DBRS Confirms Avis Budget Group, Inc.’s Issuer Rating at BB (low), Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed the BB (low) Issuer Rating of Avis Budget Group, Inc. (Avis Budget or the Company) and its related subsidiaries. The Company’s Senior Unsecured Debt rating was confirmed at B (high). Concurrently, DBRS has revised the trend on all ratings to Positive from Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The rating confirmation considers the strength of the Avis Budget franchise, which is underpinned by its multi- brand strategy and top-tier market position in North America as well as internationally in the car rental and car sharing service industry. Today’s rating action also reflects Avis Budget’s solid liquidity profile and the Company’s proven sound fleet management capabilities. To this end, in a year with many operating headwinds, including an abnormally severe winter weather in North America during 1Q14 and elevated levels of manufacturer recalls in spring 2014, Avis Budget has navigated these challenges while generating solid earnings. These factors are balanced by the Company’s reliance on secured forms of wholesale funding and the leveraged balance sheet.

In revising the trend to Positive from Stable, DBRS recognizes that the strategic actions taken by management since the last recession, including recent acquisitions and other key initiatives, have strengthened the Company’s earnings generation capacity and better position the Company to withstand a future cyclical downturn. The revised trend also reflects favorable industry fundamentals in North America, which accounts for 65% of the Company’s revenues. As a result, DBRS expects that Avis Budget will generate solid earnings in 2015, while successfully navigating normalizing vehicle costs and increasing interest rates. Ratings could be positively impacted by sustained growth in earnings that are supported by improving margins and solid cost control. Moreover, continuing access to funding markets at reasonable costs is a requirement for positive ratings action. Conversely, should earnings be notably weaker than expected, leverage increase materially, or share repurchases be viewed as aggressive the trend could be revised to Stable.

Importantly, a number of Avis Budget’s recent acquisitions and actions have reduced the Company’s dependence on North American travel volumes, improving the resiliency of revenues. From DBRS’s perspective, the 2011 acquisition of Avis Europe plc was transformative for the Company and the key catalyst for the positive development in earnings generation over the last three years. In acquiring Avis Europe, the Company’s revenue became more geographically diversified with international revenues accounting for 35% of total revenues as of September 30, 2014 compared to 16% at year-end 2009. Further, the acquisition provided Avis Budget a more significant presence in the faster growing emerging markets. Meanwhile, the Zipcar acquisition in 2013 provided the Company an additional source of revenue that is not reliant on airport travel volumes. The Zipcar acquisition also affords Avis Budget the ability to offer a full suite of products to meet a customer’s transportation rental needs. Avis Budget has also made good progress in growing its off-airport presence, with off-airport revenues accounting for 30% of total revenues in 2013, up from approximately 19% at year-end 2009.

While exposure to residual values of the vehicle fleet is unavoidable, DBRS views strategic actions taken by Avis Budget since 2008 as improving the management of this risk. To reduce the risk of a sizeable impairment on the fleet, Avis Budget has diversified its vehicle fleet supplier base, broadening the number of manufacturers and vehicle models in the fleet. DBRS also sees this as better protecting the Company from a disruption to vehicle supply should any one manufacturer become financially distressed. Further, Avis Budget utilizes program vehicles (those vehicles benefiting from a residual value guarantee from the manufacturer) on 37% of the North American fleet, which is higher than its peers. Avis Budget utilizes program vehicles to meet seasonal and geographical demand and also for those vehicle types which historically have demonstrated more volatile residual values, such as convertibles and large SUVs. To mitigate higher vehicle costs, Avis Budget has also increased the usage of alternative sales channels for the disposition of risk vehicles, allowing the Company to capture the traditionally higher retail sales price compared to those at wholesale auction.

DBRS views Avis Budget’s liquidity profile as improved since the financial crisis better placing the Company to withstand a stressed funding environment. Since 2011, Avis Budget has opportunistically refinanced high cost debt, resulting in a more balanced maturity profile for its corporate debt and lowered overall funding costs supporting earnings. Liquidity has been enhanced by Avis Budget’s increased capacity under vehicle funding facilities. At September 30, 2014, available liquidity totaled approximately $4.3 billion, including approximately $713 million of cash and cash equivalents, $866 million of available capacity under corporate revolving facilities and approximately $2.7 billion of available capacity under the Company’s vehicle programs. DBRS expects that Avis Budget will maintain access to funding at reasonable costs.

While balance sheet leverage (debt-to-equity) remains elevated at 17.5x at September 30, 2014, it is substantially lower than the 29.3x at year-end 2009. Importantly, DBRS notes on a cash flow leverage basis, (Debt-to-last twelve months EBITDA) leverage has improved to 4.3x at 3Q14. DBRS anticipates that Avis will continue to utilize its solid cash flow generation ability to maintain leverage within current levels while maintaining a pragmatic approach to share repurchases.

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

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2014). Other applicable methodology includes the DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2014). These can be found at: https://www.dbrs.com/about/methodologies

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: Roger Lister
Initial Rating Date: December 16, 2009
Most Recent Rating Update: June 28, 2013

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