DBRS Morningstar Finalizes Provisional Ratings on Hertz Vehicle Financing III LLC, Series 2023-3 and 2023-4

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the notes issued by Hertz Vehicle Financing III LLC (HVF III) as follows:

-- $337,500,000 Series 2023-3, Class A Notes at AAA (sf)
-- $55,000,000 Series 2023-3, Class B Notes at A (sf)
-- $67,500,000 Series 2023-3, Class C Notes at BBB (sf)
-- $40,000,000 Series 2023-3, Class D Notes at BB (sf)
-- $337,500,000 Series 2023-4, Class A Notes at AAA (sf)
-- $55,000,000 Series 2023-4, Class B Notes at A (sf)
-- $67,500,000 Series 2023-4, Class C Notes at BBB (sf)
-- $40,000,000 Series 2023-4, Class D Notes at BB (sf)

CREDIT RATING RATIONALE
The ratings are based on DBRS Morningstar's review of the following analytical considerations:

(1) Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement in the form of subordination, overcollateralization, letters of credit (LOCs), and any amounts held in the reserve account support the DBRS Morningstar stress-case liquidation analysis with bankruptcy and liquidation period assumptions that vary by rating category and vehicle type (program versus non-program) as well as residual value stresses that vary by rating category for non-program vehicles and program vehicles from non-investment-grade-rated manufacturers.
-- Liquid credit enhancement is provided in the form of a reserve account and/or an LOC sufficient to cover interest on the notes, consistent with DBRS Morningstar criteria for this asset class.

(2) Credit enhancement in the transaction is dynamic, depending on the composition of the vehicles in the fleet and certain market value tests.
--The enhancement in the transaction depends on whether the vehicles are program or non-program, whether the manufacturer is investment grade or below investment grade, and if a vehicle is a medium-duty truck.
-- For non-program vehicles, the enhancement levels may increase as a result of two market value tests: (A) a marked-to- market test that compares the market value of the vehicles with the net book value (NBV) of these vehicles and (B) a disposition proceeds test that compares the actual disposition proceeds of vehicles sold with the NBV of those vehicles.
-- If the credit enhancement required in the transaction increases and HVF III is unable to meet the increased enhancement levels, then an Amortization Event may occur that will result in a Rapid Amortization of the notes.
-- The required credit enhancement is subject to a floor of 11.05% of the assets.

(3) Amortization Events include, but are not limited to, default in the payment of amounts due after five 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, and administrator default.

(4) The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the documents. The ratings address the timely payment of interest to the Class A, Class B, Class C, and Class D noteholders at their respective note rates as well as the ultimate payment of principal on the notes, in each case by the legal final payment date.

(5) The intention of each party to the master lease to treat the lease as a single indivisible lease.

(6) 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 45 days for new vehicles and 60 days for used vehicles (Lien Holidays). All vehicles benefit from a negative pledge.

(7) Inclusion of medium-duty trucks that are subject to a limit of 5% and a required credit enhancement of 35%.

(8) The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2023 Update,” published on June 30, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

(9) The transaction parties’ capabilities to effectively manage rental car operations and dispose of the fleet to the extent necessary.
-- DBRS Morningstar has performed an operational review of Hertz and considers the entity to be a capable rental fleet operator and manager.
-- Lord Securities Corporation is the backup administrator for this transaction, and defi AUTO, LLC is the backup disposition agent.

(10) The legal structure and its consistency with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance” methodology, the provision of legal opinions 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.

DBRS Morningstar’s credit ratings on the securities referenced herein address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes for each series are the related Monthly Interest Amount and the related Principal Amount.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. The associated contractual payment obligation that is not a financial obligation for each of the rated notes for each series is the related interest on any unpaid Monthly Interest Amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

The principal methodology applicable to the credit rating is Rating U.S. Rental Car Securitizations (September 21, 2022; https://www.dbrsmorningstar.com/research/402958).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating U.S. Structured Finance Transactions (February 6, 2023; https://www.dbrsmorningstar.com/research/409449).

-- Operational Risk Assessment for U.S. ABS Servicers (July 20, 2023; https://www.dbrsmorningstar.com/research/417415).

-- Operational Risk Assessment for U.S. ABS Originators (July 20, 2023; https://www.dbrsmorningstar.com/research/417416).

-- Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008).

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