DBRS Morningstar Downgrades CAR to BB (low) and Places It Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) has downgraded 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 to BB (low) from BB. At the same time, Avis Budget’s ratings were placed on Under Review with Negative Implications. The ratings actions reflect DBRS Morningstar’s view that the evolving Coronavirus Disease (COVID-19) outbreak will negatively impact the Company’s credit fundamentals, especially revenues and its bottom line.

KEY RATING CONSIDERATIONS
The downgrade and Under Review with Negative Implications considers the significant coronavirus related headwinds facing Avis Budget. Global and local governments have enacted travel restrictions to reduce the spread of the coronavirus, resulting in a significant drop in aviation and automotive travel, pressuring vehicle rental volumes and utilization rates at the Company’s on-airport and off-airport businesses. Reflective of the severity of the impact of the travel restrictions, the Company’s reservations in April are down by approximately 60%. DBRS Morningstar notes that the impact of these headwinds on the Company’s bottom line will be significant and exacerbate if travel restrictions remain in place for a long period of time. Of note, the second and third quarters are critically important operating periods with a majority of the industry’s earnings generated in these quarters. 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 overall impact on Avis Budget’s long-term credit profile is dependent on the length and depth of the current downturn on the travel industry from the coronavirus pandemic.

To counter pressured revenues, Avis Budget is reducing staff levels to match demand, cutting operational costs, stopping capital expenditures, and evaluating compensation expense. As with its peers, Avis Budget is in the process of reducing vehicle levels to match demand.

Avis Budget’s funding profile is heavily reliant on secured wholesale funding, including rental car backed securitizations. This results in a high level of encumbered assets, which reduces the Company’s financial flexibility, especially in periods of stress. This high level of balance sheet encumbrance is factored in the one notch differential between the Long-Term Issuer Rating and the Senior Unsecured Debt rating of Avis Budget.

Given the current environment, liquidity management is a key function of the Company. Currently, Avis Budget has approximately $1.1 billion in cash, and approximately $750 million in credit under its undrawn revolving credit facility. The Company sees liquidity as sufficient to fund its operations through the remainder of 2020.

During the review, DBRS Morningstar will focus on Avis Budget’s capacity to offset the impact of the coronavirus pandemic and its impact on the Company’s future financial performance and credit fundamentals. DBRS Morningstar will consider the Company’s actions, including downsizing its fleet, reducing its staff, cutting operational costs, and pausing capital spending, which the Company expects to aggregate to more than $400 million in annualized cost reductions. Additionally, DBRS Morningstar will consider the impact of any U.S. or European 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. However, if solid progress is made globally, particularly in the United States, in controlling the coronavirus pandemic, and Avis Budget’s vehicle rental volumes and utilization were to approach pre-pandemic levels, ratings could return to a Stable trend. However, if the coronavirus pandemic is sustained longer than anticipated keeping rental volumes and vehicle utilization rates low, ratings would likely be downgraded. Ratings would also likely be lowered should liquidity materially weaken.

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 Financials (September 2019) and DBRS Criteria – Rating Corporate Holding Companies and their Parent/Subsidiary Rating Relationships (November 2019), which can be found on our website under methodologies and criteria: https://www.dbrsmorningstar.com/search/?doc Types=methodology&sectors=2:10008:10011:10012:10093:10094&sort=recent

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.

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.

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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