DBRS Morningstar Revises Enterprise Holdings, Inc.’s LT Ratings Trend to Stable; Confirms LT at ‘A’

DBRS, Inc. (DBRS Morningstar) has revised the long-term ratings trend for Enterprise Holdings, Inc.’s (Enterprise or the Company) and its related entity, ERAC Canada Finance Company, to Stable from Negative. At the same time, DBRS Morningstar confirmed the ratings of Enterprise and its related entity, including its Long-Term Issuer Rating of ‘A’. The Short-Term Instruments rating of R-1 (low) of both the Company and ERAC Canada Finance Company remain Stable. The Company’s Intrinsic Assessment (IA) is ‘A’, while its Support Assessment is SA3, resulting in Enterprise’s final ratings being equal with its IA. ERAC Canada Finance Company’s ratings are guaranteed by Enterprise and are also equalized.

KEY RATING CONSIDERATIONS
The revision of the long-term ratings trend to Stable from Negative along with the ratings confirmation reflect Enterprise’s solid rebound in operating performance from the early stages of the Coronavirus Disease (COVID-19) pandemic. Indeed, the Company’s improved earnings generation reflects its swift adjustment in fleet levels to meet market demand, which drove improved vehicle utilization and spurred significant cost reductions given the Company’s highly variable expense structure. Enterprise’s top line remains pressured by both lower on-airport and off-airport rental volumes due to continuing travel restrictions, lingering fears of coronavirus transmission and still low levels of corporate travel. However, we expect rental volumes to improve going forward, especially as more households become vaccinated and travel restrictions abate, spurring more people to travel, especially leisure travel. Finally, balance sheet fundamentals remain solid, including very low leverage (Debt/EBITDA), ample liquidity and a sound capital position.

The Stable trend reflects our view that Enterprise’s credit fundamentals will remain sound over the medium-term, especially as headwinds associated with the coronavirus disease abate. In our analysis we utilized the macroeconomic scenarios discussed within the DBRS Morningstar commentary “Global Macroeconomic Scenarios: March 2021 Update”, with the moderate scenario as our anchor.

RATING DRIVERS
A sustained increase in earnings generation while maintaining strong credit fundamentals, and/or improved revenue diversification, would lead to an upgrade. Conversely, a weakening market position, particularly in the Company’s home-city business, missteps in fleet management leading to prolonged pressure on earnings generation, or a significant increase in leverage, would lead to a downgrade.

RATING RATIONALE
The ratings reflect Enterprise’s strong global rental car franchise, underpinned by a highly seasoned management team with deep industry knowledge, and a strong track record in vehicle fleet management. Overall, the franchise, which includes three brands, including Enterprise Rent-A-Car, Alamo Rent A Car and National Car Rental, with each brand catering to a specific market segment, has leading market shares in the U.S. home-city and U.S. on-airport markets. The Company also operates a moderately sized truck rental business, which has evidenced solid growth over the last few years. As of January 31, 2021, Enterprise had approximately 1.0 million vehicles and 9,992 global locations, of which approximately 73% were company-owned with the remainder franchised.

The Company’s resilient earnings capacity is an important factor in the ratings. Despite a quarterly loss in its FY3Q20 (three months ended April 30, 2020) due to significantly curtailed aviation and automotive travel related revenues, earnings have rebounded, as the Company expeditiously reduced its fleet to better align with demand and significantly reduced costs, illustrating its highly variable cost structure. The rebound in earnings also reflected higher margins on sales of off-rent vehicles due to the strong used vehicle market.

Reflecting the conservative nature of the management team, Enterprise’s risk profile remains sound and is appropriately managed. We consider the Company’s fleet management capabilities, especially in mitigating residual value risk, as a key strength and differentiator from its large industry peers. Meanwhile, despite the large technology driven operating platform, including its reservations and fleet management systems, Enterprise’s operational risk remains well-managed.

Enterprise’s strong funding and liquidity profiles remain well-managed, and continue to provide a strong foundation to counter moderating coronavirus related headwinds. Funding is entirely comprised of unsecured funding, is well-diversified by source and currency and debt maturities are well spread out, with over half of total outstandings maturing in more than five years. With its high level of unencumbered assets, Enterprise has significant financial flexibility, especially during stressful periods. Meanwhile, liquidity is ample, comprised of a large cash component, significant availability under its revolving credit facilities and strong cash flows from operations.

The confirmation of Enterprise’s ratings also considers the Company’s very low leverage (Debt/EBITDA), and its solid capital position especially given its well-managed risk profile. Enterprise’s capital generation is strong given its resilient earnings. Additionally, its owners have always placed the needs of Enterprise first, before taking any material dividends, allowing the Company to manage through market disruptions or acquisitions. Overall, the Company’s leverage remains sound, and far below that of its DBRS Morningstar-rated peers.

ESG CONSIDERATIONS
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 the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021): https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 9, 2021): https://www.dbrsmorningstar.com/research/375001/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers, and DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

The primary sources of information used for this rating include Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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