Rental car company Hertz Corp., a unit of Ford Motor Co. that will soon become a stand-alone entity, is not expected to issue significant amounts of auto ABS after it becomes a stand-alone company, say analysts. Despite having a near-junk corporate debt rating (BBB-/Baa3/BBB-), which is soon expected to fall even further, the company is expected to maintain its foothold in the high-yield debt market and should not be forced to over-utilize the ABS market for funding.
Hertz is expected to issue $5 billion of rental fleet lease ABS in December, as part of the leveraged buy-out of the company, being shopped by Deutsche Bank Securities, Merrill Lynch and Lehman Brothers. Craig Hutson, analyst with Gimme Credit, an independent research firm targeting institutional corporate debt investors, said Hertz will likely try to securitize its rental fleet as soon as possible, and that will use most of the company's capacity for future securitizations, as the company would not be likely to securitize more than half its fleet. According to the most quarterly filing with the Securities & Exchange Commission, Hertz had about $10.5 billion in revenue-earning vehicles and other equipment.
Hertz has only one securitization outstanding, a $600 million deal issued in March 2004, via Lehman Brothers, backed by a full MBIA wrap. The 2.5-yaer triple-A fixed-rate notes priced at 12 basis points over swaps, with the 2.5-year triple-A floater pricing at nine basis points over one-month Libor.
While automobile manufacturers, such as Ford and General Motors Corp., have found themselves shut out of the unsecured debt markets after being placed in junk territory and have turned almost solely to the ABS market for funding, Hutson said Hertz is not likely to find itself in the same straits, since its buying group - consisting of The Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch Private Equity - is well known and active in the high yield market. "Their funding strategy should not change much after the sale," said Hutson.
Another factor that may complicate Hertz's access to the ABS market is its linkage to Ford through buy-back arrangements with those companies. Should Ford continue its slide, vehicle purchases from Hertz may subside, forcing Hertz to sell the cars in the used car market at a lower value than they would have sold to Ford.
John Wikoff, analyst with Moody's Investors Service, said that there is a linkage between rental car companies and their securitizations. If the ratings of manufacturers and/or rental car companies change significantly, Moody's may consider raising the credit enhancement levels of future deals. This means a company would have to securitize more of its fleet in each deal in order to issue at ratings levels comparable to previous transactions.
Hertz CFO Paul Siracusa did not return calls for comment and a company spokesman declined to comment. Officials from the investment banks did not respond to inquiries.
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