DBRS Morningstar Revises Rental Car ABS Sector Outlook to Developing as Continuing Effects of Coronavirus are Uncertain

DBRS, Inc. (DBRS Morningstar) released a commentary titled “DBRS Morningstar Revises Rental Car ABS Outlook to Developing as Continued Effects of Coronavirus are Uncertain.” While the initial shocks to the rental car industry from the Coronavirus Disease (COVID-19) appear to have subsided, there is continued uncertainty going into late 2020 and early 2021 related to the improvement or even sustainability of demand for rental cars because of the ongoing effects of the pandemic. Despite the potential future volatility, rental car companies have better positioned themselves through expense reduction and excess fleet dispositions. As a result, DBRS Morningstar’s outlook on the rental car asset-backed security (ABS) sector is developing.

The key highlights include:

(1) Demand has rebounded since the start of the pandemic as travelers opt to rent cars for both business and pleasure, in lieu of flying. Demand in the fall will determine if such actions are enough to return utilization rates and profitability to normalized levels. If demand does not return to expected levels, rental car companies may have to de-fleet more than anticipated for the remainder of the year and possibly into 2021.

(2) Used-vehicle values have rebounded dramatically from April 2020 lows because of pent-up demand from the lockdown and tight used-vehicle inventories, despite additional rental risk units sold as rental car companies de-fleet. As of mid-October 2020, the Manheim Used Vehicle Value Index is up 29.3% from the April 2020 low. However, used-vehicle demand may be tapering off. JD Power reports that weekly used-vehicle sales volume as of October 16, 2020, was down by close to 20% from the same period one year ago.

(3) Risks continue to persist in the automotive sector, with annual sales volume estimated to decrease by up to 20% compared with 2019 levels. Nonetheless, liquidity across the sector would appear to be sufficient for the short term. Typical rental car ABS financings require increased credit enhancement levels for vehicles from non-investment-grade manufacturers, requiring the financial support of the rental car operating company to meet these obligations.

Notes:
The commentary is available at www.dbrsmorningstar.com.

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