogram vehicles that are inconsistent with original expectations and current ratings.

5. Concern that recovery in the tourism and travel sector, a significant driver of rental business, could be protracted to the extent individuals are wary of resuming normal travel patterns.

6. DBRS Morningstar downgraded Hertz’s ratings, including Hertz’s Long-Term Issuer Rating to CCC (high) from B (high). The Company’s ratings remain Under Review with Negative Implications.
   When a rating is placed Under Review with Negative Implications, DBRS Morningstar seeks to complete its assessment and remove the rating from this status as soon as appropriate. Upon the resolution of the Under Review with Negative Implications status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

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:
The principal methodology is the DBRS Master U.S. ABS Surveillance Methodology (July 31, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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