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 Positive from Stable. 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
The ratings confirmation and Positive trend consider Avis Budget’s sound vehicle rental franchise, underpinned by its top-tier U.S. on-airport business, its solid off-airport business, its broad international business, and its capable senior management team. The rating actions reflect the Company’s improved earnings generation capacity driven by the solid demand for rental cars and improved pricing. Avis Budget’s risk profile is effectively managed, underpinned by its sophisticated fleet management platform, which performed soundly through the trough of the coronavirus pandemic. The ratings also consider the Company’s reliance on secured wholesale funding and deficit capital position. The Positive trend reflects our view that Avis Budget’s credit fundamentals will remain sound over the near-term, including sustained earnings momentum, despite the uncertain economic outlook and rising interest rate environment.
Maintaining solid earnings generation including performance metrics more typical of a higher rating, while maintaining appropriate balance sheet fundamentals would result in a ratings upgrade. Weaker than anticipated earnings generation or credit fundamentals would result in a return of the ratings to a Stable trend. Missteps in fleet management along with a declining market position leading to a weakening of its franchise, or if liquidity were to materially weaken, the ratings would be downgraded.
Avis Budget maintains a top-tier vehicle rental franchise, including its large U.S. on-airport and off-airport businesses, and international business, that maintains a presence in 180 countries. Avis Budget, has a significant scale of operations with 10,400 locations globally, while holding an average rental fleet of approximately 632,000 vehicles in 1H22. Additionally, the franchise reflects a seasoned senior management team with deep industry knowledge and expertise, that successfully navigated the Company through the trough of the coronavirus pandemic.
Avis Budget’s earnings generation has significantly improved, reflecting strong vehicle demand due to a robust rebound in global leisure and commercial travel from the depths of the pandemic. Meanwhile, a tight supply of vehicles has led to solid pricing and improved fleet utilization. On the expense side of the income statement, the Company continues to focus on cost efficiencies through several initiatives, benefiting its bottom line. Over the near-term, we expect earnings to somewhat normalize with lower gains on fleet vehicle dispositions especially as the Company sells higher mileage vehicles and original equipment manufacturers (OEM) vehicle production constraints gradually subside. We also expect the income statement to reflect more typical seasonality.
Risk is well managed, and supported by Avis Budget’s solid fleet management platform which was instrumental in quickly right sizing the fleet to meet lower demand during the early stages of the pandemic, as well as more recently to match the recovery in demand. Risk vehicles represent a large component of the Company’s fleet, exposing it to used vehicle value volatility and residual value risk. Avis Budget’s solid fleet management operations, the diverse set of OEMs supplying fleet vehicles, and the disparate vehicle models reduce concentration related issues, helping to offset residual value risk. Positively, the Company continues to increase its use of alternative disposition channels to obtain higher proceeds from the sale of its vehicles, as dealers and retail channels typically generate higher prices than wholesale auctions. Moreover, credit risk is modest, given Avis Budget’s modest usage of program vehicles from OEMs. Finally, with its strong operating platform, including its large reservation system and extensive fleet management system, operational risk is a material component of the Company’s risk profile. We note that a disruption of a major system could result in interruption to Avis Budget’s capacity to manage its fleet, lost reservations, and potentially lower revenues and earnings. The Company has safeguards in place to protect sensitive data on its operating platform. Avis Budget has not reported a material data breach related to its operating platform.
The Company is reliant on secured wholesale funding, particularly its significant component of rental car backed asset-backed securitizations. Secured funding encumbers the Company’s earning assets, reducing its overall financial flexibility. We note that this high level of encumbrance is factored in the one notch differential between the Long-Term Issuer Rating and the Long-Term Senior Debt rating of Avis Budget. With its high level of wholesale funding and exposure to the cyclical capital markets, liquidity management is a crucial function of the Company. Avis Budget’s liquidity position is sound and has benefitted from several debt issuances in 2021, and improved cash flow generation from operating activities.
The Company’s capital is a ratings constraint, given its negative equity position. Nonetheless, with the absence of material credit risk on the balance sheet, we consider Avis Budget’s cash flow leverage (debt-to-EBITDA) level as sound and improved.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021): https://www.dbrsmorningstar.com/research/386615/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 (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
Each of the methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the DBRS Morningstar Criteria, Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021) was utilized in determining the notching between Avis Budget Group, Inc. and Avis Budget Car Rental, LLC.
The primary sources of information used for this rating include Morningstar, Inc. and 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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