DBRS Upgrades Avis Budget Group, Inc.’s Issuer Rating to BB, Trend Stable

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

The rating action reflects the strength of the Avis Budget franchise, which is underpinned by its multi-brand strategy and top-tier market position in North America, and the Company’s increasing international presence following a number of strategic acquisitions. Importantly to the ratings, DBRS sees these acquisitions, in particular the transformative acquisition of Avis Europe plc in 2011, along with other actions taken by management, as strengthening the Company’s earnings capacity. From DBRS’s perspective, this improvement entails not only higher revenue generation and improved operating margins, but also a more resilient earnings profile, better positioning the Company to withstand a cyclical downturn while maintaining appropriate operating results. The rating action also considers the Company’s fleet management acumen and well-managed liquidity profile. Ratings are constrained by the Company’s reliance on secured forms of wholesale funding and the leveraged balance sheet.

The Stable trend reflects DBRS’s view that Avis Budget will continue to generate solid operating results in 2016. Indeed, modest economic expansion in the U.S. and other key markets should support higher business and leisure travel volumes underpinning rental car demand. The Stable trend also incorporates DBRS’s view that industry fundamentals will remain mostly favorable supported by transaction volume growth and a modest improvement in pricing. While residual values are moderating, DBRS expects values to remain above historical averages anchored by still favorable supply and demand trends.

While upward ratings movement is unlikely over the medium-term, further improvement in the capital structure, specifically higher levels of tangible equity, reduced levels of outstanding debt and lower leverage may lead to positive rating momentum. Further, continuing sound operating performance accompanied by a notable reduction in the reliance on the North American on-airport market could have positive rating implications. Conversely, a sustained decline in revenue generation indicating a weakening of the franchise, or a material loss resulting from fleet mismanagement could result in downward rating pressure. Moreover, a deterioration in the Company’s liquidity position or a notable increase in leverage; especially if driven by a large acquisition, may negatively impact ratings.

In recent years, Avis Budget has strengthened the franchise by broadening its geographic operating footprint and diversifying its portfolio of brands. Further, management has sought to expand revenues from more profitable channels and improve operating efficiency. As a result of these actions, Avis Budget has become less dependent on North American travel volumes, while improving the resiliency of revenues. Indeed, International revenues were 30% of total revenues in 9M15, compared to 16% in 2009, despite headwinds from the stronger U.S. dollar. Meanwhile, off-airport revenues were also 30% of total revenues in 9M15, up from approximately 19% in 2009. This improvement in revenue mix was accomplished while improving operating margins and returns. For 9M15, Avis Budget generated pre-tax income of $378 million, a 5% improvement year-over-year (YoY) on total revenues of $6.6 billion. Cost adjusted EBITDA margins for 9M15 were a very solid 11.7%, which would be the highest in Company history, if maintained for the full year.

Avis Budget’s risk profile is stable with no material change in the Company’s risk exposures. However, the Company has taken a number of actions since the last recession to better mitigate these risks during another industry downturn. To lower the Company’s exposure to residual value risk from the vehicle fleet, Avis Budget has broadened the number of manufacturers and vehicle models in the fleet, while also having a more balanced fleet mix by vehicle risk type. At year-end 2014, 42% of the Company’s fleet was comprised of program vehicles (those vehicles benefiting from a residual value guarantee from the manufacturer), a greater portion than its industry peers. To offset the impact of higher vehicle costs on financial results, Avis Budget has also expanded the usage of alternative sales channels for the disposition of risk vehicles, allowing the Company to capture a greater share of the normally higher retail sales price compared to those via the wholesale auction channel. DBRS also sees the greater fleet diversity by original equipment manufacturer (OEM) as better protecting the Company from a disruption to vehicle supply should any one manufacturer become financially distressed or face a prolonged work stoppage. Overall, DBRS sees these actions as prudent during a period of expected moderation in used vehicle values, and further evidence of Avis Budget’s sound fleet management capabilities, which is an important factor in the ratings.

Liquidity continues to be well-managed and sufficient to meet upcoming requirements. Corporate debt maturities are manageable with no maturities until late 2017 ($548 million). Nevertheless, the Company’s reliance on vehicle-backed debt, which tends to have shorter durations than corporate debt, does introduce a degree of refinancing risk.

Avis Budget’s highly leveraged balance sheet continues to be a constraint on the ratings. At September 30, 2015, balance sheet leverage (debt-to-equity, including fleet debt) was a very high 22.5x. Importantly, DBRS notes on a cash flow leverage basis, (Debt-to-last twelve months EBITDA) leverage was relatively stable from the comparable period a year ago at 4.4x.

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

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2015). Other applicable methodologies include the DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2015). These can be found at: http://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: William Schwartz
Initial Rating Date: 16 December 2009
Most Recent Rating Update: 19 December 2014

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