DBRS Morningstar Downgrades HTZ to B (high) and Places It Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) has downgraded the ratings of The Hertz Corporation (Hertz or the Company), including Hertz’s Long-Term Issuer Rating to B (high) from BB (low). At the same time, the Company’s ratings were placed Under Review with Negative Implications. The ratings actions reflect DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) outbreak will have a significant impact on Hertz’s credit fundamentals, especially its bottom line.

KEY RATING CONSIDERATIONS
The downgrade and the Under Review with Negative Implications considers the significant impact of the coronavirus pandemic is having on Hertz. Across the globe, governments have put in place substantial travel restrictions in order to reduce the spread of the coronavirus. These travel restrictions have greatly reduced aviation and automotive travel, materially impacting Hertz’s on-airport and off-airport rental volumes and vehicle utilization rates, leading to a meaningfully reduction in revenues and operational cashflow. DBRS Morningstar notes that the full impact of the coronavirus is still unclear, including the severity of the disease, as well as its duration before it runs its course. As such, the ultimate impact on Hertz’s credit profile is dependent upon the length and severity of the downturn in the travel industry, due to the coronavirus.

Offsetting this headwind, Hertz is proactively managing its costs, including prioritizing sales and marketing strategies, implementing employee furlough programs across North America, and substantially cutting capital expenditures. Additionally, the Company is selling vehicles to better balance supply with demand.

The ratings consider the encumbered nature of Hertz’s balance sheet, which is due to the predominance of secured debt. This high level of asset encumbrance results in the one notch differential between the Long-Term Issuer Rating and Long-Term Senior Debt rating. With its highly encumbered assets, Hertz’s financial flexibility is limited, especially during stressful periods. DBRS Morningstar notes that the Company has approximately $1.0 billion in liquidity, and only a moderate level of corporate debt coming due in 2020. Additionally, Hertz is looking to gain excess liquidity by accessing surplus equity in its fleet-backed facilities. Finally, the Company does not expect any vehicle debt financing requirements for its global car rental business during the remainder of 2020.

During the review, DBRS Morningstar will focus on Hertz’s ability to counter the impact of lower rental volumes and vehicle utilization, and the corresponding negative impact on revenues and the bottom line. DBRS Morningstar will take into consideration the Company’s actions, including reducing fleet levels, managing costs, and reducing capital expenditures. DBRS Morningstar will also assess Hertz’s balance sheet fundamentals, especially its liquidity position. Additionally, the review will consider the impact of any European or U.S. governmental support for the rental car industry.

The Under Review with Negative Implications status is generally resolved with a rating action within three months. However, if heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.

RATING DRIVERS
Given the Under Review with Negative Implications, an upgrade in the near term is unlikely. Meanwhile, if solid progress is made globally, particularly in the United States, in controlling the coronavirus pandemic and rental volumes and utilization rates were to approach pre-pandemic levels, the ratings could return back to a Stable trend. Conversely, if the coronavirus pandemic is sustained longer than anticipated and weak industry fundamentals were to persist, including low rental volumes and vehicle utilization, ratings would likely be downgraded. Additionally, material negative changes to the Company’s liquidity or capital profiles could result in a downgrade.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions, (September 2019), which can be found on our website under Methodologies & Criteria: https://www.dbrsmorningstar.com/research/ 350802/global-methodology-for-rating-non-bank-financial-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

The rated entity or its related entities did 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.

DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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