DBRS Morningstar Maintains Under Review With Negative Implications on Avis Budget Rental Car Funding (AESOP) LLC

DBRS, Inc. (DBRS Morningstar) maintained its Under Review with Negative Implications status on the following classes of securities issued by Avis Budget Rental Car Funding (AESOP) LLC:

-- Series 2016-2 Notes, Class A rated AAA (sf)
-- Series 2016-2 Notes, Class B rated A (high) (sf)
-- Series 2016-2 Notes, Class C rated BBB (sf)
-- Series 2017-2, Class A Notes rated AAA (sf)
-- Series 2017-2, Class B Notes rated A (high) (sf)
-- Series 2017-2, Class C Notes rated BBB (sf)
-- Series 2018-1, Class A Notes rated AAA (sf)
-- Series 2018-1, Class B Notes rated A (high) (sf)
-- Series 2018-1, Class C Notes rated BBB (sf)

Maintaining the Under Review with Negative Implications status on the notes considers DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19), available in its commentary “Global Macroeconomic Scenarios: September Update,” published on September 10, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which were last updated on September 10, 2020, and are reflected in DBRS Morningstar’s analysis. The moderate scenario remains predicated on a more rapid return of confidence and a steady recovery heading into 2021.

As a result of the on-going nature of the coronavirus pandemic, there continues to be uncertainty regarding the effect of the pandemic on the rental car industry through the remainder of 2020 and into 2021. As a result, additional time is required to evaluate the impact on the industry, as well as the impact on the financial condition of the AESOP sponsor, Avis Budget Group, Inc. (Avis or the Company). While infection rates have come down from the spring, there is still concern that current levels could rise again, having the potential to cause additional business disruptions and closures.

In response to the coronavirus pandemic to date, Avis has reduced its fleet size to be more aligned with reduced demand over the past seven months, resulting in improving rental car utilization rates over the same period. In addition, Avis has significantly reduced costs by removing $2.5 billion of annualized expenses.

DBRS Morningstar confirmed the rating of Avis at B (Negative trend) on August 18, 2020, removing the rating from Under Review–Negative Implications. Previously, DBRS Morningstar downgraded Avis to B from BB (low) on May 7, 2020, putting the rating Under Review with Negative Implications. The Negative trend reflects DBRS Morningstar’s view that the current economic downturn driven by the coronavirus 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.

In addition, risks continue to persist in the automotive sector. While the manufacturers have resumed operations after spring shutdowns and sales have somewhat recovered in the second and third quarters, annual volumes are nonetheless estimated to decrease by up to 20% relative to 2019 levels. Earnings and cash flow will be correspondingly much weaker (although liquidity across the sector appears sufficient for the time being).

The rental car industry continues to face challenges stemming from the coronavirus pandemic, as travel and tourism activities have not yet resumed pre-pandemic volume. At present, vehicle disposition channels have resumed operations, particularly with the migration to digital format, allowing rental car companies to right size fleets. DBRS Morningstar’s criteria considers certain time horizons, by rating category, for the liquidation of the rental fleet after an operating company’s bankruptcy. Currently, DBRS Morningstar has not modified its criteria regarding liquidation time horizons and associated market value declines during the assumed liquidation period. The risk of localized or widespread coronavirus outbreaks in the fall could portend some level of disruption to demand for rental cars and to used vehicle market operations in the future. As a result, liquidation horizon and associated market value decline assumptions may be reconsidered at that time.

When a rating is placed Under Review with Negative Implications, DBRS Morningstar seeks to complete its assessment and remove the rating from this status as soon as appropriate. Upon the resolution of the Under Review status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

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 DBRS Morningstar Master U.S. ABS Surveillance Methodology (May 27, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on these transactions took place on June 29, 2020, when all the securities referenced herein were placed Under Review with Negative Implications.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Mike Babick, Senior Vice President, U.S. ABS Global Structured Finance
Rating Committee Chair: Chris D’Onofrio, Managing Director, Head of US ABS - Global Structured Finance

Initial Rating Date: May 18, 2016 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2016-2); December 1, 2017 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2017-2); and April 19, 2018 (Avis Budget Rental Car Funding (AESOP) LLC, Series 2018-1).

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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DBRS Morningstar Master U.S. ABS Surveillance Methodology (May 27, 2020) https://www.dbrsmorningstar.com/research/361480/dbrs-morningstar-master-us-abs-surveillance