DBRS Confirms Enterprise Holdings, Inc. at A (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Enterprise Holdings, Inc. (Enterprise, EHI or the Company), including it’s A (low) Issuer and Long-Term Debt rating. Concurrently, DBRS has confirmed the Company’s Short-Term Instruments rating of R-1 (low). Further, the Guaranteed Senior Notes rating of ERAC Canada Finance Ltd. are confirmed at A (low) reflecting the guarantee from Enterprise Holdings, Inc. The trend on all ratings is Stable. This rating action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The rating confirmation reflects EHI’s top tier market position in the on-airport market as well as its leading position in the home-city market. The rating action also considers the substantial earnings generation capacity produced by the strong franchise, the Company’s sound fleet management capabilities and well-managed liquidity and funding. These considerations are balanced by the challenge of sustaining positive earnings momentum in the slow growth economic environment. Moreover, DBRS sees navigating the normalization of used vehicle values as a key challenge. However, DBRS does not view this challenge as unique to EHI, but rather a challenge for all financial institutions with exposure to the residual value of automobiles whether through ownership, like EHI, or leasing.

The Stable trend considers DBRS’s expectation that EHI will continue to generate sound earnings through fiscal year 2015, while successfully absorbing rising vehicle costs to more normalized levels and the impact of potentially higher interest rates. Moreover, while DBRS expects vehicle recall activity to remain elevated going forward reflecting heightened OEM sensitivity, DBRS sees Enterprise’s sound fleet management as allowing the Company to minimize the impact of recalls on operating performance. The Stable trend also considers DBRS’s view, that industry fundamentals will remain largely favorable supported by strengthening rental volumes as consumer and business confidence improves, positive pricing trends, and residual values; which, while moderating from record levels, should remain solid on a historical basis anchored by favorable supply and demand trends.

Ratings could be negatively impacted if leverage were to increase materially, particularly if related to a large acquisition. Furthermore, a sustained weakening in revenues and cash flow generation resulting from a deterioration in the Company’s market position, especially in the home city business would pressure the ratings, given the relative importance of this business to the Company.

With more than 6,000 neighborhood and airport locations within 15 miles of 90% of the U.S. population, Enterprise has a significant local market presence that is the foundation for its leading home-city and insurance replacement business. DBRS considers the strong home-city business as providing Enterprise a competitive advantage over its industry peers as this business tends to be less correlated with the U.S. economy and travel volumes than the traditional on-airport car rental market. As a result, the home-city business supports the Company’s resilient and rather predictable revenue and earnings streams. Complementing the home-city business is the Company’s leading on-airport business, which operates under the Enterprise Rent-A-Car, National Car Rental (National) and Alamo Rent A Car (Alamo) brands. From DBRS’s perspective, the Company’s tri-brand strategy benefits the business by allowing for differentiated market positioning and pricing while leveraging efficiencies of scale in non-customer facing operations.

DBRS considers Enterprise’s ability to generate strong and resilient earnings across all business and economic cycles as a key factor in the ratings. To this end, Enterprise was profitable every quarter during the recent recession, despite an unprecedented decline in residual values and noteworthy weakening of travel volumes. Further, despite a record level of vehicle recalls by OEMs during the second half of the Company’s 2014 fiscal year (year ending July 31st), Enterprise navigated the challenging environment successfully, reporting the Company’s third most profitable fiscal year in its 57-year operating history. DBRS sees this as demonstrating the Company’s strong fleet management aptitude.

Enterprise’s strong balance sheet is supportive of the rating. Liquidity is well-managed with sufficient available liquidity (after covering outstanding commercial paper) to cover maturing senior debt maturities over the next 24 months. Further, liquidity is supported by good levels of free operating cash flow. Term debt maturities remain well-laddered with approximately 60% of outstanding Term debt, as of July 31, 2014, maturing in more than five years. Balance sheet leverage remains low and well-below industry peers, with debt-to-equity of 1.4x at July 31, 2014. DBRS considers capital to be acceptable given the low risk profile of the balance sheet, the strong earning capability and substantial cash flow generation.

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

The principal applicable methodology is Global Methodology for Rating Finance Companies (October 2014). Other applicable methodology include DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2014) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013). These can be found at:
https://www.dbrs.com/about/methodologies

[Amended on February 18, 2015 to reflect actual methodologies used.]

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 16 May 2001
Most Recent Rating 19 August 2013

For additional information on this rating, please refer to the linking document under Related Research.