DBRS Morningstar Assigns Ratings to Hertz Vehicle Interim Financing LLC’s Series 2020-1 Delayed Draw Rental Car Asset-Backed Notes

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following notes issued by Hertz Vehicle Interim Financing LLC (HVIF or the Issuer):

-- Series 2020-1, Class A Notes at A (sf)
-- Series 2020-1, Class B Notes at BB (sf)

The Hertz Corporation (Hertz or the Company) has secured a $4 billion asset-backed, debtor-in-possession (DIP) facility (the Transaction) from Apollo Management Holdings L.P. The purpose of the Transaction is to provide Hertz with financing to refresh its rental car fleet. Hertz filed for bankruptcy under Chapter 11 on May 22, 2020, and has secured both corporate and asset-backed DIP financing. A newly formed special-purpose entity, HVIF, which is a direct wholly owned subsidiary of Hertz, will purchase the vehicles to be leased to Hertz under a master lease. The $4 billion Transaction consists of two tranches of notes, Series 2020-1 Delayed Draw Rental Car Asset-Backed Notes, Class A (in the amount of $3,500,000,000) and Class B (in the amount of $500,000,000).

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

(1) The Transaction’s capital structure as well as the form and sufficiency of available credit enhancement.
-- The notes are delayed draw notes with a draw period of 364 days, subject to one six-month extension, and a legal final payment date that is one year after the commitment termination date.
-- Credit enhancement is in the form of subordination, overcollateralization, letters of credit, and any amounts held in the reserve account.
-- The Transaction utilizes a borrowing base test, such that at the time of a draw under the notes, the aggregate asset amount must be greater than or equal to the required asset amount. The required asset amount is the sum of the Class A principal outstanding and the Class B principal outstanding divided by a maximum of 80% (subject to excess concentration limits and market value/disposition proceeds tests that go into effect subject to certain conditions being met). The aggregate asset amount includes the net book value (NBV) of the vehicles the Issuer leased to Hertz, subject to ineligibility requirements, manufacturer receivables, eligible incentive rebate receivables, and accrued but unpaid rent due on the next payment date.
-- Credit enhancement as a percentage of the aggregate asset amount for the Class A notes is 30%, consisting of 20% in the form of overcollateralization, letters of credit, and amounts held in the reserve account as well as 10% subordination. Credit enhancement as a percentage of the aggregate asset amount for the Class B notes is 20%, in the form of overcollateralization, letters of credit, and amounts held in the reserve account. A portion of the credit enhancement is in the form of letters of credit and cash held in the reserve account in an amount equal to six months of interest on the notes, servicing fees, and senior capped expenses.
-- Draws under the notes are pro rata between the Class A and B notes.
-- A Rapid Amortization Period occurs on the earlier of (1) the commitment termination date and (2) the occurrence of any Amortization Event and ends on the earlier of (1) the date on which the Series 2020-1 notes are paid in full and (2) the termination of the Series 2020-1 Supplement.
-- Amortization Events include, but are not limited to, default in the payment of amounts due after three consecutive business days, default in the payments of amounts due by the expected final payment date, deficiency of amounts available in the liquidity reserve account, payment default under the master lease, the required asset amount exceeding the aggregate asset amount, servicer default, administrator default, and failure of Hertz and its debtor subsidiaries and affiliates to file a Chapter 11 plan of reorganization by August 1, 2021.
-- Payment of interest on the Class B notes is subordinate to payment of interest on the Class A notes both prior to and during a Rapid Amortization Period.
-- Prior to a Rapid Amortization Period, a mandatory decrease of principal will be applied to the Class A and B notes pro rata. A mandatory decrease happens when an Excess Principal Event occurs or when rental fleet vehicles have been sold. Proceeds from the disposition of rental vehicles may be reinvested to acquire additional vehicles for the rental fleet, subject to a reinvestment limit of 10% of the maximum facility amount.
-- During a Rapid Amortization Period, payment of principal will be applied sequentially, first to the Class A notes until paid in full and second to the Class B notes.

(2) The ability of the Transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.

(3) The analysis considers DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19), available in its commentary “Global Macroeconomic Scenarios: September Update,” published on September 10, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which were last updated on September 10, 2020, and are reflected in DBRS Morningstar’s rating analysis. The assumptions consider the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for the current rating. The moderate scenario remains predicated on a more rapid return of confidence and a steady recovery heading into 2021.

(4) For this Transaction, the ratings address the timely payment of interest to the Class A noteholders at the Class A Note Rate and interest to the Class B noteholders at the Class B Base Note Rate as well as ultimate payment of principal on the Class A and B notes, in each case by the legal final maturity date.

(5) The Transaction parties’ capabilities to effectively manage rental car operations and dispose of the fleet to the extent necessary.

(6) The legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance” methodology, the provision of legal opinions (to be provided when Hertz emerges from Chapter 11 bankruptcy) that address the treatment of the operating lease as a true lease, the non-consolidation of the special-purpose vehicles with Hertz and its affiliates, and that the trust has a valid first-priority security interest in the assets.

(7) The Bankruptcy Court Order authorizing and directing Hertz to enter into and perform under the Transaction documents and ordering that such obligations of Hertz thereunder constitute superpriority administrative expense claims, provided that such superpriority administrative expense claim shall be subordinate only to other superpriority administrative expense claims.

(8) Because Hertz is already in bankruptcy, there would not be a bankruptcy stay period if the Transaction were to go into liquidation, either because of the occurrence of a liquidation event or the conversion of Hertz’s Chapter 11 proceedings to Chapter 7.

(9) The Transaction parties have agreed to execute the Backup Disposition Agent Agreement within 60 days from closing. If the agreement is not executed within the 60-day window, an Amortization Event, due to breach of covenant, would occur after a 30-day cure period. If Hertz was not able to effectuate the liquidation, and there was not a Backup Disposition Agent in place to liquidate the collateral, then the Asset-Backed Securities (ABS) DIP Facility Order allows for the Trustee and Collateral Agent to liquidate the collateral at the direction of the controlling noteholders.

(10) The Transaction allows vehicles, for which the Collateral Agent has not yet been noted on the Certificates of Title as lienholder, to remain as eligible assets for up to 14 days, or up to 45 days for some vehicles in certain states (Lien Holidays). All vehicles benefit from a negative pledge.

(11) Draws on the notes are subject to the three-month rolling average rental utilization rate on a Companywide basis to be greater than 55%.

(12) Excess funds are not permitted to be released from the Transaction until the Company has successfully emerged from bankruptcy; such excess funds are any amounts above 107% of the NBV of disposed vehicles.

(13) The Transaction does not incorporate a fair market value or disposition proceeds test until Hertz has successfully emerged from bankruptcy.

(14) The Company’s rental car business has been severely affected by negative developments in the travel and tourism industries related to the coronavirus pandemic as well as by mandatory shutdowns of nonessential businesses in spring 2020, which led to the closure of used vehicle auctions and dealerships and resulted in a rapid decline in the value of used vehicles.

(15) Hertz filed for bankruptcy on May 22, 2020. On April 27, 2020, Hertz had failed to pay variable rent (interest) and base rent (principal) due under the Hertz Vehicle Financing II LP operating lease. On May 5, 2020, the trustee received funds for interest due on the Series 2013-A variable-funding notes (VFNs) and the remainder of the ABS medium-term notes (MTNs) secured by such operating lease. 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 expired on May 22, 2020, resulting in a liquidation event at expiration.

(16) On June 11, 2020, Hertz filed a Motion for Order Rejecting Certain Unexpired Vehicle Leases Effective (the Rejection Motion). If approved, this motion would have relieved Hertz from owing or making rent payments on approximately 30% of its rental fleet at the time of the filing. The basis for Hertz’s motion was to argue that the master lease is an aggregation of individual leases, so it could select the individual leases to reject, thus avoiding the rent payment associated with those individual leases.

(17) On June 24, 2020, an objection to the Rejection Motion was filed on behalf of the VFN holders and MTN investors arguing that the operating lease is a master lease; thus, certain payments related to vehicles in possession of Hertz are still an obligation of Hertz. Further, the VFN holders and MTN investors noted that Hertz is permitted to sell vehicles under the master lease agreement as currently structured.

(18) On July 24, 2020, Hertz and the VFN holders and MTN investors came to an agreement for an orderly disposition of approximately 182,000 vehicles and an agreement on reduced rent payments to be made, among other terms, between June 30, 2020, and December 31, 2020. To date, the Company has met all required lease payments and exceeded all disposition targets.

(19) On October 29, 2020, Hertz received approval from the bankruptcy court for $1.65 billion corporate DIP financing and on November 5, 2020, received the commitment for the Transaction described herein. The bankruptcy hearing for approval of the rated notes in the Transaction occurred on November 24, 2020. Approximately $1 billion of the corporate DIP facility will fund Hertz’s equity contribution to the vehicles financed pursuant to the related notes in the Transaction.

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 Rating U.S. Rental Car Securitizations (September 18, 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.

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

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on these rating actions. If you are interested in receiving this report, contact us at [email protected].

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

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