DBRS Morningstar Revises Avis’s Ratings Trend to Stable; Confirms LT Issuer Rating at B

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), and its related subsidiary Avis Budget Car Rental, LLC, including the Company’s Long-Term Issuer Rating of B. At the same time, DBRS Morningstar revised all trends to Stable from Negative. The Company’s Intrinsic Assessment (IA) is B, while its Support Assessment is SA3, resulting in Avis Budget’s final ratings being equal with its IA.

KEY RATING CONSIDERATIONS
In confirming the ratings and revising the trend to Stable, DBRS Morningstar recognizes Avis Budget’s improved operating performance since the trough of the Coronavirus Disease (COVID-19) pandemic reflecting the Company’s rationalized rental fleet, which better matches demand and the strong used vehicle markets. The significant rebound in the U.S. economy has contributed to improving leisure travel volumes resulting in sound fleet utilization. The ratings confirmation and revision of the trend to Stable also consider the Company’s sound rental car franchise, underpinned by its large U.S. on-airport and off-airport businesses, and capable senior management team. Given the increase in U.S. rental volumes, better balance of fleet, and sound cost control, Avis Budget generated strong results in 1H21. We view the Company’s risk profile as adequately managed, while funding which is reliant on secured wholesale funding, is acceptable. Finally, capitalization is modest, and leverage on a cash flow basis is high.

The Stable trend reflects our view that the Company’s credit fundamentals will remain sound over the medium-term, despite regional surges of coronavirus positivity rates across the U.S. In our analysis, we utilized the macroeconomic scenarios discussed within the DBRS Morningstar commentary “Global Macroeconomic Scenarios: June 2021 Update”, with the moderate scenario as our anchor.

RATING DRIVERS
Sustained solid annual earnings performance metrics, or a restoration of cash flow leverage to pre-pandemic levels would result in a ratings upgrade. Conversely, missteps in fleet management along with a declining market position leading to a weakening of its franchise or sustained material losses would lead to a downgrade of the ratings. Ratings would also be downgraded if liquidity were to materially weaken.

RATING RATIONALE
We view Avis Budget’s global vehicle rental franchise as solid, supported by its large U.S. on-airport and off-airport, and international businesses. As one of the largest vehicle rental companies in the world, Avis Budget maintains an extensive operating platform, including corporate and licensee locations in approximately 180 countries and an average rental fleet of nearly 533,000 vehicles. The new senior management team is seasoned, with deep industry knowledge and expertise that helped in meeting the Company’s challenge through the ongoing pandemic.

Despite the material loss incurred in 2020, Avis Budget’s earnings generation ability is considered acceptable. For 1H21, the Company generated net income of $228 million, a notable turnaround from the considerable loss of $639 million in the same prior year period. The improved 1H21 results were primarily driven by recovering U.S. travel volumes that led to increased demand for rental cars, as well as tight market supply that led to improved pricing and fleet utilization. The rebound in earnings also reflected Avis Budget’s significant cost mitigation efforts and higher margins on sales of off-rent vehicles due to the strong used vehicle market. Although earnings have improved in conjunction with rising rental volumes, revenue generation growth could remain constrained due to emerging coronavirus variants and limited vaccine penetration in some areas, as well as still low levels of corporate travel. Furthermore, limited vehicle production by the OEMs could pose a headwind to earnings, offsetting the benefits from the solid gains on vehicle sales and the Company’s increasing utilization of alternative disposition channels to capture better disposition results.

Avis Budget’s risk profile is adequately managed, underpinned by its solid fleet management platform that was instrumental in expeditiously right sizing the fleet to meet demand, particularly during the early stages of the pandemic. Importantly, utilization has improved with an average rate of 71% at 2Q21, up significantly from 2Q20 and in line with 2Q19. Despite the semiconductor chip shortage and limited production at OEMs, Avis Budget was able to procure vehicles from OEMs in 2021 to grow its fleet, as well as invest heavily to recondition existing vehicles in order to maximize its available fleet for the peak summer season. Furthermore, we note that operational risk remains well-managed, given the Company’s capable fleet management system.

We view funding as acceptable but reliant on secured wholesale funding, including rental car backed asset-backed securitizations. The high level of encumbered assets reduces the Company’s financial flexibility, especially in periods of significant market stress. This high level of balance sheet encumbrance is factored in the one notch differential between the Long-Term Issuer Rating and the Long-Term Senior Debt rating of Avis Budget. In 2021, through August, the Company was active in managing its funding profile, tapping the debt markets to refinance senior notes and renewing its credit facility. This extended Avis Budget’s debt maturity profile and lowered its funding costs. We note there is limited refinancing risk in the near-term for the Company, as the earliest corporate debt maturity is in 2024, and there are no fleet financing maturities over the remainder of 2021. Given Avis Budget’s high level of wholesale funding and exposure to the cyclical capital markets, liquidity management is a critical function of the Company. Avis Budget’s liquidity position has benefitted from recent corporate debt issuances, improved operating cash flow generation and strong expense control.

Avis Budget’s capital position is a ratings constraint as the Company’s tangible equity is in a deficit position, and its balance sheet leverage remains very high. Nevertheless, given the absence of material credit risk on the balance sheet, we consider its cash flow leverage (debt-to-EBITDA) level as appropriate for its current ratings.

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 DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020): https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships 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.

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

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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