DBRS Morningstar Confirms Avis Budget Group, Inc.’s Issuer Rating at BB, Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Avis Budget Group, Inc. (Avis Budget or the Company), and its related subsidiary Avis Budget Car Rental, LLC, including the Company’s Long-Term Issuer Rating of BB. The trend for all ratings is Stable. The Company’s Intrinsic Assessment (IA) is BB, while its Support Assessment is SA3, resulting in Avis Budget’s final ratings being equal to the IA.

KEY RATING CONSIDERATIONS
The ratings confirmation considers Avis Budget’s solid global franchise, underpinned by its top-tier U.S. on-airport business and leading international franchise. The ratings also consider Avis Budget’s acceptable earnings generation, sound risk profile, and solidly managed liquidity position. The ratings also reflect the Company’s moderate level of capitalization and significant dependence on secured wholesale funding, which deeply encumbers its earning assets, restricting financial flexibility. The Stable trend reflects DBRS Morningstar’s view that Avis Budget’s underlying credit fundamentals will remain sound over the medium term, benefiting from still solid industry fundamentals.

RATING DRIVERS
Sustained positive operating leverage could result in positive ratings implications. Additionally, a material reduction in balance sheet leverage could result in positive ratings implications. Conversely, a sustained decline in revenue generation, indicating fleet mismanagement or a weakening franchise could result in negative ratings implications. Finally, a material deterioration in the Company’s liquidity position could have negative ratings implications.

RATING RATIONALE
Avis Budget’s solid global vehicle rental franchise that is anchored by its large U.S. on-airport, off-airport, and international businesses, is a key consideration in the ratings. The Company has highly recognizable brands, including Avis, Budget, and Zipcar, with each operating as distinct brands, offering their own distinct value proposition, service and pricing. These diverse brands and their respective positioning allow Avis Budget to capture the full spectrum of business and leisure travelers.

Avis Budget’s earnings power remains acceptable. Revenues are diverse across its businesses as well as geographically with locations in 180 countries. Meanwhile, expenses remain well managed. Positively, the Company initiated a restructuring plan in 1Q19 to enhance operating efficiencies by improving processes and consolidating functions, as well as to create new strategies for its U.S. truck rental operations including reductions in headcount, large vehicles and rental locations. As of September 30, 2019, the Company anticipates this initiative will result in the termination of 470 employees, of which 365 have already been let go. Also, in 3Q19, the Company initiated a plan to exit the Brazilian market, which will result in the termination of an additional 175 employees. Going forward, DBRS Morningstar anticipates that Avis Budget’s earnings power will remain acceptable over the medium-term, underpinned by solid industry fundamentals, including right-sized fleets, as well as still solid global enplanement levels despite slowing economic growth.

The Company’s risk profile is well managed. Residual value risk is tempered by the Company’s strong fleet management operations, its focus on purchasing vehicle models and trim levels that are in high demand, and the utilization of alternative disposition channels to capture additional value upon vehicle sales. Positively, in 2019, the Company intends to sell approximately 70% of its vehicles through alternative disposition channels. Another key risk is operational risk, which is considerable, especially given Avis Budget’s large fleet management system, and robust reservations systems. If these systems were interrupted, the disruptions could negatively impact the Company’s bottom line. However, DBRS Morningstar notes that operational risk at Avis Budget has historically been well-managed. Other risks include travel volume risk, which is offset by the Company’s strong fleet management operations and geographic diversification, and OEM concentration risk which is moderate, given the Company’s large pool of OEMs from which it purchases vehicles. Finally, credit risk is modest, given its moderate level of program vehicles.

Funding is acceptable but reliant on secured forms of wholesale funding, consisting of rental car backed asset backed securitizations. Given its high level of secured funding and corresponding high level of encumbered assets, financial flexibility is limited. DBRS Morningstar notes that this level of encumbrance of assets on the balance sheet is factored in the one notch differential between the Long-Term Issuer Rating and the Senior Unsecured Debt rating of Avis Budget. Importantly, debt maturities are well spread out into future years with the nearest corporate debt maturity not until April 2023. Finally, with its high level wholesale funding and corresponding exposure to the cyclical capital markets, liquidity management is a critical function of the Company. DBRS Morningstar views the Company’s liquidity management as sound.

Avis Budget’s capital profile remains moderate DBRS Morningstar views the Company’s cash flow leverage level as appropriate for the current ratings. At September 30, 2019, Avis Budget’s debt-to-EBTIDA (DBRS Morningstar calculated) was 4.8x at September 30, 2019.

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

The applicable methodology is Global Methodology for Rating Non-Bank Financial Institutions (September 2019) and DBRS Criteria – Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on our website under Methodologies & Criteria.

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

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

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

This is an unsolicited credit rating.

For more information on this credit or on this industry, visit www.dbrs.com.

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