DBRS Confirms Hertz at BB (low), Stable Trend Following Separation from Global Equip. Rental Business

DBRS, Inc. (DBRS) has today confirmed the ratings of Hertz Corporation (Hertz or the Company), including its Issuer Rating of BB (low). The trend on all ratings is Stable. The rating action follows the Company’s separation from its global equipment rental business, now called HERC Holdings, Inc. (HERC Holdings).

The rating action is consistent with DBRS’s view as previously stated (please see DBRS’s press release dated March 19, 2014), that completion of the separation of the global car rental business from the global equipment business has no material impact on Hertz’s strong franchise and leading global market position in the daily vehicle rental market, which are key factors underpinning the ratings. Indeed, there is little market overlap or cross selling opportunities between the businesses. DBRS sees the separation as providing improved focus and execution on the strategic objectives and operational performance of each business, as well as enhancing each business’ financial flexibility, including the elimination of internal competition for capital.

Although DBRS did view Hertz as benefiting from the revenue and earnings diversification provided by the global equipment rental business, this benefit did not provide material lift to the ratings. Specifically, for 2015, the global equipment rental business accounted for 14% of total revenues, and a Company calculated 18% contribution to adjusted pre-tax income, prior to general corporate expense, certain interest expense, and other business activities. DBRS notes that the global equipment rental business had a higher level of asset risk, given that it serves certain more volatile industries, including oil and gas. Overall, DBRS sees Hertz as being able to manage the loss in earnings contribution from the equipment rental business, especially given the Company’s success in broadening its revenue base to be less reliant on U.S. corporate travel volumes.

Following the spin-off, the global equipment rental business will transfer to Hertz and its subsidiaries approximately $2.0 billion of consideration. Moreover, Hertz’s ultimate parent, Hertz Global Holdings, Inc. (or a subsidiary thereof), formerly known as Hertz Rental Car Holding Company, Inc. and Herc Holdings Inc. (or a subsidiary thereof), formerly known as Hertz Global Holdings, Inc. will enter into a number of agreements, including a separation and distribution agreement, a tax matters agreement, and an employee matters agreement.

RATINGS DRIVERS
Over the medium-term, sustained improvement in financial results underpinned by revenue growth, and improved operating and fleet efficiency could have positive rating implications. Conversely, ratings could come under pressure should the Company be unable to execute management’s strategic initiatives to improve results evidenced by weak profitability, low utilization rates, and erosion of the Company’s market share. Further, any additional issues related to the Company’s internal controls, risk management or corporate governance could lead to negative ratings pressure.

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

The applicable methodology is Global Methodology for Rating Finance Companies (October 2015).

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.

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: May 16, 2001
Most Recent Rating Update: July 24, 2015

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.