DBRS Morningstar Confirms Avis’s LT Issuer Rating at B, Neg Trend: Removes from Under Review

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 B. At the same time, DBRS Morningstar placed all ratings of Avis Budget and its related entity on Negative trend. The Company’s Intrinsic Assessment (IA) is B, while its Support Assessment is SA3, resulting in Avis Budget’s final ratings being equal with its IA. With these rating actions, DBRS Morningstar has removed all ratings from Under Review with Negative Implications, where they were placed on May 7, 2020.

KEY RATING CONSIDERATIONS
The Negative trend reflects DBRS Morningstar’s view that the current economic downturn driven by the Coronavirus Disease (COVID-19) pandemic will continue to place significant pressure on the Company’s rental car franchise, especially its on-airport business. The Negative trend also takes into consideration that the full impact of the coronavirus pandemic remains unclear, including the severity of the disease, as well as its duration before it runs its course and the economy approaches pre-coronavirus levels.

The confirmation of the ratings reflects the Company’s improving utilization rate through solid progress in downsizing its vehicle fleet to meet the significant decline in customer demand due to the pandemic, as well as significant cost savings. While these actions have better positioned the Company to offset lower rental car demand and corresponding decline in revenues, we still expect profitability to remain pressured. Gains on vehicle sales have been better than we have expected, benefiting from solid used vehicle values and the Company’s increasing utilization of alternative disposition channels. The confirmation also considers Avis Budget’s acceptable but constrained liquidity position, which benefited from lower than anticipated cash burn, as well as proceeds from recent notes issuances.

RATING DRIVERS
Given the Negative trend, an upgrade in the near term is unlikely. If Avis Budget’s vehicle utilization rate were to track back to pre-pandemic levels and the Company were to restore sustained positive cash flow generation, the trends would move to Stable. Ratings would be downgraded if liquidity materially weakens. If vehicle utilization rates remain significantly below pre-pandemic levels leading to material losses, the ratings would be downgraded.

RATING RATIONALE
Founded in 1946, Avis Budget maintains a top tier global multi-brand rental car franchise, underpinned by large U.S. on-airport, off-airport, and international businesses. The Company maintains corporate and licensee locations in 180 countries, with more than 11,000 car and truck rental locations. Although the senior management team is in transition, DBRS Morningstar views the team’s deep industry knowledge and experience as beneficial in countering the coronavirus headwinds.

The substantial reduction in airline passenger rentals at on-airport locations, along with constrained yet improving rentals at off-airport locations, continues to pressure the Company’s top line and cash flows. These dynamics reflected in Avis Budget’s significant 1H20 loss. For 1H20, the Company reported a $639 million loss, materially worse than the $29 million loss in 1H19, primarily reflecting a 40.9% decrease in revenues. The substantial YoY decline in revenues was driven by a 35% decrease in rental volume and an 8% decrease in revenue per day (excluding exchange rate movements) as a result of the impact of the coronavirus pandemic, along with a $28 million negative impact from currency exchange rate movements. Top line revenue pressures were partially offset by cost reduction actions taken by management which resulted in a 21.4% YoY decline in expenses. Although airline passenger travel is not likely to revert back to the pre-pandemic levels over the medium term, Avis Budget’s significant cost mitigation efforts and the continuing right-sizing of its fleet to meet lower demand will help ease the negative impact on the Company’s bottom line. Going forward, we expect that the Company’s 2H20 results will improve as compared to 1H20, especially as vehicle utilization continues to improve and the economy reopens.

The ratings also consider Avis Budget’s constrained liquidity position, particularly given the Company’s low cash flow generation, significant levels of interest expense, lease costs, and other working capital needs. Avis Budget’s liquidity position has benefitted from recent corporate debt issuances and lower than anticipated cash burn in 2Q20, driven by better than expected vehicle fleet disposals and strong expense controls. As of June 30, 2020, Avis Budget’s available liquidity totaled $1.5 billion ($1.3 billion of available cash and cash equivalents and $0.2 billion in available borrowings under its revolving credit facility). DBRS Morningstar notes that the adequacy of the Company’s liquidity will be dependent on how quickly it can match its fleet levels to customer demand. Importantly, Avis Budget has made considerable headway with realigning its fleet to demand benefitting utilization rates. Overall, the Company’s debt maturities remain manageable.

Ratings also reflect the Company’s high level of collateralized funding, and equity deficit. The majority of Avis Budget’s assets are encumbered, limiting its financial flexibility, especially during periods of stress, which results in the one notch differential between the Long-Term Issuer Rating and Long-Term Senior Debt rating.

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 24, 2019) which can be found on our website under Methodologies and Criteria: https://www.dbrsmorningstar.com/research/350802/global-methodology-for-rating-non-bank-financial-institutions
and DBRS Morningstar Criteria – Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on our website under Methodologies and Criteria: https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships

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 participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. 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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