DBRS Morningstar Downgrades Ratings on Hertz Vehicle Financing II LP Securities, Maintains UR-Neg. Status

DBRS, Inc. (DBRS Morningstar) downgraded the ratings on the following classes of securities issued by Hertz Vehicle Financing II LP:

-- Series 2013-A, Class A to A (high) (sf) from AAA (sf)
-- Series 2013-A, Class B to BBB (sf) from AA (sf)
-- Series 2013-A, Class C to B (high) (sf) from A (sf)
-- Series 2013-A, Class D to B (low) (sf) from BBB (sf)
-- Series 2015-3, Class A to AA (low) (sf) from AAA (sf)
-- Series 2015-3, Class B to BB (high) (sf) from A (sf)
-- Series 2015-3, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2016-2, Class A to AA (low) (sf) from AAA (sf)
-- Series 2016-2, Class B to BB (high) (sf) from A (sf)
-- Series 2016-2, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2016-2, Class D to CC (sf) from BB (sf)
-- Series 2016-4, Class A to AA (low) (sf) from AAA (sf)
-- Series 2016-4, Class B to BB (high) (sf) from A (sf)
-- Series 2016-4, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2016-4, Class D to CC (sf) from BB (sf)
-- Series 2017-1, Class A to AA (low) (sf) from AAA (sf)
-- Series 2017-1, Class B to BB (high) (sf) from A (sf)
-- Series 2017-1, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2017-1, Class D to CC (sf) from BB (sf)
-- Series 2017-2, Class A to AA (low) (sf) from AAA (sf)
-- Series 2017-2, Class B to BB (high) (sf) from A (sf)
-- Series 2017-2, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2017-2, Class D to CC (sf) from BB (sf)
-- Series 2018-1, Class A to AA (low) (sf) from AAA (sf)
-- Series 2018-1, Class B to BB (high) (sf) from A (sf)
-- Series 2018-1, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2018-1, Class D to CC (sf) from BB (sf)
-- Series 2018-2, Class A to AA (low) (sf) from AAA (sf)
-- Series 2018-2, Class B to BB (high) (sf) from A (sf)
-- Series 2018-2, Class C to B (low) (sf) from BBB (sf)
-- Series 2018-2, Class D to CC (sf) from BB (sf)
-- Series 2018-3, Class A to AA (low) (sf) from AAA (sf)
-- Series 2018-3, Class B to BB (high) (sf) from A (sf)
-- Series 2018-3, Class C to B (low) (sf) from BBB (sf)
-- Series 2018-3, Class D to CC (sf) from BB (sf)
-- Series 2019-1, Class A to AA (low) (sf) from AAA (sf)
-- Series 2019-1, Class B to BB (high) (sf) from A (sf)
-- Series 2019-1, Class C to CCC (high) (sf) from BBB (sf)
-- Series 2019-1, Class D to CC (sf) from BB (sf)
-- Series 2019-2, Class A to AA (low) (sf) from AAA (sf)
-- Series 2019-2, Class B to BB (high) (sf) from A (sf)
-- Series 2019-2, Class C to B (low) (sf) from BBB (sf)
-- Series 2019-2, Class D to CC (sf) from BB (sf)
-- Series 2019-3, Class A to AA (low) (sf) from AAA (sf)
-- Series 2019-3, Class B to BB (high) (sf) from A (sf)
-- Series 2019-3, Class C to B (low) (sf) from BBB (sf)
-- Series 2019-3, Class D to CC (sf) from BB (sf)

The ratings remain Under Review with Negative Implications, where they were placed on April 29, 2020.

In a commentary titled “Rental Car ABS Performance Expected to Remain Stable in the Near Term Despite Coronavirus Disease (COVID-19) Concerns” 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 security (ABS) performance remained stable. In a subsequent commentary titled “DBRS Morningstar Revises Rental Car ABS Sector Outlook to Negative Due to Coronavirus Disease (COVID-19) Concerns” published on April 21, 2020, DBRS Morningstar revised its outlook for the rental car ABS sector 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, the 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 CC, 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, Hertz’s liquidity has been and may continue to be impaired because of requirements in its ABS financing arrangements whereby lease payments are required on vehicles regardless of their revenue or nonrevenue-producing status.

(2) On April 27, 2020, Hertz failed to pay variable rent (interest) and base rent (principal) due under the operating lease. On May 5, 2020, the trustee received funds with respect to interest due on the Series 2013-A variable-funding notes (VFNs) and the remainder of the ABS medium-term notes (MTNs). The nonpayment under the lease triggered an amortization event and a liquidation event with respect to the VFNs. On May 5, 2020, Hertz entered into a Forbearance Agreement with the VFN holders and lenders in their senior credit facility whereby they agreed to forbear their rights to direct a liquidation. No waiver was provided by the VFN holders with respect to the amortization event and the Forbearance Agreement will expire on May 22, 2020. Failure to pay base rent under the lease resulted in an amortization event occurring with respect to the MTNs which, absent a waiver from the requisite amount of MTN noteholders, will result in a liquidation event with respect to the MTNs.

(3) 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.

(4) 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 tests. 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.

(5) The failure to or inability to adjust the credit enhancement as indicated under the ABS financing documents, potential deterioration in the used vehicle market beyond original expectations, and the failure to pay base rent due on April 27, 2020, could result in losses upon disposition that are inconsistent with original expectations and outstanding ratings prior to these rating downgrades.

(6) 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.

(7) DBRS Morningstar downgraded Hertz’ ratings, including its Long-Term Issuer Rating, to CC from CCC (high) on April 29, 2020, and the ratings remain Under Review with Negative Implications.

(8) The DBRS Morningstar ratings of the relevant original equipment manufacturers as of May 19, 2020.

The ratings remain Under Review with Negative Implications. DBRS Morningstar will seek to complete its assessment and remove the ratings from Under Review with Negative Implications status as soon as appropriate. Upon the resolution of the Under Review 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.

DBRS Morningstar notes that the above press release was amended on August 17, 2020, to correct the ratings of Series 2017-2, Class C and Class D to CCC (high) (sf) and CC (sf), respectively. The ratings on the two classes were inadvertently switched in the table only and have now been corrected accordingly.

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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