DBRS Morningstar Takes Rating Actions on Hertz Vehicle Financing II LP Securities

DBRS, Inc. (DBRS Morningstar) took rating actions on 43 securities issued by Hertz Vehicle Financing II LP (HVF II LP):

-- Series 2013-A, Class A, upgraded to AA (low) (sf); changed to Under Review with Positive Implications
-- Series 2013-A, Class B, upgraded to A (sf)
-- Series 2013-A, Class C, upgraded to BB (sf)
-- Series 2013-A, Class D, changed to Under Review with Developing Implications
-- Series 2015-3, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2016-2, Class A Notes, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2016-2, Class B Notes, upgraded to BBB (sf)
-- Series 2016-2, Class C Notes, upgraded to B (sf)
-- Series 2016-2, Class D Notes, changed to Under Review with Developing Implications
-- Series 2016-4, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2016-4, Class B, upgraded to BBB (sf)
-- Series 2016-4, Class C, upgraded to B (sf)
-- Series 2016-4, Class D, changed to Under Review with Developing Implications
-- Series 2017-1, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2017-1, Class D, changed to Under Review with Developing Implications
-- Series 2017-2, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2017-2, Class B, upgraded to BBB (sf)
-- Series 2017-2, Class C, upgraded to B (sf)
-- Series 2017-2, Class D, changed to Under Review with Developing Implications
-- Series 2018-1, Class A Notes, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2018-1, Class B Notes, upgraded to BBB (sf)
-- Series 2018-1, Class C Notes, upgraded to B (sf)
-- Series 2018-1, Class D Notes, changed to Under Review with Developing Implications
-- Series 2018-2, Class A, upgraded to AA (sf); placed Under Review with Positive Implications
-- Series 2018-2, Class B, upgraded to BBB (sf)
-- Series 2018-2, Class C, upgraded to B (high) (sf)
-- Series 2018-2, Class D, changed to Under Review with Developing Implications
-- Series 2018-3, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2018-3, Class B, upgraded to BBB (sf)
-- Series 2018-3, Class C, upgraded to B (high) (sf)
-- Series 2018-3, Class D, changed to Under Review with Developing Implications
-- Series 2019-1, Class A, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2019-1, Class B, upgraded to BBB (sf)
-- Series 2019-1, Class C, upgraded to B (sf)
-- Series 2019-1, Class D, changed to Under Review with Developing Implications
-- Series 2019-2, Class A Notes, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2019-2, Class B Notes, upgraded to BBB (sf)
-- Series 2019-2, Class C Notes, upgraded to B (high) (sf)
-- Series 2019-2, Class D Notes, changed to Under Review with Developing Implications
-- Series 2019-3, Class A Notes, upgraded to AA (sf); changed to Under Review with Positive Implications
-- Series 2019-3, Class B Notes, upgraded to BBB (sf)
-- Series 2019-3, Class C Notes, upgraded to B (high) (sf)
-- Series 2019-3, Class D Notes, changed to Under Review with Developing Implications

In addition, DBRS Morningstar maintained the Under Review with Developing Implications status on 24 securities issued by HVF II LP:

-- Series 2013-A, Class B
-- Series 2013-A, Class C
-- Series 2015-3, Class B
-- Series 2015-3, Class C
-- Series 2016-2, Class B Notes
-- Series 2016-2, Class C Notes
-- Series 2016-4, Class B
-- Series 2016-4, Class C
-- Series 2017-1, Class B
-- Series 2017-1, Class C
-- Series 2017-2, Class B
-- Series 2017-2, Class C
-- Series 2018-1, Class B Notes
-- Series 2018-1, Class C Notes
-- Series 2018-2, Class B
-- Series 2018-2, Class C
-- Series 2018-3, Class B
-- Series 2018-3, Class C
-- Series 2019-1, Class B
-- Series 2019-1, Class C
-- Series 2019-2, Class B Notes
-- Series 2019-2, Class C Notes
-- Series 2019-3, Class B Notes
-- Series 2019-3, Class C Notes

DBRS Morningstar initially placed all of the ratings on the notes issued Under Review with Negative Implications on April 29, 2020. DBRS Morningstar subsequently downgraded all of the ratings and maintained the Under Review with Negative Implications status on May 21, 2020. On August 19, 2020, DBRS Morningstar changed the ratings for 36 Class A, Class B, and Class C notes to Under Review with Developing Implications and maintained the Under Review with Negative Implications status on the Class D notes. On December 2, 2020, DBRS Morningstar maintained the Under Review with Developing Implications status on 36 securities issued by HVF II LP and also maintained the Under Review with Negative Implications status on the ratings of all Class D notes.

The rating actions reflect the following considerations:

(1) Increased credit enhancement levels for the Series 2013-A, Class A, B, C, and D variable funding notes (VFNs) as proceeds from fleet dispositions under the Interim Agreement (initially agreed to on July 24, 2020, and subsequently extended and amended on January 7, 2021) between The Hertz Corporation (Hertz) and the investors of the Series 2013-A VFNs and medium-term notes have been used to pay down the principal balance of the notes. The senior Series 2013-A, Class A notes have been paid down to $1.01 billion at February 28, 2021, from $3.76 billion at May 31, 2020. DBRS Morningstar upgraded the Series 2013-A, Class A notes to AA (low) (sf) from A (high) (sf) and changed the status to Under Review with Positive Implications from Under Review with Developing Implications, as it is expected that the Series 2013-A, Class A notes will continue to pay down under the terms of the Interim Agreement. The subordinated Series 2013-A, Class B, C, and D VFNs have not been paid down under the terms of the Interim Agreement but have benefited from increasing credit enhancement as a percentage of the net book value of the HVF II LP assets allocated to the series. The Series 2013-A, Class B notes were upgraded to A (sf) from BBB (sf), and the Under Review with Developing Implications status has been maintained. The Series 2013-A, Class C notes were upgraded to BB (sf) from B (high) (sf), and the Under Review with Developing Implications status has been maintained. The status on the Series 2013-A, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.

(2) Increased credit enhancement levels for the Class A, B, and C notes of Series 2016-2, Series 2016-4, Series 2017-2, Series 2018-1, Series 2018-2, Series 2018-3, Series 2019-1, Series 2019-2, and Series 2019-3 as proceeds from the fleet dispositions under the Interim Agreement have been used to pay down the principal balance of the notes.
-- The senior Series 2016-2, Class A Notes have been paid down to $72.90 million at February 28, 2021, from $388.51 million at May 31, 2020. The Series 2016-2, Class A Notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2016-4, Class A notes have been paid down to $48.25 million at February 28, 2021, from $240.58 million at May 31, 2020. The Series 2016-4, Class A notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2017-2, Class A notes have been paid down to $48.75 million at February 28, 2021, from $244.60 million at May 31, 2020. The Series 2017-2, Class A notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2018-1, Class A Notes have been paid down to $139.05 million at February 28, 2021, from $698.87 million at May 31, 2020. The Series 2018-1, Class A Notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2018-2, Class A notes have been paid down to $28.10 million at February 28, 2021, from $140.58 million at May 31, 2020. The Series 2018-2, Class A notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2018-3, Class A notes have been paid down to $28.09 million at February 28, 2021, from $140.74 million at May 31, 2020. The Series 2018-3, Class A notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2019-1, Class A notes have been paid down to $98.48 million at February 28, 2021, from $492.32 million at May 31, 2020. The Series 2019-1, Class A notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2019-2, Class A Notes have been paid down to $105.19 million at February 28, 2021, from $576.53 million at May 31, 2020. The Series 2019-2, Class A Notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.
-- The senior Series 2019-3, Class A Notes have been paid down to $102.02 million at February 28, 2021, from $526.97 million at May 31, 2020. The Series 2019-3, Class A Notes were upgraded to AA (sf) from AA (low) (sf), and the status has been changed to Under Review with Positive Implications from Under Review with Developing Implications.

(3) The subordinated Class B, C, and D notes for Series 2016-2, Series 2016-4, Series 2017-2, Series 2018-1, Series 2018-2, Series 2018-3, Series 2019-1, Series 2019-2, and Series 2019-3 have not been paid down since May 31, 2020, but have benefited from increasing credit enhancement as a percentage of the net book value of the HVF II LP assets allocated to each series.
-- The Series 2016-2, Class B Notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2016-2, Class C Notes were upgraded to B (sf) from CCC (high) (sf). There is no rating change to the Series 2016-2, Class D Notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2016-2, Class B and C Notes has been maintained. The status on the Series 2016-2, Class D Notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2016-4, Class B notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2016-4, Class C notes were upgraded to B (sf) from CCC (high) (sf). There is no rating change to the Series 2016-4, Class D notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2016-4, Class B and C notes has been maintained. The status on the Series 2016-4, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2017-2, Class B notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2017-2, Class C notes were upgraded to B (sf) from CCC (high) (sf). There is no rating change to the Series 2017-2, Class D notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2017-2, Class B and C notes has been maintained. The status on the Series 2017-2, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2018-1, Class B Notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2018-1, Class C Notes were upgraded to B (sf) from CCC (high) (sf). There is no rating change to the Series 2018-1, Class D Notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2018-1, Class B and C Notes has been maintained. The status on the Series 2018-1, Class D Notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2018-2, Class B notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2018-2, Class C notes were upgraded to B (high) (sf) from B (low) (sf). There is no rating change to the Series 2018-2, Class D notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2018-2, Class B and C notes has been maintained. The status on the Series 2018-2, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2018-3, Class B notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2018-3, Class C notes were upgraded to B (high) (sf) from B (low) (sf). There is no rating change to the Series 2018-3, Class D notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2018-3, Class B and C notes has been maintained. The status on the Series 2018-3, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2019-1, Class B notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2019-1, Class C notes were upgraded to B (sf) from CCC (high) (sf). There is no rating change to the Series 2019-1, Class D notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2019-1, Class B and C notes has been maintained. The status on the Series 2019-1, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2019-2, Class B Notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2019-2, Class C Notes were upgraded to B (high) (sf) from B (low) (sf). There is no rating change to the Series 2019-2, Class D Notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2019-2, Class B and C Notes has been maintained. The status on the Series 2019-2, Class D Notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.
-- The Series 2019-3, Class B Notes were upgraded to BBB (sf) from BB (high) (sf). The Series 2019-3, Class C Notes were upgraded to B (high) (sf) from B (low) (sf). There is no rating change to the Series 2019-3, Class D Notes, as the increase in credit enhancement is not to a level commensurate with a higher rating. The Under Review with Developing Implications status on the Series 2019-3, Class B and C Notes has been maintained. The status on the Series 2019-3, Class D Notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.

(4) The legal final maturity date for the Series 2015-3, Class A, B, C, and D notes is September 27, 2021, which is prior to the end date of the Interim Agreement (September 30, 2021). There is increased likelihood that the notes may be outstanding at the legal final maturity date. The Series 2015-3, Class A notes have benefited from increased credit enhancement and have been paid down to $44.80 million at February 28, 2021, from $242.33 million at May 31, 2020. The Series 2015-3, Class A notes were upgraded to AA (sf) from AA (low) (sf), as it is likely that they will be repaid in full prior to the legal final maturity date. The status on the Series 2015-3, Class A notes has been changed to Under Review with Positive Implications from Under Review with Developing Implications, as the Class A notes continue to pay down under the terms of the Interim Agreement. The subordinated Series 2015-3, Class B and C notes have benefited from increasing credit enhancement but have not paid down during the period of the Interim Agreement. It is less likely that the Series 2015-3, Class B and C notes will be repaid in full by the legal final maturity date pursuant to the Interim Agreement. However, Hertz filed a Plan of Reorganization on March 2, 2021, that contemplates the full repayment of the HVF II LP notes with the proceeds from a new funding facility. The plan is still subject to approval, but if it is executed in full and prior to the legal maturity date of the Series 2015-3 notes, then the Class B and C notes will be repaid in full prior to their legal maturity date. As a result, there is no rating change for the Series 2015-3, Class B and Class C notes, and the Under Review with Developing Implications status on the ratings has been maintained.

(5) The legal final maturity date for the Series 2017-1, Class A, B, C, and D notes is October 25, 2021, which is less than one month after the end of the Interim Agreement (September 30, 2021). Because of the proximity of the legal final maturity date to the end of the Interim Agreement, there is increased likelihood that the notes may be outstanding at the legal final maturity date. The Series 2017-1, Class A notes have benefited from increased credit enhancement and have been paid down to $59.23 million at February 28, 2021, from $297.19 million at May 31, 2020. The Series 2017-1, Class A notes were upgraded to AA (sf) from AA (low) (sf), as it is likely that they will be repaid in full prior to the legal final maturity date. The status on the Series 2017-1, Class A notes has been changed to Under Review with Positive Implications from Under Review with Developing Implications, as the notes continue to pay down under the terms of the Interim Agreement. The subordinated Series 2017-1, Class B, C, and D notes have benefited from increasing credit enhancement but have not paid down during the period of the Interim Agreement. It is less likely that the Series 2017-1, Class B, C, and D notes will be repaid in full by the legal final maturity date. However, Hertz filed a Plan of Reorganization on March 2, 2021, that contemplates the full repayment of the HVF II LP notes with the proceeds from a new funding facility. The plan is still subject to approval, but if it is executed in full and prior to the legal maturity date of the Series 2017-1 notes, then the Class B, C and D notes will be repaid in full prior to their legal maturity date. As a result, there is no rating change for the Series 2017-1, Class B and C notes, and the Under Review with Developing Implications status on the ratings has been maintained. However, the status on the Series 2017-1, Class D notes has been changed to Under Review with Developing Implications from Under Review with Negative Implications.

(6) The extended and modified Interim Agreement provides for Hertz to continue paying down the HVF II LP notes through September 30, 2021, at which point the Class A notes for all series would be repaid in full and the Class B notes for all series would be partially repaid. Under the current terms of the agreement, the Class C and D notes for all series would not be repaid or partially repaid.

(7) On March 2, 2021, Hertz filed a Plan of Reorganization. The plan contemplates that Hertz’s existing equity will be extinguished and the Plan Sponsors (Knighthead Capital Management and Certares Opportunities LLC) will purchase at least 51% ownership of Reorganized Hertz. The unsecured debtholders will be able to acquire equity of Reorganized Hertz via a rights offering. The rights offering is fully backstopped by the Plan Sponsors. The Plan of Reorganization includes $2.283 billion of direct investment from the Plan Sponsors, $1.970 billion from the rights offering, and $1 billion in exit financing in the form of a secured term loan. In addition, the plan specifies that Hertz shall cause HVF II LP to repay in full in cash all of the outstanding HVF II LP notes with the proceeds of a new asset-backed securitization facility and/or securities to be issued by a newly formed non-debtor bankruptcy-remote subsidiary of Hertz (contemplated to be HVF III).

(8) DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19) pandemic, available in its commentary “Global Macroeconomic Scenarios: March 2021 Update,” published on March 17, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, and they were last updated on March 17, 2021; these macroeconomic scenarios are reflected in DBRS Morningstar’s analysis. The rating actions consider the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

(9) The rental car industry continues to encounter challenges stemming from the coronavirus, as travel and tourism activities have not yet resumed prepandemic volume. While vaccination coverage rates continue to increase in the U.S., the risk of new coronavirus variants could pose additional risk in returning back to normalized business and leisure activity.

(10) Demand for used vehicles continues to be robust, with current used vehicle inventories at or below normal levels. The potential impact of the worldwide shortage of semiconductor chips for new vehicle production may further increase demand for used vehicles, which could further support the current strong value of used vehicles.

(11) Vehicle disposition channels are currently operating at normal capacity, particularly with the migration to digital formats. Potential localized or widespread coronavirus outbreaks, however, could result in some level of disruption in the future, which in turn could affect Hertz’s ability to dispose of additional excess fleet, if required.

(12) Automotive manufacturer liquidity has been generally strong going into 2021, but the semiconductor chip shortage could pose production issues. Demand for new vehicles in 2021 will also be a factor for manufacturers as unemployment rates remain elevated in the U.S.

DBRS Morningstar’s criteria considers certain time horizons, by rating category, for the liquidation of the rental fleet after an operating company’s bankruptcy. DBRS Morningstar has not modified its methodology/criteria regarding liquidation time horizons and associated market value declines during the assumed liquidation period. It is possible that liquidation horizon and associated market value decline assumptions may be reconsidered at some point in the future if there are additional widespread shutdowns of businesses, including used vehicle auctions.

DBRS Morningstar will seek to complete its assessment and remove the ratings from Under Review status as soon as appropriate. Upon the resolution of the Under Review with Developing Implications status, DBRS Morningstar may upgrade, confirm, or downgrade the ratings on the affected classes. Upon the resolution of the Under Review with Negative Implications 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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.

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277