DBRS Morningstar Downgrades HTZ to CC and Maintains Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) has downgraded the ratings of The Hertz Corporation (Hertz or the Company), including Hertz’s Long-Term Issuer Rating to CC from CCC (high). The Company’s ratings remain Under Review with Negative Implications.

KEY RATING CONSIDERATIONS
The ratings action and the maintenance of the Under Review with Negative Implications consider Hertz’s recent announcement that on April 27, 2020, the Company did not make certain payments in accordance with its Amended and Restated Master Motor Vehicle Operating Lease and Servicing Agreement Series 2013-G1 (Operating Lease), pursuant to which Hertz leases vehicles used in its day-to-day United States rental car fleet operations from its special-purpose vehicle finance subsidiary. The filing noted that if such payments are not made by the end of the grace period on May 4, 2020, and a sufficient amount of Hertz’s Senior Credit Lenders and VFN Noteholders do not agree to waive any resulting default or forbear from exercising remedies, Hertz could be materially and negatively impacted. DBRS Morningstar sees the missed payment as reflecting the Company’s strained liquidity position and the limited options the Company has to preserve its liquidity. As such, the ratings action and the ratings reflect the increasing likelihood of an adverse impact to Hertz’s senior unsecured noteholders, including the potential that Hertz could file for bankruptcy protection.

Despite its approximately $1.0 billion in liquidity, as of March 26, 2020, and only a moderate level of corporate debt coming due in 2020, the exceptional decline in travel volumes at airports and off airport locations is severely impacting Hertz’s revenues and cash flows. DBRS Morningstar views the Company’s interest and lease expenses, along with the potential need for future incremental credit enhancement for its asset backed securitizations (ABS) and other working capital needs as placing significant pressure on the Company’s existing liquidity.

The impact of the Coronavirus Disease (COVID-19) is severely pressuring Hertz’s bottom line and liquidity position. As guidance to the impact of the coronavirus on Hertz’s future credit fundamentals, DBRS Morningstar utilizes the moderate scenario as described in DBRS Morningstar’s Sovereign Group’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings”. In this scenario, DBRS Morningstar assumes some success in containment of the virus within the second quarter and then a gradual relaxation of restrictions, enabling economies to begin a gradual economic recovery in the third quarter. Within this scenario, DBRS Morningstar sees the recovery in the global travel industry as being very slow across both leisure and business travel, which will result in meaningful headwinds through 2020 for rental car companies. Indeed, these headwinds will impact the Company’s second and third quarters, which are typically when it generates the majority of its revenues, further pressuring the bottom line. DBRS Morningstar notes that coronavirus-related headwinds also continue to severely pressure Hertz’s global vehicle rental volumes and fleet utilization rates, as well as used vehicle values.

During the review, DBRS Morningstar will focus on Hertz’s ability to offset the pressure on its liquidity position as well as the impact of the current environment on its financial performance. We will consider the Company’s actions, including any waivers and concessions granted to Hertz by its creditors, reducing the size of the fleet, managing costs, and reducing capital expenditures. Additionally, the review will consider the impact of any potential European or U.S. governmental support for the rental car industry.

The Under Review with Negative Implications status is generally resolved with a rating action within three months. However, if heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.

RATING DRIVERS
Given the Under Review with Negative Implications, an upgrade in the near term is unlikely. Meanwhile, if the Company’s liquidity position were to deteriorate further or were the Company to seek to restructure its debt with creditors, the ratings would be downgraded. Conversely, should Hertz receive waivers or other concessions from its creditors that afford the Company time to align its fleet to demand while reducing potential liquidity pressure, the ratings could return back to a Stable trend.

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 principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions, (September 24, 2019), which can be found on our website under Methodologies & Criteria: https://www.dbrsmorningstar.com/research/ 350802/global-methodology-for-rating-non-bank-financial-institutions.

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 Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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

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

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