DBRS Morningstar Takes Rating Actions on Avis Budget Rental Car Funding (AESOP) LLC

DBRS, Inc. (DBRS Morningstar) placed the following classes of securities issued by Avis Budget Rental Car Funding (AESOP) LLC transactions Under Review with Negative Implications:

-- Series 2016-2 Notes, Class A rated AAA (sf)
-- Series 2016-2 Notes, Class B rated A (high) (sf)
-- Series 2016-2 Notes, Class C rated BBB (sf)
-- Series 2017-2, Class A Notes rated AAA (sf)
-- Series 2017-2, Class B Notes rated A (high) (sf)
-- Series 2017-2, Class C Notes rated BBB (sf)
-- Series 2018-1, Class A Notes rated AAA (sf)
-- Series 2018-1, Class B Notes rated A (high) (sf)
-- Series 2018-1, Class C Notes rated BBB (sf)

On April 21, 2020, DBRS Morningstar published a commentary titled “DBRS Morningstar Revises Rental Car ABS Sector Outlook to Negative Due to Coronavirus Disease (COVID-19) Concerns,” revising its outlook for the rental car sector to negative from stable. The primary reason for the revised outlook was that negative developments related to the Coronavirus Disease (COVID-19) pandemic were more rapid and severe in the rental car business than DBRS Morningstar originally anticipated.

The rental car industry faces challenges stemming from the coronavirus, including disruptions in the automotive sector, particularly regarding vehicle disposition channels, which have compromised rental car companies’ ability to rightsize the fleet. The uncertainty about when travel and tourism will recover further exacerbates the situation.

DBRS Morningstar’s criteria considers certain time horizons, by rating category, for the liquidation of the rental fleet after an operating company’s bankruptcy. These time horizons assume wholesale markets are open, functioning efficiently, and able to handle volumes consistent with historical norms. Given the disruption in vehicle disposition channels stemming from the coronavirus, and the potential for future disruptions, DBRS Morningstar is re-evaluating the time horizons it assumes during a potential fleet liquidation. Under its approach to evaluating rental car securitizations, DBRS Morningstar’s assumptions for liquidation horizons also affect the market value decline assumptions for at-risk vehicles. At-risk vehicles are not subject to buyback agreements or guaranteed depreciation agreements with a manufacturer. Because liquidation horizons and market value declines are important considerations when evaluating the sufficiency of credit enhancement at the current rating levels, DBRS Morningstar placed the aforementioned ratings for AESOP securities Under Review with Negative Implications while it considers appropriate liquidation horizons and market value decline stresses for at-risk vehicles in rental car securitizations.

When placing a rating 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 status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

DBRS Morningstar also determined to place the ratings Under Review with Negative Implications based on its set of macroeconomic scenarios for select economies related to the coronavirus, available in “Global Macroeconomic Scenarios: June Update," published on June 1, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on June 1, 2020, and are reflected in DBRS Morningstar’s rating analysis. In the moderate scenario (which serves as the anchor for the current ratings) for the United States, DBRS Morningstar anticipates that containment of the coronavirus will begin during Q2 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures and allowing a gradual economic recovery to begin starting in Q3 2020.

The rating actions also reflect the following analytical considerations:

-- At the start of the pandemic, nonessential business closures limited the company’s ability to reduce fleet commensurate with demand, hurting fleet utilization and liquidity. However, recent fleet dispositions have improved utilization, and the company has been able to preserve and enhance liquidity through aggressive cost-cutting and the recent completion of a $500 million senior debt offering. These positive developments help mitigate the risk of further adverse impacts to liquidity because of the overall uncertainty related to the pandemic, including provisions in asset-backed securities (ABS) financing arrangements requiring lease payments on vehicles regardless of their revenue or non-revenue-producing status.

-- DBRS Morningstar is concerned that the timing and degree of recovery in the tourism and travel sector, a significant driver of rental business, may complicate the company’s ability to size the fleet commensurate with demand.

-- DBRS Morningstar downgraded Avis Budget Group, Inc. to B from BB (low) on May 7, 2020. The rating remains Under Review with Negative Implications.

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 DBRS Morningstar Master U.S. ABS Surveillance (May 27, 2020), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on these transactions took place on November 22, 2019, when all the securities referenced herein were confirmed.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Mike Babick, Senior Vice President, U.S. ABS – Global Structured Finance
Rating Committee Chair: Chris D’Onofrio, Managing Director, Credit Ratings – Global Structured Finance

Initial Rating Date: May 18, 2016 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2016-2); December 1, 2017 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2017-2); and April 19, 2018 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2018-1).

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

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DBRS Morningstar Master U.S. ABS Surveillance (May 27, 2020) https://www.dbrsmorningstar.com/research/361480/dbrs-morningstar-master-us-abs-surveillance