DBRS Morningstar Downgrades Avis Budget to B and Maintains UR - Negative

DBRS, Inc. (DBRS Morningstar) has downgraded 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 to B from BB (low). The Company’s ratings remain Under Review with Negative Implications.

KEY RATING CONSIDERATIONS
The ratings action reflects the severe pressure that the Coronavirus Disease (COVID-19) is placing on Avis Budget’s credit fundamentals. The material decline in airline passenger travel as well as the significant contraction in local off-airport rental car demand, is pressuring the Company’s revenues and cash flows. These headwinds were evident in Avis Budget’s steeper year-on-year net loss in 1Q20. DBRS Morningstar anticipates that Avis Budget’s full year 2020 bottom line will remain highly pressured, in particular in 2Q20, given that the pandemic will keep travel demand significantly below historical levels. We expect improved results in 2H20 as the economy reopens, travel restrictions abate, and the Company right sizes its fleet to improve vehicle utilization. Additionally, the Company’s significant cost reduction initiatives will partially mitigate the revenue headwinds from lower rental demand. However, a significant second wave of the pandemic would be very challenging for Avis Budget.

Avis Budget reported a $158 million net loss in 1Q20, worse than the $91 million net loss in 1Q19, due to a 9% decline in revenues, partially offset by a 2% decrease in total expenses. The higher loss reflected the material drop-off in rental volumes in March, driven by the severe slowdown in both on-airport and off-airport business. Offsetting pressured revenues, the Company is significantly reducing its expense base. Indeed, the Company announced that it had achieved over $2 billion in annual costs removal actions to date, underscored by the reduction or furlough of approximately 70% of its global workforce.

The ratings action also reflects the Company’s pressured liquidity position, especially given its constrained cash flow generation along with material levels of interest expense, lease costs, and other working capital needs. That said, the Company expects its cash burn to moderate as 2Q20 progresses reflecting the substantial actions taken by management to align costs with the lower demand environment. Overall, the Company believes it has adequate liquidity for the balance of 2020 and into 2021, based on its estimated cash burn projections which includes a $400 million cash usage in April, $250 million in May, and $150 million in June. Thereafter, the Company expects to be cash flow positive. As of March 31, 2020, Avis Budget had approximately $1.6 billion in liquidity ($1.4 billion of available cash and cash equivalents, and $225 million of availability under its revolving credit facility). Liquidity will be further bolstered by the recently announced pricing of a $500 million issuance of privately placed senior secured notes due in 2025. Overall, the Company’s debt maturities are manageable with no meaningful corporate debt coming due until 2023, and no material level of fleet financing maturities in 2020.

The adequacy of the Company’s liquidity position will, in part, be driven, by its ability to quickly right size its fleet to better match demand. However, the Company will be selling vehicles into stiff headwinds, including a sales channel where most physical wholesale auctions are closed and many auto dealerships’ sales activities have been restricted to online sales. Moreover, the recent spike in unemployment, will likely result in lower used vehicle sales volumes. These factors will likely result in the Company incurring losses on the disposition of vehicles.

Avis Budget’s balance sheet is further pressured by its high level of collateralized funding. Indeed, with the majority of its assets encumbered, the Company’s financial flexibility is limited, especially during periods of stress, which results in the one notch differential between the Long-Term Issuer Rating and Long-Term Senior Debt rating.

The maintenance of the Under Review with Negative Implications reflects the heightened level of uncertainty related to the ultimate duration of the downturn caused by the coronavirus and the overall impact on demand for both leisure and commercial travel and thereby earnings. While Avis Budget has indicated it is seeing early signs of improvement in rental demand for June and July, this improvement remains fragile and at risk from any potential second wave of the coronavirus.

During the review, DBRS Morningstar will focus on Avis Budget’s capacity to offset the impact of the coronavirus pandemic and its impact on the Company’s future financial performance and credit fundamentals. DBRS Morningstar will consider the Company’s expense reduction actions, including success in downsizing its fleet, reducing its staff, cutting operational costs, and pausing capital spending. Additionally, DBRS Morningstar will consider the impact of any U.S. or European governmental support for the rental car industry, if support is forthcoming.

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. However, if Avis Budget’s vehicle utilization rate were to begin tracking towards pre-pandemic levels signaling that the Company’s fleet was becoming more aligned with rental demand and the Company were to restore positive cash flow generation ratings could move to a Stable trend. Conversely, ratings would be downgraded should liquidity materially weaken. Also, if the coronavirus pandemic is sustained longer, or people still decide not to travel despite progress made against the pandemic, keeping vehicle utilization rates below historical levels leading to material losses, the ratings would also be downgraded.

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 Financials (September 24, 2019) and DBRS Criteria – Rating Corporate Holding Companies and their Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on our website under methodologies and criteria: https://www.dbrsmorningstar.com/search/?doc Types=methodology&sectors=2:10008:10011:10012:10093:10094&sort=recent

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.

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

The rated entity or its related entities did not 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 is an unsolicited credit rating.

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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